New South Wales Supreme Court CITATION : Sanum-Kehlbeck GMBH & Co KG V Sanum Australia Pty Ltd [2009] NSWSC 690 HEARING DATE(S) : 01/06/09 JUDGMENT DATE : 23 July 2009 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Dr Hilbert Seeger ordered to pay plaintiff's costs assessed on the party/party basis CATCHWORDS : PROCEDURE - costs - application by successful plaintiff for costs order against non party - proceedings for winding up of company on application of one of two shareholders - where other shareholder caused company to defend in early stages and then to capitulate - whether defence was abuse of process - whether second shareholder purported to conduct proceedings in name of defendant company without authority - dispute in truth between the shareholders - costs awarded against second shareholder - whether costs should be assessed on the indemnity basis LEGISLATION CITED : Corporations Act 2001 (Cth), s 237 Uniform Civil Procedure Rules 2005, rules 42.3.1, 42.3.2 CATEGORY : Principal judgment Carson v Legal Services Commissioner [2000] NSWCA 308 Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178 CASES CITED : Lemoto v Able Technical Pty Ltd [2005] NSWCA 153; (2005) 63 NSWLR 300 Rickard Constructions Pty Ltd v Rickard Hails Moretti Pty Ltd [2008] NSWCA 283 Walton v Gardiner [1993] HCA 77; (1993) 177 CLR 378 Sanum-Kehlbeck GMBH & Co KG - Plaintiff/Applicant PARTIES : Sanum Australia Pty Limited - Defendant Dr Hilbert Seeger - Respondent FILE NUMBER(S) : SC 5675/08 COUNSEL : Mr A C Harding - Plaintiff/Applicant Ms J F Merkel - Respondent SOLICITORS : Coleman & Greig - Plaintiff In person - Respondent IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J THURSDAY 23 JULY 2009 5675/08 SANUM-KEHLBECK GMBH & CO KG v SANUM AUSTRALIA PTY LTD JUDGMENT 1 On 2 February 2009, I ordered that Sanum Australia Pty Ltd ("Sanum Australia") be wound up and that Mr Hillig be appointed liquidator. The orders were made on the application of Sanum-Kehlbeck GMBH & Co KG ("Sanum-Kehlbeck"), a German company. Sanum-Kehlbeck held 51% of the shares in Sanum Australia. The remaining 49% was held by Dr Seeger. The judgment of 2 February 2009 was short. I quote it in full: "1. I am satisfied that the defendant company's business has been suspended since August 2007. I am also satisfied that the substratum of the defendant company has been removed by reason of breakdown of the relationship between the members making it impossible for the company to perform the functions it was intended to perform. 2. I note that by letter from its solicitors dated 15 January 2009 the defendant company indicated that it does not oppose the making of a winding up order, that it will not be filing and serving any affidavits nor will it be attending court today. 3. In these circumstances I am satisfied that the case for winding up on at least the grounds in s 461(1)(c) and (k) is established. 4. I order that Sanum Australia Pty Ltd ACN 080 191 133 be wound up. 5. I order that Peter Hillig of Smith Hancock, 88 Phillip Street, Parramatta, an official liquidator, be appointed liquidator of Sanum Australia Pty Ltd. 6. The question of costs is reserved pending determination of an interlocutory process listed before the court on 23 February 2009 with respect to costs." 2 I am now dealing with the question of costs and, in particular, the application by Sanum-Kehlbeck for an order that Dr Seeger, a non-party to the winding up proceedings, pay its costs of the proceedings as a whole. Sanum-Kehlbeck also says that the costs that Dr Seeger is ordered to pay should be assessed on the indemnity basis. Sanum-Kehlbeck's application was heard on 1 June 2009. 3 The circumstances of Sanum Australia's formation and commercial life are described as follows in written submissions furnished by Mr A Harding of counsel who appeared for Sanum-Kehlbeck: "6.1 Sanum-Kehlbeck is a German company that manufactures and supplies pharmaceutical products including homoeopathic preparations. 6.2 Sanum Australia was incorporated on 25 September 1997 to import and distribute in Australia pharmaceutical products manufactured by Sanum-Kehlbeck. 6.3 The shareholders of Sanum Australia were Sanum-Kehlbeck (51%) and Dr Seeger (49%). 6.4 The directors of Sanum Australia were Reiner Kehlbeck and Dr Seeger. Mr Kehlbeck (who is also a director of Sanum-Kehlbeck) resided in Germany and Dr Seeger resided in Australia. 6.5 On or about 7 October 1997, Sanum-Kehlbeck and Sanum Australia entered into a Distributor Agreement by which Sanum Australia agreed to become the exclusive distributor in Australia of Sanum-Kehlbeck's products. 6.6 On the same date, Sanum Australia entered into an Employment Agreement with Dr Seeger by which it employed Dr Seeger as its Managing Director. 6.7 The Distributor Agreement expired on 7 October 2001. It had certainly come to an end, at the latest, by 31 August 2007 following the issue of a notice of termination by Sanum-Kehlbeck. 6.8 Dr Seeger's employment with Sanum Australia as Managing Director also ceased on 31 August 2007. 6.9 From 31 August 2007, neither Sanum Australia nor Dr Seeger had any involvement in the distribution of Sanum-Kehlbeck's products in Australia. 6.10 From about December 2007, Dr Seeger whilst holding himself out as 'Managing Director' of Sanum Australia actively set about: (a) disparaging Sanum's products by distributing emails to healthcare practitioners and publishing on a website with the registered name 'Sanum Australia' allegations that Sanum's products: 'may contribute to or even cause: 1. Alzheimer's Disease. 2. Parkinson's Disease. 3. Motor Neurone Disease. 4. Diabetes Type II.' (b) denigrating the reputation of the new distributor of Sanum's products in Australia, describing him in letters to third parties as a ' drop out with no formal education ', 'a n insult to all practitioners who studied hard to earn their professional life ' and on the 'Sanum Australia' website as a ' shonk '. 6.11 On or about 17 October 2008, Dr Seeger, unilaterally and without the knowledge or consent of Sanum-Kehlbeck or fellow director Dr Kehlbeck, purported to: (a) remove Dr Kehlbeck as a director of Sanum Australia, and (b) transfer to himself the majority shareholding in Sanum Australia held by Sanum Kelbeck. 6.12 Dr Seeger thereafter conducted himself as though he were the sole shareholder and director of Sanum Australia. On 17 October 2008 he lodged with the Australian Securities and Investments Commission ( ASIC ) a Form 484 (change to company details) recording the purported (but unauthorised) changes to the membership and directorship of Sanum Australia." 4 Mr Harding then set out the history of the winding up litigation: "7.1 Sanum-Kehlbeck had proposed to Dr Seeger as early as June 2007 that, in the absence of some agreement for the future ownership of the business, Sanum Australia be dissolved. 7.2 Dr Seeger did not accede to this proposal and no agreement for the future ownership of the business was ever made. 7.3 Mr Kehlbeck attempted to convene a meeting of directors in November 2007, and a meeting of members in February 2008, for the purpose of passing resolutions to remove Dr Seeger as Managing Director. Although he received these notices of meeting, Dr Seeger did not attend the meetings and as a result the resolutions were never passed. 7.4 On 14 November 2008 Sanum-Kehlbeck filed its Originating Process for the winding up of Sanum Australia. 7.5 The first return date of the Originating Process was 15 December 2008. 7.6 Early in the morning of 15 December 2008, a solicitor, Mr Gaby Boskovitz (Mr Boskovitz) of Boskovitz & Associates, wrote to the solicitors for Sanum-Kehlbeck stating that he acted for Sanum Australia and advising, for the first time, that Sanum Australia intended to defend the winding up application. 7.7 Mr Boskovitz received his instructions to defend the winding up application from Dr Seeger: (a) Mr Boskovitz's initial costs disclosure, correspondence reporting on the winding up application and a memorandum of fees rendered by Mr Boskovitz in respect of the matter, were all addressed to: ' The Director, Sanum Australia Pty Limited '. This could only be a reference to Dr Seeger who, as noted above, only one month earlier had unlawfully set about to constitute himself as sole director and shareholder of Sanum Australia. (b) Mr Boskovitz admitted this was so in a conversation with Ms Khodeir, a solicitor acting for Sanum-Kehlbeck. (c) Dr Seeger had referred to Mr Boskovitz as ' our solicitor '. 7.8 On 15 December 2008, the proceedings were referred to his Honour Justice White. 7.9 Justice White granted leave to Mr Boskovitz to file in court a Notice of Appearance. The Notice of Appearance recited the following grounds of opposition to the winding up application: (a) Sanum-Kehlbeck had no standing to apply for the winding up as it was not and never had been a contributory of Sanum Australia; (b) Sanum Australia commenced business within one year from its incorporation and had not suspended its business for a whole year; (c) the directors of Sanum Australia (other than directors associated with Sanum-Kehlbeck) had not acted in their own interests rather than in the interests of the members as a whole, and had not acted in any other manner that was unfair and unjust to other members; (d) the affairs of Sanum Australia were not being conducted (other than by persons associated with Sanum-Kehlbeck) in a manner that was oppressive or unfairly prejudicial to, or discriminatory against, a member or members or in a manner that was contrary to the interests of the members as a whole; (e) pursuant to section 462(4) of the Corporations Act (which relates to winding up applications bought by a contingent or prospective creditor), the Court should not hear the application until such security for costs had been given as the Court thinks reasonable. 7.10 Justice White granted leave to Sanum-Kehlbeck to file in court an Amended Originating Process and an Interlocutory Process. By the Amended Originating Process, Sanum-Kehlbeck sought (in addition to the orders for the winding up of Sanum Australia) orders requiring Sanum Australia to correct its register of members so as to restore Sanum Kelhbeck as a shareholder of Sanum-Kehlbeck, and to correct its register of directors so as to restore Mr Kehlbeck as a director. By the Interlocutory Process, Sanum-Kehlbeck sought the appointment of a provisional liquidator to Sanum Australia, and alternatively certain interlocutory injunctions against Sanum Australia. 7.11 After hearing argument from both parties, White J delivered an ex tempore judgement on 15 December 2008 in which he rejected out of hand the argument that Sanum-Kehlbeck had no standing to bring the application; he held that Sanum Australia was estopped from so asserting by the recitals to the shareholders agreement of 7 October 1997. 7.12 The following day (16 December) White J made orders in accordance with his judgement delivered on 15 December, the effect of which was to: (a) restrain Sanum Australia from engaging in certain conduct pending the final determination of the proceedings; (b) require Sanum Australia to take such steps as may be necessary to restore Mr Kehlbeck as a director of Australia, and to restore Sanum Australia or Mr Kehlbeck as the holder of 51% of the issued shares in Sanum Australia; and (c) set down a timetable for the preparation to hearing of the winding up application. 7.13 By letter dated 15 January 2009, Mr Boskovitz advised that Sanum Australia had taken steps to 'reappoint' Mr Kehlbeck as director and to transfer 'back' to Dr Kehlbeck 51% of the issues shares in the company. 7.14 In the same letter, Mr Boskovitz advised that Sanum Australia 'will not oppose the proposed winding-up. Accordingly, it will not be filing/serving any affidavits, nor attending Court on 2 February 2009'. 7.15 Mr Boskovitz also stated that ' our retainer regarding the winding up proceedings have been terminated ' but that ' we will continue to act for the company in other respects until it is wound up '." 5 Final orders were then made on 2 February 2009 as previously stated. 6 Sanum-Kehlbeck's application for an order that Dr Seeger pay its costs of the proceedings is based on certain aspects of the power to award costs against a non-party saved by rule 42.3.2 of the Uniform Civil Procedure Rules 2005 from the operation of the prohibition in rule 42.3.1 upon the making of an order for costs against a person who is not a party. Rule 42.3.2 says that rule 42.3.1 does not limit the power of the court to make orders within particular categories. The categories upon which Sanum-Kehlbeck relies are: "(c) to make an order for payment, by a person who has committed contempt of court or an abuse of process of the court, of the whole or any part of the costs of a party to proceedings occasioned by the contempt or abuse of process, or" "(d) to make an order for costs against a person who purports, without authority, to conduct proceedings in the name of another person" 7 It is accepted that there is no general jurisdiction to award costs against a non-party and that such an order can be made solely by reference to the categories in rule 42.3.2: Rickard Constructions Pty Ltd v Rickard Hails Moretti Pty Ltd [2008] NSWCA 283. 8 Sanum-Kehlbeck places particular emphasis on rule 42.3.2(c) and the proposition that Dr Seeger committed an abuse of process. The particular species of abuse said to be involved is that identified by Sheller JA in Carson v Legal Services Commissioner [2000] NSWCA 308, by reference to observations of Mason CJ, Deane J and Dawson J in Walton v Gardiner [1993] HCA 77; (1993) 177 CLR 378, where it was said that proceedings will constitute an abuse of process if they can be clearly seen to be foredoomed to fail; and this is so regardless of the propriety of the purpose of the person responsible for the institution and maintenance of the proceedings. A "plainly unarguable" and "futile" test was adopted by the Court of Appeal in Lemoto v Able Technical Pty Ltd [2005] NSWCA 153; (2005) 63 NSWLR 300 in its discussion of circumstances in which a plaintiff's legal practitioner might be ordered to pay a defendant's costs. The impropriety relevant to abuse of process lies in the knowing pursuit of a claim that simply cannot succeed. 9 There is no reason to doubt that the same thinking holds good when the conduct in issue is that of defending rather than attacking. A person who knowingly maintains a defence against the obviously indefensible thereby commits an abuse. 10 I am not satisfied, however, that an abuse of process of this kind was committed. Genuine issues of standing were raised by the notice of appearance referred to at paragraph 7.9 of Mr Harding's submissions, quoted above. Those issues were determined in favour of Sanum-Kehlbeck on 15 December 2008 when White J found that it was Sanum-Kehlbeck, not Mr Reiner Kehlbbeck, that was the 51% shareholder. Despite what is said at paragraphs 6.11 and 6.12 of Mr Harding's submissions, White J's judgment proceeded on the basis that the question concerning the 51% shareholding was whether it was Sanum-Kehlbeck or Mr Kehlbeck, that held those shares; there was no suggestion that Dr Seeger was, in the proceedings, seeking to establish that he held those shares. 11 Once the question of standing had been determined by White J favourably to Sanum-Kehlbeck, as plaintiff, Sanum Australia, having filed a notice of appearance and grounds of opposition in court before that determination was made, did not seek to defend the winding up application. After the question of standing had been resolved adversely to it and an interlocutory regime had been put in place, Sanum Australia, as defendant, took no step until 15 January 2009 when its solicitor indicated that it would not oppose the making of a winding up order. 12 It is thus clear that the only opposition Sanum Australia actually offered was on the standing question, as to which the judgment of White J makes it clear that there was a genuine question to be determined. Once it had lost that argument, Sanum Australia effectively capitulated. 13 There is thus no basis for concluding that Sanum Australia knowingly maintained a defence against the obviously indefensible. There would accordingly be no basis for the making of a costs order against Mr Seeger under rule 42.3.2(c), even if were shown that it was he who instructed Mr Boskowitz on behalf of Sanum Australia. 14 In view of the conclusion just stated, it is not necessary, in the rule 42.3.2(c) context, to decide whether it was Dr Seeger who purported to instruct Mr Boskowitz on behalf of Sanum Australia. The point is, however, of significance to the rule 42.3.2(d) aspect to which I must now turn. I therefore record my conclusion it was Dr Seeger who purported to instruct Mr Boskowitz on behalf of Sanum Australia. There are two reasons for this. First, it is impossible to identify anyone else who might have done so. Second, Mr Boskowitz, in the course of a telephone conversation with Sanum-Kehlbeck's solicitor in January 2009, was asked who was instructing him in the proceedings and replied: "Dr Seeger is sitting next to me." 15 The question posed by rule 42.3.2(d) is whether Dr Seeger purported, without authority, to conduct proceedings in the name of Sanum Australia. 16 There were, at all material times, two directors of Sanum Australia, Mr Kehlbeck and Dr Seeger; and this was so despite the filing with ASIC in October 2008 of notification that Dr Seeger had become the sole director. It may be accepted that a resolution of directors was necessary in order to cause a solicitor to be retained by Sanum Australia for the purpose of appearing in response to Sanum-Kehlbeck's originating process and filing a notice of appearance. 17 Regard must be had to the substantial reality of this litigation. Although it was, in form, a claim by Sanum-Kehlbeck for an order for the winding up of Sanum Australia, it was, in reality, a dispute between Mr Kehlbeck on the one hand and Dr Seeger on the other about control of Sanum Australia. Neither individual was a party to the proceedings but, in the particular circumstances, Dr Seeger was the only person who could cause Sanum Australia to defend or, at least, put Sanum-Kohlbeck to proof. In addition, the position that defence of the proceedings sought to protect was that which White J held did not exist, that is, that Sanum-Kehlbeck was not a shareholder in Sanum Australia and therefore had no standing to initiate winding up proceedings. 18 It is, to my mind, clear that Dr Seeger set Sanum Australia in motion to defend Sanum-Kehlbeck's winding up application as a means of seeking to retain and assert his own dominion over Sanum Australia – that he was the "real party" as referred to by Mason CJ and Deane J in Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178 at 190 and that the defence he mounted ostensibly for Sanum Australia was really a defence of his own position and own interests engaged in, as it had to be, through and in the name of Sanum Australia. 19 Ms Merkel submitted on behalf of Dr Seeger that he was, in effect, acting for the company in the same way as if leave under s 237 of the Corporations Act 2001 (Cth) had been granted to him and that the absence of that leave was, in substance, a procedural irregularity. There is some merit in that submission, but acceptance of the analogy would carry with it an assumption that any leave granted would very likely have been on the usual terms that the person granted leave protect the company against costs unless and until, in the light of the outcome, it is seen appropriate that those costs be an impost on the company's own financial resources. The reality of the situation, as it seems to me, is that Dr Seeger appropriated to himself a position that, had it been formally sought and granted, would almost certainly have put him at risk personally as to the company's costs. 20 The nature of these proceedings as, in substance, a dispute between Mr Kehlbeck and Dr Seeger in which Sanum Australia, at the instigation of Dr Seeger, argued the case that Dr Seeger would have argued had he been a party (being, in any event, a case that served his interests to the exclusion of those of his co-shareholder), coupled with the factual finding about how Mr Boskowitz came to be retained and instructed, leads me to conclude that the case is within the rule 42.3.2(d) description. 21 I am satisfied, therefore, that it is open to the court, as a matter of discretion, to order that Sanum-Kohlbeck's costs be paid by Dr Seeger. If Sanum Australia were ordered to pay Sanum-Kahlbeck's costs, the financial burden would fall as to 49% on Dr Seeger and 51% on Sanum-Kohlbeck itself, so that the effective recovery would be as to 49% only. That is enough to cause me to think that the discretion should be exercised and Dr Seeger should be made to bear 100%. 22 There is then the question whether it should be ordered that costs be assessed on the indemnity basis. I am of the opinion that no sufficient basis for such an order has been shown. There was a genuine issue as to the identity of the 51% shareholder. That was determined by White J in favour of Sanum-Kaklbeck. Thereafter, as I have said, Sanum Australia effectively capitulated. I do not discern in this any delinquency of the kind that must be found to warrant assessment on the indemnity basis. 23 In the result, therefore, it is ordered that Dr Hilbert Seeger pay the plaintiff's costs of the proceedings as a whole, such costs to be assessed on the party/party basis. ********** 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.