New South Wales Supreme Court CITATION : Arena Management Pty Ltd (Admin App) (Rec & Mgrs App) & Anor v Campbell Street Theatre Pty Ltd (No 2) [2010] NSWSC 1230 HEARING DATE(S) : Written submissions by 9 September 2010 JUDGMENT DATE : 26 October 2010 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Palmer J DECISION : Liquidator personally ordered to pay defendants' costs on indemnity basis. CATCHWORDS : CORPORATIONS – LIQUIDATORS – COSTS – liquidator's claims failed – whether liquidator personally should pay defendants' costs on indemnity basis – whether liquidator acted prudently and reasonably in prosecuting the proceedings. CATEGORY : Consequential orders - Adsett v Berlouis (1992) 37 FCR 201 - Arena Management Pty Ltd (Admin App) (Rec & Mgrs App) & Anor v Campbell Street Theatre Pty Ltd [2010] NSWSC 957 CASES CITED : - Magill v Magill (2006) 231 ALR 277 - Mead v Watson as liquidator of Hypec Electronics [2005] NSWCA 133 - Rajski v Bainton (1990) 22 NSWLR 125 Arena Management Pty Ltd (Admin App) (Rec & Mgrs App) (First Plaintiff) PARTIES : Randall Joubert in his capacity as Administrator of Arena Management Pty Ltd (Admin App) (Second Plaintiff) Campbell Street Theatre Pty Ltd (Defendant) FILE NUMBER(S) : SC 2010/290258 COUNSEL : G.P. George (Plaintiffs) A.J. McInerney, D.J. Barnett (Defendant) SOLICITORS : Pateman Legal (Plaintiffs) Piper Alderman Lawyers (Defendant) 2010/290258 Arena Management Pty Ltd (Admin App) (Rec & Mgrs App) & Anor v Campbell Street Theatre Pty Ltd (No 2) JUDGMENT 26 October, 2010 1 On 2 September 2010 I dismissed the Plaintiffs' Amended Originating Process: Arena Management Pty Ltd (Admin App) (Rec & Mgrs App) & Anor v Campbell Street Theatre Pty Ltd [2010] NSWSC 957. I will assume that the reader is familiar with that judgment. 2 Now in issue is the question of costs. The parties have delivered written submissions, which are extensive and comprehensive. I do not think anything further is to be gained by hearing oral submissions. As I foreshadowed at the trial, I have therefore determined the issue in Chambers, without further argument. 3 In dispute in the proceedings were two essential issues: was the Deed of Charge enforceable and, if so, what was the amount secured. The Plaintiffs contended that the Charge was unenforceable or should be set aside and that, in any event, it did not secure any indebtedness of Arena to Campbell Street Theatre (CST). On both issues the Plaintiffs were unsuccessful. 4 Mr A. McInerney of Counsel, who appears with Mr D.J. Barnett of Counsel for CST, submits that not only should costs follow the event but that the liquidator, Mr Joubert, should be ordered to pay CST's costs on the indemnity basis, without indemnification from the assets of Arena. Mr McInerney says that such an order is required because Mr Joubert did not act reasonably and prudently in bringing and prosecuting the proceedings so that the expenses incurred in the litigation were not "properly incurred" in the liquidation. Mr McInerney relies on the principles discussed in Mead v Watson as liquidator of Hypec Electronics [2005] NSWCA 133 at [11]-[13], and in Adsett v Berlouis (1992) 37 FCR 201 at 211-212. 5 Mr G. George of Counsel, who appears for the Plaintiffs, resists any costs order against the Plaintiffs and submits that each party should pay its and his own costs. 6 Mr George submits that, although the Plaintiffs failed on the issue as to enforceability of the Charge, they succeeded on the issue as to indebtedness secured by the Charge. That appears to be the principal ground upon which he submits that each party should be left to bear his and its own costs. 7 I am unable to understand this submission. The Plaintiffs sought a declaration that there "is no money owing by [Arena] to [CST] which is secured by the Charge". The Plaintiffs failed to obtain that declaration. On the contrary, at [33] of the judgment, I found that amount secured by the Charge was $665,883. As the Plaintiffs failed on both major issues in the proceedings, there is no basis for an order that each side should bear its own costs. 8 Mr McInerney submits that Mr Joubert, as liquidator of Arena, acted negligently and unreasonably in bringing and prosecuting these proceedings, for five reasons. 9 First, Mr McInerney relies on the fact that Mr Joubert sought to advance in cross examination of Mr Kevin Jacobsen a positive case of fraud as a basis for a finding that no monies were secured by the Charge. That allegation was a serious one and it was not pleaded, as it ought to have been: judgment [13]-[16]; Magill v Magill (2006) 231 ALR 277, at [39]; Rajski v Bainton (1990) 22 NSWLR 125, at 135. 10 Mr George responded to this submission in his written submissions, as follows: "The first argument (para 11 of the defendant's submissions) is that a claim in fraud was advanced and this was not pleaded. This is errant nonsence [sic]. In the points of claim (paras 14 to 18) it was pleaded an initial advance of $500,000 was paid and repaid and the first plaintiff made advances to the defendant so that at June 2009, the defendant owed the first plaintiff $290,000. In its points of defence, the defendant denied a debt of $290,000 was owed to the first plaintiff and it alleged four additional loan sums were advanced to the first plaintiff (para 18). Joinder of issue therefore occurred (see UCPR Rule 14.27(1)). In these circumstances, it was a legitimate forensic exercise for the first plaintiff to test where the alleged payments had come from, whether the monies had been paid at all to the first plaintiff and if paid, whether the sums had been paid by the defendant." 11 I do not agree that, CST having alleged in its Points of Defence the making of certain loans, it was then open to Mr Joubert or Mr George, without any pleading in reply, to advance in the course of cross examination a positive case of fraud to rebut the allegations of loan. Suggesting a positive case of fraud went far beyond "testing where the payments had come from". 12 I do not need to repeat the rules of pleading and the Bar Rules governing allegations by Counsel of fraud: see Bar Rule 37(a). It is entirely impermissible, as an abuse of the privilege of the courtroom and of the advocate, to put to a witness in cross examination that he or she has been party to a fraud directly affecting the subject matter of the proceedings without having pleaded and particularised the fraud and without being in possession of material which could provide a proper basis for the allegation. 13 In the present case, quite apart from the absence of any pleading of fraud on the part of Mr Joubert, Mr George was not able to put forward any evidence properly founding an allegation of fraud. It was apparent from the way in which he was cross examining that he was asking questions of Mr Jacobsen – not knowing the answers to those questions by reference to any documentary evidence in his possession – and hoping that the answers could in some eventually way support a submission of fraud. 14 There is another aspect of Mr George's response to Mr McInerney's submission which calls for comment. Mr George, in his written submissions, describes Mr McInerney's submission as to failure to plead fraud as "errant nonsence" – presumably meaning "arrant nonsense". The use of such language by counsel is to be deplored. Robust advocacy, which is commendable, does not license rudeness, which is not. The use by counsel of intemperate language, particularly when there is, in fact, nothing calling for adverse comment, suggests a degree of emotional involvement which counsel have a duty to avoid if they are to discharge their duties to the client and to the Court with proper professionalism: see Bar Rule 20. 15 The second criticism which Mr McInerney makes is Mr Joubert's failure, noted in the judgment at several points, to tender evidence which, obviously, could have improved his case. Of particular importance is that Mr Joubert, in asserting that no debt was secured by the Charge, seemed to rely entirely on the absence in Arena's general ledger of relevant entries when there was clear evidence in bank statements and other documents of associated companies supporting the making of the loans. 16 In response, Mr George submits, in essence, that Mr Joubert was justified in relying solely upon what appeared in Arena's own books and accounts. I disagree. Arena was part of a group of companies which were related and which were under the control of at least some common directors. In interpreting the effect of the financial evidence, what was required of Mr Joubert was pragmatic, commercial common sense. The material available to him, from a variety of sources, indicated as a matter of commercial reality that the alleged loans had indeed been made. The very correspondence of payments in and out of bank accounts strongly supported the alleged loan transactions. I conclude that it was unreasonable for Mr Joubert to have blinkered himself in the way that he did in deciding that there was no evidence of secured indebtedness between Arena and CST. 17 The third criticism upon which Mr McInerney relies is that Mr Joubert did not support his case as to Arena's insolvency in the way that the Court would reasonably expect, that is, by a comprehensive analysis of Arena's financial position as a whole at the relevant time so as to enable Mr Joubert, as an expert insolvency practitioner, to draw together the evidence supporting his opinion that Arena was insolvent. 18 Mr George gives no explanation for this failure. He does not, for example, assert that Mr Joubert had insufficient assets in the liquidation to prepare the case properly. 19 In short, Mr Joubert brought claims which were bound to fail if he could not prove insolvency. The evidence as to insolvency which Mr Joubert adduced was piecemeal and fragmentary but he suggested that the Court should draw inferences from that evidence. 20 Further, some of the evidence which Mr Joubert tendered on the issue of insolvency was of no assistance at all. He tendered a document apparently showing aged debts of Arena which he said he had found in Arena's financial records. He himself had conducted no meaningful analysis of this document. Indeed, the document was so deficient in information that, in cross examination, Mr Joubert was forced to concede that one could not draw from the document any inference of Arena's insolvency. 21 I am of the view that the evidence relied upon by Mr Joubert to support an assertion of insolvency was so weak that he was not acting responsibly and prudently as liquidator in allowing the case to go forward to trial. If better evidence was available – for example, if Mr Joubert had been able to show insolvency through a comprehensive analysis of Arena's financial position – then he was not acting reasonably and prudently as liquidator in failing to prepare that evidence before the trial. 22 The fourth and fifth criticisms which Mr McInerney makes are that Mr Joubert advanced two claims which were unsupportable. The first claim was that Arena had been improperly using funds in a certain account to trade while insolvent. That claim failed for lack of any evidence that the use to which Arena put the funds was circumscribed in any way. The second claim failed because I simply could not understand what it meant. 23 Mr George says, in response, that costs cannot be ordered against Mr Joubert personally simply because his case ultimately failed. That, of course, is an unexceptionable proposition but, for the reasons which I have given, the complaints against Mr Joubert's conduct of the litigation go far beyond the mere fact that the claims all ultimately failed. 24 In determining whether or not Mr Joubert acted properly and responsibly as liquidator of Arena in bringing and prosecuting these proceedings I must ask whether a prudent liquidator, with the benefit of commercial common sense and experience and with the benefit of competent legal advice, could reasonably have concluded that these proceedings had a sufficient prospect of success to justify spending a considerable amount of the creditors' money on his own legal costs, not to mention risking an adverse costs order if the case failed. 25 What is a "sufficient prospect" in the context of this question does not mean only "fairly arguable" – that is a low threshold to surmount if one is resisting an application for summary dismissal of proceedings. However, a liquidator, like a trustee, is dealing with other people's money and he or she must look at the ultimate result of the proceedings, not merely whether it will survive an application for summary dismissal. 26 In his submissions as to costs, Mr George sought leave to tender on the question of costs experts' reports which he did not read in the trial. Mr McInerney objected to the tender. I do not see how evidence, going to a substantive issue in the proceedings, which has not been admitted at the trial can be tendered after judgment on the question of costs. To allow such evidence would be to invite reconsideration of the issue decided at the trial in the absence of the evidence now tendered. I decline to receive such evidence. 27 For the reasons advanced by Mr McInerney, I conclude that Mr Joubert did not act prudently and reasonably in commencing and prosecuting the proceedings. I order that Mr Joubert pay the Defendant's costs of the proceedings on the indemnity basis, without a right of indemnification out of the assets of Arena. – oOo – 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.