Supreme Court New South Wales Medium Neutral Citation: Young v Kruger [2012] NSWSC 628 Hearing dates: 31/05/2012 Decision date: 19 June 2012 Jurisdiction: Common Law Before: Harrison AsJ Decision: (1) Leave to appeal is not granted. (2) The summons filed 4 November 2011 is dismissed. (3) The plaintiffs are to pay the defendant's costs as agreed or assessed. Catchwords: APPEAL FROM LOCAL COURT - plaintiffs successful at Local Court - appeal against decision that parties pay their own costs -Calderbank offer by plaintiffs - whether plaintiffs satisfied court that costs discretion should have been exercised in their favour - leave to appeal refused Legislation Cited: Civil Procedure Act 2005 Corporations Act 2001 (Cth) Local Court Act 2007 Uniform Civil Procedure Rules 2005 Cases Cited: A Team Diamond Headquarters Pty Ltd v Main Road Property Group Pty Ltd [2009] VSCA 208 Be Financial Pty Ltd as Trustee for Be Financial Operations Trust v Das [2012] NSWCA 164 Brereton v Higgins [2004] NSWCA 48 Calderbank v Calderbank [1976] Fam 93 Campbell & Co v Pollak [1927] AC 732 Cat Media Pty Ltd v Allianz Australia Insurance Ltd [2006] NSWSC 790 Hall v Poolman [2009] NSWCA 64 Hall v Poolman [2007] NSWSC 1330 House v The King (1936) 55 CLR 499 Luxmore Pty Ltd v Hydedale Pty Ltd [2008] VSCA 212 McDonnell v McDonnell [1977] 1 All ER 76 Messiter v Hutchinson (1987) 10 NSWLR 525 Ohn v Walton (1995) 36 NSWLR 77 Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 Ritter v Godfrey [1920] 2 KB 47 SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 Category: Principal judgment Parties: David Gregory Young (First Plaintiff) Kruger Specialist Services Pty Limited (In Liquidation) (Second Plaintiff) Susan Margaret Kruger (Defendant) Representation: RD Marshall (Plaintiffs) D Accoto (Defendant) Gillis Delaney Lawyers (Plaintiffs) Hall Partners (Defendant) File Number(s): 2011/353021 Decision under appeal Date of Decision: 2011-10-13 00:00:00 Before: Maloney LCM File Number(s): 2010/5355 Judgment 1HER HONOUR: By summons filed 4 November 2011, the plaintiffs seek orders, firstly, that pursuant to s 40(2) of the Local Court Act 2007 leave be granted to the plaintiffs to appeal; secondly, that the appeal be allowed; thirdly, the costs order made in the Local Court on 13 October 2011 be set aside; and fourthly, instead of the costs order made in the Local Court on 13 October 2011, there be an order that the defendant pay the costs of the plaintiffs on the ordinary basis up to the end of 12 August 2010 and thereafter on an indemnity basis. 2The first plaintiff is David Gregory Young ("Mr Young"). The second plaintiff is Kruger Specialist Services Pty Limited (in liq) ACN 112 320 117 (collectively, "the plaintiffs"). Mr Young is the official liquidator of Kruger Specialist Services. The defendant is Susan Margaret Kruger ("the defendant") who was the sole director and also a creditor of Kruger Specialist Services. The plaintiffs were also the plaintiffs in the Local Court and the defendant was also the defendant in the Local Court. 3In the Local Court the plaintiffs sued the defendant to recover preference payments totalling $20,460. The cause of action sued upon was purely statutory and is contained within Part 5.7B of the Corporations Act 2001 (Cth), being a proceeding available to a liquidator, intended to benefit creditors. 4The plaintiffs succeeded in obtaining judgment for that amount plus interest. On 13 October 2011, the Magistrate ordered that each party pay their own costs of the proceedings. The appeal 5Section 40(2) of the Local Court Act provides that a party who is dissatisfied with an order as to costs of the Local Court may appeal to the Supreme Court, but only by leave of the Supreme Court. Section 41 of the Local Court Act provides that this Court may determine an appeal either (a) by varying the terms of the judgment or order, or (b) by setting aside the judgment or order, or (c) by setting aside the judgment or order and remitting the matter to the Local Court for determination in accordance with the Supreme Court's directions, or (d) by dismissing the appeal. Whether leave should be granted 6The first issue to be determined is whether leave to appeal should be granted. The defendant opposed leave being granted. 7In House v The King (1936) 55 CLR 499 at 504-505, the High Court set out the limited circumstances in which an appeal may lie against an exercise of discretion at first instance and stated that "it is not enough that the judges composing the appellate court (...) would have taken a different course". There must have been some error at first instance in exercising the discretion. 8Recently in Be Financial Pty Ltd as Trustee for Be Financial Operations Trust v Das [2012] NSWCA 164, the Court of Appeal set out the principles to be considered in deciding whether leave to appeal should be granted, at [32], [33] and [35] (per Basten JA): "32 The principles governing cases such as these have recently been restated in Zelden v Sewell; Henamast Pty Ltd v Sewell [2011] NSWCA 56. As Campbell JA noted (with the agreement of Young JA) at [22]: "It is of some importance to reiterate the principles that were stated in Carolan v AMF Bowling Pty Limited [1995] NSWCA 69, where Sheller JA said that an applicant for leave must demonstrate something more than that the trial judge was arguably wrong in the conclusion arrived at. Cole JA relied on a principle that where small claims are involved, it is important that there be early finality in determination of litigation, otherwise the costs that will be involved are likely to swamp the money sum involved in the dispute." 33 In Jaycar Pty Ltd v Lombardo [2011] NSWCA 284 Campbell JA, with the agreement of Young and Meagher JJA, expanded on his summary of Carolan, noting that Kirby P had recognised "that ordinarily it was appropriate to grant leave to appeal only concerning matters that involve issues of principle, questions of general public importance or an injustice which is reasonably clear, in the sense of going beyond [what is] merely arguable": at [46]. ... 35 In Coulter v The Queen [1988] HCA 3; 164 CLR 350, dealing with a challenge to a refusal of the South Australian Full Court to grant leave to appeal in a criminal matter, the majority noted that a leave requirement was a preliminary procedure "recognised by the legislature as a means of enabling the court to control in some measure the volume of appellate work requiring its attention": at 356 (Mason CJ, Wilson and Brennan JJ). That statement is clearly applicable to civil, as well as criminal, appellate jurisdiction." 9(The reference to small claims in [32] is not a reference to small claims in the Small Claims Division of the Local Court.) 10The Court of Appeal at [38] also noted the importance of s 60 of the Civil Procedure Act 2005, which deals with proportionality of costs. I have referred to s 60 in more detail under the next heading. 11Hence it is important to keep in mind that the purpose of a requirement of leave to appeal is that it is intended to act as a filter to ensure that unsuitable appellate proceedings are not able to be brought with the demands which that places upon the resources of the court and the burden which it places upon other parties and the delays which it causes to other litigants. 12So far as seeking leave to appeal a costs order, in A Team Diamond Headquarters Pty Ltd v Main Road Property Group Pty Ltd [2009] VSCA 208, the Victorian Court of Appeal stated: "[8] Of critical importance in this case is whether the order for costs which the applicants seek to impugn is attended with doubt sufficient to justify the granting of leave. As was said by Redlich JA in Spotless Group Limited v Premier Building and Consulting Pty Ltd: It is well established that an appellate Court will not, in the absence of strong reasons, interfere with the exercise of discretion by the Court below with respect to the question of costs. As Callaway JA said in Hanlon v Brookes: It is almost invariably the case that the judge at first instance is better placed to deal with the costs after a long trial and counsel seeking leave ordinarily has a difficult task. The test is not whether we should have exercised the discretion in the same way as his Honour did but whether there was or were a ground or grounds on which he could reasonably do so. This Court may disturb the costs orders made below where an error in principle is identified, where the judge acted on a manifestly erroneous view of the facts, or where the award is manifestly unreasonable. But the applicant must satisfy a high threshold for such a grant of leave. The test to be applied is not whether the Court of Appeal would have made the same order but whether there is a ground upon which the order by his Honour could reasonably be made. Some manifest error must be exposed to take the case out of the ordinary situation in which, wherever a discretion is to be exercised, minds may differ on the result. Ormiston JA recognised this high threshold in Transport Accident Commissioner v O'Reilly observing that: It is extraordinarily difficult to show that a court of first instance or a tribunal with wide discretionary powers has erred in the exercise of its powers to award costs, if there be some basis for making an order other than the conventional order in favour of the successful party." 13The plaintiffs made two primary submissions as to why leave should be granted. The first is that the Magistrate failed to consider its written offer to settle dated 12 August 2010. The second is that the Magistrate acted on an error of principle in departing from the general principle that costs follow the event. The law on costs 14The starting point for costs is ss 60, 98(1) and 98(4) of the Civil Procedure Act. They relevantly read: "60 Proportionality of costs In any proceedings, the practice and procedure of the court should be implemented with the object of resolving the issues between the parties in such a way that the costs to the parties is proportionate to the importance and complexity of the subject-matter in dispute." and "98 Courts powers as to costs (1) Subject to rules of court and to this or any other Act: (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis. ... (4) In particular, at any time before costs are referred for assessment, the court may make an order to the effect that the party to whom costs are to be paid is to be entitled to: (a) costs up to, or from, a specified stage of the proceedings, or (b) a specified proportion of the assessed costs, or (c) a specified gross sum instead of assessed costs, or (d) such proportion of the assessed costs as does not exceed a specified amount..." 15Rules 42.1 and 42.2 of the Uniform Civil Procedure Rules 2005 read: "42.1 General Rule that costs follow the event Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs. 42.2 General rule as to assessment of costs Unless the court orders otherwise or these rules otherwise provide, costs payable to a person under an order of the court or these rules are to be assessed on the ordinary basis." 16The Magistrate delivered his substantive written decision on 29 September 2011. He made a finding that the defendant Susan Kruger had paid $91,000 out of her own moneys in reduction of the debt to the Australian Taxation Office of $111,193. In these proceedings the liquidator sought a further sum of $20,460. In dismissing her defence raised under ss 1317S and 1318 of the Corporations Act (Cth), his Honour stated at [39] (AB 428): "So it is the situation, regrettable in the extreme, that I am bound by the decisions of these higher courts. I decline to make an order under CA s. 1317S and s. 1318. I say regrettable because (a)not one cent of the proceeds of this litigation will go to creditors and (b) Mrs. Kruger, being an intrinsically honest person, will solely bear the effect of it." 17In his extempore judgment on costs delivered on 13 October 2011, his Honour stated at 9-10 (AB 450-451): "The exercise of costs is always a discretionary one. It is compensatory and it is not punitive in its operation. However, as submitted by Mr Hall, the general approach recognises that the Court may deprive an otherwise successful party of costs in relation to particular matters. 'A court may however depart from the general principle that costs follow the event if it is satisfied some other order should be made.' A court may in appropriate circumstances either order costs against or merely refrain from ordering costs in favour of a successful party. The case that I have been dealing with does not strictly fall within Donald Campbell and Co v Pollak, or any of the other cases that Mr Hall has referred me to, other than to say that these general principles as to costs are indeed noted within, are then extrapolated through the facts of those particular cases. Here I have a situation, and I harken back to it: $111,000 was owed to the Australian Taxation Office, and there is only $20,000 outstanding. The costs of this litigation are well in advance of the amount claimed, far in advance. I agree with Mr Hall's submission that these proceedings were designed to advance one party and one party only, and that is the liquidator. Creditors, to use an Australian expression, were not going to get a look in. Indeed, so far as getting the Australian look in, Mrs Kruger was paying the tax debt from her own resources, and a document was tendered to me in the proceedings that exhibited that fact. Costs are discretionary: they do not always have to follow the event. The appropriate order in this case is that each party can pay their own costs and I make that order accordingly." The Calderbank offer 18An offer made by letter to settle a proceeding which is later sought to be relied upon in the determination of costs draws its name from the English case of Calderbank v Calderbank [1976] Fam 93. 19The plaintiffs made such a written offer to settle the proceedings on 12 August 2010 (AB 435). It states: "...We consider our clients have very strong prospects of obtaining a judgment against your client for the full amount and, if so, we expect the liability to your client to be approximately: Amount claimed in Statement of Claim $24,432.15 Additional interest to judgment (say 6 months) $800.00 Costs, say 80% of $15,000.00 $12.000.00 _________ TOTAL $37,232.15 We expect your client's costs of defending the proceedings to be approximately $15,000.00 and, therefore, if judgment is eventually entered against your client after a contested hearing, the liability to your client will exceed $52,000.00. In an effort to avoid the time and costs associated with a contested hearing, our client is prepared to accept the principal amount of the claim, being $20,460.00, in full and final settlement of the proceedings on the basis that the settlement sum is paid within 14 days of this offer being accepted..." 20The defendant had seven days within which to accept that offer to settle proceedings for the principal sum of $20,460.00, without interest or costs. The plaintiffs say that its offer bettered what the Magistrate actually ordered, the plaintiffs having achieved a judgment for $23,272.11 with interest from 22 May 2009. 21The English Court of Appeal has determined that a Calderbank offer "should influence but not govern the exercise of the discretion", see McDonnell v McDonnell [1977] 1 All ER 766 at 770. 22Similarly in New South Wales, it has been held that a Calderbank letter should be taken into account by the court in determining whether to make a special costs order displacing the usual order that costs follow the event: Messiter v Hutchinson (1987) 10 NSWLR 525 at 528 per Rogers J. However, in considering the weight that should be given to such a letter, all the relevant circumstances must be taken into account: Messiter v Hutchinson at 529. See also SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [37] per Giles JA and the recent decision of Cat Media Pty Ltd v Allianz Australia Insurance Ltd [2006] NSWSC 790. The effect is that while the court may take such an offer into account in determining the issue of costs, it does not determine the issue. It is merely one factor for the court to weigh in the exercise of its discretion. 23At the costs hearing in the Local Court Mr Marshall made the submission that the plaintiffs had obtained a better result at trial than they had offered to settle for in their letter (T1.40-47). The Magistrate responded "page 2 [of the letter] yes, you've got [$]20,460" (T1.49). The Magistrate therefore acknowledged that the offer was made and did not think much of it. That offer did not on any view represent a significant compromise. The Magistrate was obliged to take the offer into account but he was not obliged to determine the issue in accordance with that offer. 24In my view the Magistrate did take the offer into account although I accept that it was not specifically referred to in his extempore judgment. As the Victorian Court of Appeal determined in Luxmore Pty Ltd v Hydedale Pty Ltd [2008] VSCA 212: "This Court will assume, as should the parties, that every matter addressed in argument on costs has been considered. This Court will set its face against any proposition which would require judges disposing of questions of costs to give elaborate reasons." 25The plaintiffs' submission that the Magistrate failed to consider the Calderbank offer, thereby making a "manifest mistake" justifying leave to appeal being granted, fails. Was departure from the general principle warranted? 26The plaintiffs referred to Ritter v Godfrey [1920] 2 KB 47 at 60-61, where Atkin LJ stated that the grounds for departure from the rule that costs follow the event were limited to: (a) unreasonable or improper conduct of the plaintiff which has induced the defendant reasonably to believe it had a good defence; (b) unreasonable or improper conduct of the plaintiff calculated to occasion unnecessary litigation and expense; or (c) in the course of the transactions upon which the plaintiff sues, the plaintiff has done some wrongful act involving criminal or quasi criminal conduct such as fraud, a crime, or preparation for a fraud or crime, or possibly some act of serious oppression. 27The plaintiffs also referred to Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72, where McHugh J stated: "[69] The traditional exceptions to the usual order as to costs focus on the conduct of the successful party which disentitles it to the beneficial exercise of the discretion. In Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd, Devlin J formulated the relevant principle as follows: 'No doubt, the ordinary rule is that, where a plaintiff has been successful, he ought not to be deprived of his costs, or, at any rate, made to pay the costs of the other side, unless he has been guilty of some sort of misconduct.' "Misconduct" in this context means misconduct relating to the litigation, or the circumstances leading up to the litigation. Thus, the court may properly depart from the usual order as to costs when the successful party by its lax conduct effectively invites the litigation; unnecessarily protracts the proceedings; succeeds on a point not argued before a lower court; prosecutes the matter solely for the purpose of increasing the costs recoverable; or obtains relief which the unsuccessful party had already offered in settlement of the dispute." 28It is important to bear in mind that these cases were decided before the introduction of the Civil Procedure Act, in particular s 60, and the Uniform Civil Procedure Rules. Furthermore McHugh J expressly resisted listing each instance in which it would be appropriate for a court to depart from the usual order as to costs (at 98). 29It is clear that there were no allegations of liquidator's misconduct in the conduct of the proceedings before the Magistrate. However, the defendant argued (T 6.43), and the Magistrate accepted (T 10.9), that the proceedings could only ever have advanced the position of the liquidator, rather than the second plaintiff's creditors. 30On 13 October 2011 his Honour said (at T 10.5-6) "Here I have a situation, and I harken back to it: $111,000 was owed to the Australian Taxation Office, and there is only $20,000 outstanding." The Magistrate also stated (at T 7.38-45): "...but the largest sum of unsecured creditors was the Australian Taxation Office, of $111,193. The difference between the total deficiency and what the ATO was due is in round figures $20,000, which coincidentally, in round figures, happens to be the amount of the claim, because that happens to be the amount of the preference payments that the defendant was - for the want of a better description, guilty of appropriating towards her own cause." 31His Honour considered Hall v Poolman [2007] NSWSC 1330 in which Palmer J commented on the bringing of insolvent trading proceedings which benefit only the liquidator or commercial funder. Palmer J stated at [393] and [395]: "[393] A liquidator who enters into a litigation funding agreement and promotes expensive litigation resulting in little or no return to creditors without first seeking the Court's direction that he or she is justified in doing so runs the risk that the Court will, at an appropriate stage in the proceedings and of its own motion, exercise the power to enquire into the liquidator's conduct conferred by CA s 536(1)(a). ... [395] A liquidator is appointed to salvage as much as possible for the benefit of creditors. If a proposed course of action - whether it be a legal proceeding or a commercial transaction - is not likely to produce a worthwhile benefit for creditors, the liquidator should not undertake it simply because it will generate enough to pay the liquidator's fees in undertaking that very transaction or litigation - a practice which is familiarly known in the market place as 'churning and burning'." 32However, in Hall v Poolman [2009] NSWCA 64 the Court of Appeal at [128] stated: "[128] These cases confirm the general proposition that there is a public interest in liquidators bringing recovery proceedings, such as proceedings against directors for breach of duty or insolvent trading and proceedings for recovery of unfair preferences. The public interest in the liquidators in the present case taking the Main Proceedings and the Unfair Preference Proceedings was consequently a relevant factor for Palmer J to take into account in exercising his discretion to order an inquiry under s 536." 33(The proceedings before the Magistrate did not involve any litigation funding, something the Magistrate stressed in his costs judgment.) 34The plaintiffs submitted that the fact that the fiercely defended litigation resulted in the incurring of liquidator's remuneration and the expense of the litigation increasing to the point where, as the Magistrate found, there was no return to unsecured creditors, is not a reason to deny costs to the successful plaintiffs and this is an irrelevant consideration. I do not agree with this proposition. Consideration should have been given by the liquidator to the fact that the amount of costs being expended, if proceedings were commenced, was likely to equal or exceed the amount sought to be recovered. The amount at stake in litigation is a relevant consideration when considering how to exercise the discretion as to costs (Brereton v Higgins [2004] NSWCA 48 per Giles JA at [24]). 35Furthermore, as set out in Ohn v Walton (1995) 36 NSWLR 77: "The usual rationale of making a costs order is that it is just and reasonable that the successful party should be reimbursed for costs incurred, in the absence of grounds connected with the charge or the conduct of the proceedings which make it unjust or unreasonable that there should be such reimbursement." (emphasis added) 36In this case the Magistrate applied the correct principle on costs, that is that the court is to order that costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs. His Honour in his discretion decided that some other costs order should be made because the defendant had repaid $91,000 to the ATO from her own funds and the $20,000 sought to be recovered did not benefit creditors, but went to pay the liquidator's and lawyers' costs. In the exercise of his discretion, his Honour decided that the appropriate costs order should be that each party pay its own costs. By making this order, the defendant did not get the benefit of a costs order in her favour either. She elected to defend the claim that put the liquidator to proof on matters, some of which were conceded on the morning of the hearing. 37In my view, the plaintiffs have not discharged their onus and shown that the costs order was based on an error of principle or attended with sufficient doubt to warrant reconsideration on appeal. Nor have they shown that they would suffer a reasonably clear injustice if the costs order were not set aside. 38Accordingly, leave to appeal is not granted. The summons filed 4 November 2011 is dismissed. Costs are discretionary. Costs usually follow the event. This is an appropriate order in the circumstances. The plaintiffs are to pay the defendant's costs as agreed or assessed. The Court orders that: (1) Leave to appeal is not granted. (2) The summons filed 4 November 2011 is dismissed. (3) The plaintiffs are to pay the defendant's costs of as agreed or assessed. ********** 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. Decision last updated: 20 June 2012