Supreme Court New South Wales Medium Neutral Citation: Marshall v QBE Insurance (Australia) Limited [2013] NSWSC 1935 Hearing dates: 5 December 2013 Decision date: 20 December 2013 Jurisdiction: Common Law Before: Schmidt J Decision: 1. Leave to appeal is granted. 2. The appeal is dismissed. 3. Unless the parties approach to be heard on costs within 21 days the order as to costs will be that the plaintiff pay the defendant's costs, as agreed or assessed. Catchwords: APPEAL - appeal from Local Court decision - costs - costs order - applicable principle - indemnity costs - applicable principle - Section 190 of the Evidence Act 1995 - no error established - orders Legislation Cited: Civil Procedure Act 2005 Corporations Act 2001 (Cth) Local Court Act 2007 Uniform Civil Procedure Rules 2005 Cases Cited: Edmunds-Jones Pty Limited v Australian Women's Hockey Association Inc [1999] NSWSC 285 FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178 Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 QBE Insurance (Australia) Limited v Hotchin [2013] NSWSC 315 Category: Principal judgment Parties: Stene Marshall (Plaintiff) QBE Insurance (Australia) Limited (ACN 003 191 035) Representation: Counsel: Mr J Loxton (Plaintiff) Mr AM Stewart (Defendant) Solicitors: JP Leong & Co (Plaintiff) Hicksons Lawyers (Defendant) File Number(s): 2013/245873 Publication restriction: None Judgment 1The plaintiff, Mr Marshall, was ordered to pay costs incurred by the defendant, QBE Insurance (Australia) Ltd, in Local Court proceedings brought by Cell Share Consortium Pty Limited (in liquidation), of which he was formerly a director, after he became aware that Cell Share had gone into liquidation, but informed neither the liquidator of the proceedings, nor QBE of the liquidation. He now seeks leave to appeal and appeals from the costs decision given by Grahame LCM on 16 July 2013. 2Under s 39 of the Local Court Act 2007 a party has a right to appeal to this Court on a question of law. An appeal that involves a question of mixed law and fact, or which concerns an order as to costs, may only be pursued with leave of this Court (s 40). 3Mr Marshall seeks to challenge the correctness of rulings as to the admission of certain evidence, factual findings, error as to the operation of s 98 of the Civil Procedure Act 2005 and the exercise of the costs discretion. He submitted that a decision to award costs against a non-party involved a question of law which does not require leave, as did the question of admissibility of evidence. 4I do not consider those submissions to be correct, but nevertheless, propose to grant leave to appeal, given the issues raised. For reasons which follow, the appeal must, nevertheless, be dismissed. 5For its part QBE not only resisted the appeal but also relied on a notice of contention, in which it submitted that the costs order could also be supported on the basis that even in the absence of any interest in the proceedings, Mr Marshall's conduct of the litigation for Cell Share was unreasonable or improper, causing it unnecessarily to expend the costs awarded in its favour. The proceedings below 6Cell Share commenced the proceedings in February 2012. They concerned a claim made against QBE under an insurance policy for goods lost in transition. Up until December 2011, Mr Marshall was recorded on ASIC records as being a director of Cell Share. He had sold his interest in Cell Share the preceding July to a Mr Nasser, but despite this, he continued to conduct the proceedings on its behalf. His wife remained a one-third shareholder of Cell Share. 7Cell Share went into liquidation on 24 August 2012, with the appointment of Mr Donnelly of Ferrier Hodgson as liquidator. It was not until 18 October 2012 that Mr Marshall informed Cell Share's solicitors of the liquidation. They advised Mr Donnelly of the proceedings on 19 October. Mr Donnelly advised them by letter of 22 October 2012 that he was without funds in the liquidation and that the proceedings would not be pursued. He asked that the Local Court be informed on 23 October that he consented to the proceedings being discontinued. QBE was advised of Mr Donnelly's appointment on 22 October. 8The Local Court was concerned to understand who had been instructing Cell Share's solicitors. Mr Zreika had carriage of the matter for Cell Share. He was then on leave and so a Mr Jamal appeared for Cell Share. The proceedings were adjourned and Mr Zreika ordered to provide an affidavit. On 5 December, having heard the parties Marshall LCM ordered that the proceedings be dismissed; that Cell Share pay QBE's costs, as agreed or assessed; and that QBE have leave to file a motion seeking a costs order against Mr Marshall. 9The hearing of that motion proceeded before Graham LCM on 24 June and 16 July 2013. Grahame LCM ordered that: "Notice of Motion granted. Verdict for Applicant (Defendant) on the notice of motion. Respondent to pay the applicants (Mr Marshall) costs on an indemnity basis from September 3, 2012 to 18 October 2012 plus costs thrown away by the hearing at Downing Centre Local Court on 23/10/12. Cost on the Notice of Motion to be paid by respondent (Mr Marshall) on an ordinary basis as agreed or assessed with 28 days." The evidence below 10Mr Tannie Kwong swore an affidavit on 28 February 2013 to which was annexed a letter of 5 November 2012 from Mr Donnelly, advising Cell Share's solicitors, amongst other things, that following representations from QBE, he would consent to the proceedings being dismissed and that Mr Marshall had failed to inform him of the proceedings, despite having been on notice since 3 September 2012 of his appointment. 11Mr Marshall objected to aspects of the affidavit and certain of the documents annexed, including the letter of 5 November and the affidavit sworn by Mr Zreika. 12The disputed evidence was pressed under both s 75 and s 190 of the Evidence Act 1995. There was a dispute as to whether the costs application was interlocutory, s 75 providing that 'in an interlocutory proceeding, the hearsay rule does not apply to evidence if the party who adduces it also adduces evidence of its source'. The evidence was provisionally received and later admitted under s 190. The cases advanced below 13QBE submitted in its written submissions that Mr Marshall had been Cell Share's sole director from 24 May to 2010 to 12 December 2011, the period in which its claim was said to have arisen and the demand was made on QBE. Thereafter Mr Nasser was the sole director and he and Mrs Marshall the sole shareholders, but Mr Marshal still assisted in the business and gave instructions to its solicitors in the proceedings. They understood that he remained a director. 14It was Mr Marshall who had conducted the litigation which was commenced in February 2012 and was delayed while he was overseas and not available to give instructions to its solicitors. Cell Share's defence was filed only on 7 August 2012 and Cell Share went into liquidation on 24 August. That was not revealed to its solicitors, or QBE, for another 6 weeks, during which considerable costs were incurred, even though Mr Marshall was aware from 3 September of the appointment. 15On 24 August, QBE served a notice to produce. On 28 August, it made an offer of compromise and Cell Share sought time to respond to the notice, while Mr Marshall was overseas. 16On 3 September 2012, Mr Marshall was notified of the liquidator's appointment. Despite this, he did not reveal the litigation to Mr Donnelly nor the appointment of the liquidator to Cell Share's solicitors or QBE. Instead, he gave instructions that QBE's offer be rejected and a counter offer be made. That was conveyed to QBE by Cell Share's solicitors on 13 September. 17On 19 September, QBE rejected the counter offer and advised that the proof of payment document Cell Share relied on to establish the claim was fraudulent. On 4 October QBE served a subpoena to produce documents on Cell Share and advised that steps would be taken to amend the defence to rely on the alleged fraud. An amended defence was later served. 18On 9 October 2012, there was a directions hearing in the Local Court and on 17 October, a return of subpoena at which some documents were produced by Cell Share. 19On 18 October, Mr Marshall revealed the appointment of the liquidator to Cell Share's solicitors. Mr Donnelly was informed of the proceedings on 19 October. QBE was notified of the liquidator's existence and instructions on 22 October. 20The directions hearing on 23 October was adjourned to 20 November, so that the liquidator's position could be explained to the Court and so that Cell Share's solicitor could explain who had furnished him with instructions. The hearing proceeded in December. 21QBE submitted that the evidence established that Mr Marshall had an interest in the litigation through his marriage to one of its shareholders. He was the driving force in the litigation in the period in issue. He was the only person who had knowledge of both the proceedings and the liquidation and still, he had pursued the proceedings as if he still had active management of Cell Share. 22Mr Marshall was the only person who could have prevented costs being unnecessarily incurred in the proceedings. He was under a duty to inform the liquidator of the proceedings and to inform Cell Share's solicitors of the liquidation, but did neither, contrary to his obligations under s 475(2)(a) of the Corporations Act 2001 (Cth). Instead, he continued to give instructions, thereby incurring costs and creating the appearance that the proceedings were still properly on foot. 23His conduct also resulted in QBE incurring unnecessary expense. In those circumstances he should be liable for those costs on an indemnity basis, on restitutionary grounds alone. Further, there were serious doubts as to the genuineness of the claim he pursued for Cell Share, given what, in the absence of an explanation from Mr Marshall, appeared to be fraudulent documents. 24The factual matters on which QBE relied were largely not in dispute, but Mr Marshall denied that Cell Share's claim rested on any forged documents, or that he had been involved in any relevant misconduct. 25The case advanced for Mr Marshall in written submissions below was that Rule 42.5 of the Uniform Civil Procedure Rules 2005 only empowered the Court to make an indemnity costs order where costs had been unreasonably incurred. Cell Share had only been ordered to pay costs on the ordinary basis. He submitted that there was thus no reason for making an indemnity costs order against him. He was not a party to the proceedings, a shareholder or director of Cell Share and stood to gain no personal benefit from them, and thus should not be put in a worse position than Cell Share. 26In oral submissions the view was urged that it was a serious business to ask a former director of a company to pay its costs. Such an order was rarely made. The circumstances were submitted to be akin to those considered in FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340, where a director had pursued proceedings for a company which had failed, but no costs order was made against him. Nor did the circumstances fall within those discussed in Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178 at [34]. 27Mrs Marshall's shareholding was argued not to be a relevant interest, although it was accepted that Mr Marshall's conduct of the case might have resulted in some benefit to her, although there was no evidence of that. Such an interest would depend on a dividend being paid by the company to shareholders. The pursuit of the claim was only for the benefit of Cell Share. 28The claim it had pursued was for goods which had been lost, it was not fraudulent and its merits had never been determined. The fact that the liquidator had decided not to pursue the proceedings was irrelevant to Mr Marshall's view that the claim was a good one. The liquidator's questions as to the proceedings should have been directed to Mr Nasser, the major shareholder and sole director, not to Mr Marshall. 29In the circumstances, it was argued, it would be unfair to force Mr Marshall to pay QBE's costs. That Mr Marshall was seeking to settle the case was in order that money could go to the company and the liquidator. It was also relevant that it was not known what the liquidator would have done, had he earlier known of the proceedings, or what costs would then have been incurred. 30As to the disputed evidence, it was argued that admitting evidence under s 190 was not to be used as a shortcut for people to take the 'lazy route' to proving their case. Documents prepared for the litigation were not business records and thus not admissible under either s 75 or s 190. QBE should have come to Court to prove its case and his misconduct, if Mr Marshall was to be made responsible for its costs. To admit the evidence relied on would involve a denial of natural justice to Mr Marshall, who could not cross-examine witnesses about the hearsay matters dealt with in Mr Kwong's affidavit. The liquidator should have written to Mr Nasser, not Mr Marshall and he should have been joined and called as a witness and an apportionment order made against him. 31When questioned by her Honour as to what was in fact in dispute, it was accepted that Mr Marshall had provided instructions to Cell Share's solicitors, 'making the calls' in the litigation, even though he was not a director. He hoped that thereby that the company or the liquidator would receive the benefit of the proceedings he was pursing on its behalf. The proceedings were only dismissed because the liquidator and QBE agreed to that course, a verdict for QBE being given under s 91 of the Civil Procedure Act 2005, with an order for costs and leave to pursue a motion against Mr Marshall. 32It was argued that Mr Marshall might have been lazy in not responding to the liquidator, but submitted that was not a basis upon which a costs order could be made against him. It could not even be inferred that QBE was not aware of the liquidation, given advertising in newspapers. There was no evidence as to what the liquidator would have done, if Mr Marshall had spoken to him. It could thus not be concluded that the proceedings would have been abandoned earlier than they were, or that the costs in issue would then not have been incurred. It was also submitted that the claim that the proceedings were fraudulent had to be ignored, there being no evidence to support it. 33It was also urged that the corporate veil should not be pierced by the costs order sought, making Mr Marshall guarantee the payment of the costs incurred by Cell Share, particularly given that it had not had an indemnity costs order made against it. The application should be dismissed, resting as it did on hearsay evidence, which could not be tested and was not admissible under either s 75 or s 190. 34The fact that Cell Share had gone into liquidation was submitted to have been 'just one of the problems of life', for which Mr Marshall should not be made responsible. Graham LCM's decision 35Grahame LCM had provisionally admitted certain conversations deposed to by Mr Kwong, as well as certain annexures to Mr Kwong's affidavit on which QBE relied. They included an ASIC report, the 5 November letter and the affidavit sworn by Mr Zreika on 4 December 2012. Having heard the evidence of Mr Marshall, she admitted the documents, taking the view under s 190 of the Evidence Act that the matters there dealt with were not genuinely in dispute and that considerable time and unnecessary expense would have been taken, to prove their contents. 36Her Honour noted that there was no question as to the Court's power to make the costs order sought against Mr Marshall under s 98 of the Civil Procedure Act. She noted that his case was that to make such an order would be to extend the categories of allowable cases and that such an order was reserved for an exceptional case, lest 'there is an abuse of the general rule and in the case of directors of companies to avoid any lifting of the corporate veil.' 37After referring to the applicable principles and noting the obligation to exercise the costs power judicially, her Honour turned to Mr Marshall's evidence. She found amongst other things that: " [his evidence] was in many respects unimpressive. At times he was defensive and surprisingly unable to assist. He offered little by way of clarification on matters that one might have expected him to know something about. It was established that he had extensive involvement in running companies, having been engaged in different companies his whole working life. He had been director and shareholder of many companies. ... His evidence clearly established him as a professional businessman with direct corporate experience, access to accountants and solicitors and experience in dealing with such professionals. He was aware at the relevant time that when a company goes into liquidation legal proceedings are stayed, the liquidator must decide whether to continue or not and that the affairs of the company are no longer in the hands of the directors. ... He had a sophisticated understanding of corporate governance as demonstrated by his knowledge in relation to those areas. At the same time, there was clear evidence, both in his oral evidence and his affidavit evidence, that he had an active role in the litigation. ... He was involved in commencing or originating the litigation, that when he ceased as a director, he voluntarily kept control of the management of the litigation, that the solicitors he dealt with appeared to have dealt only with him in relation to the litigation. There was certainly no evidence of them dealing with anybody else in a meaningful way. ... The solicitors were, in fact, of the view that he was still a director and that is, to some extent, troubling. The bulk of the evidence before this Court from Sterling Legal was that Mr Marshall was the only person they dealt with in relation to the litigation. ... The litigation process was delayed when Mr Marshall was overseas because, essentially, he was the man, he was the only person who was dealing with this litigation. And although he said in his evidence in this Court that he spoke with Mr Nasser about it, that person remains a most elusive figure and it is difficult to understand what role he could have had given that the solicitors only deal with Mr Marshall. ... He had some interest in the litigation, although he was, in my view, quite cagey about exactly what that was. He was a former director, but his wife was still a one-third shareholder. He conceded - and we do not have a transcript of the evidence that he gave - but in my notation of it, he conceded something to the effect of that there may have been something in it, that is, that he had some possible financial or other interest in pursuing the litigation. ... It certainly was not a situation where he was doing it just as a good Samaritan to people who were entirely unrelated to him. He had some kind of interest in that litigation. Why would he continue with it even after liquidation? It is most likely that he continued just as a matter of principle. But to some extent, that is unanswered. ... He did not fund the litigation. But he was certainly active in the litigation to the exclusion of the elusive Mr Nasser or, indeed, his wife, who was a one-third shareholder of that company. ... He was the driving force behind and the originator of the litigation. As I said, that he had some interest in the litigation that was possibly an indirect financial interest, but I cannot be sure about the exact nature of his interest. ... His conduct was both unreasonable and improper. I do not base that on anything to do with allegations of fraud. I say his conduct was unreasonable and improper because he did not inform the liquidator contrary to his known responsibilities and that in all the evidence that he gave, he came across as a sophisticated person. He understood the basics of corporate governance and yet his dealing with the litigation after he knew the company was in liquidation was, in my view, both unreasonable and quite probably improper. ... He continued when he knew the company was in a dire financial situation. He appears to have been the only person with knowledge of the liquidation and the litigation at the relevant time and he did nothing, I am concerned that relevant parties seemed to think he was a director when he was not. But in any event, there is clear evidence that he continued to involve himself in offers and correspondence after he knew of the liquidation. He was notified of his obligations in relation to the RATA and he appears on the evidence before me to have done nothing. ... He was pushing the litigation forward at a time he had no right to. He was making decisions which he knew should have been in the hands of the liquidator, it has been put that it is a rare case where a director will be held responsible in this way. As I said, and I quote from the submissions made by the respondent, "We should avoid lifting the corporate veil." But this is a situation where he was not even a director. He was just a gentleman pulling the strings for reasons which are partially unclear." 38Her Honour considered the circumstances to be unusual and Cell Share to have been operating in an odd manner, given the decisions that Mr Marshall was taking responsibility for, well past a time when he should have been. She rejected his submission that QBE should have had constructive knowledge of Cell Share's liquidation from newspaper advertising. She also rejected the submission that there was no evidence that if the liquidator had earlier been aware of the proceedings, the costs Mr Marshall had caused subsequently would not have been incurred, given the evidence that the liquidator had moved quickly, once aware of the proceedings, to make sure it ceased almost immediately. 39Her Honour concluded that given the liquidation and Mr Marshall's knowledge of it, his conduct of the proceedings during the limited time in issue between the parties, had been both unreasonable and improper. She also observed: "Mr Marshall's lack of transparency in those late negotiations is most concerning. I am on(sic) the view that costs in the limited respect now sought should be paid by him." 40Her Honour ordered costs for the period 3 September 2012 to 18 October 2012, plus costs thrown away by the hearing on 23 October 2012 to be paid on an indemnity basis, observing: "The discretion must be exercised judicially and is regarded as exceptional. Caution must be exercised when departing from the usual basis for awarding costs and I have to think very carefully whether this case has a sufficient or unusual feature, ask myself whether or not there is some relevant delinquency shown in the manner in which the case has been conducted. In many respects for the reasons already stated it seems to me an appropriate case for indemnity costs. Mr Marshall's conduct, lacking as it did in transparency and in respect for the corporations law which he was aware of, caused, in my view, considerable costs and expenses and the court is most concerned that he did not ask himself what real authority did he have to conduct himself as he did once he knew the liquidation was on foot." Section 190 of the Evidence Act 1995 41No error was established in her Honour's admission of the disputed evidence, which it was complained on appeal related to suggestions of improper purpose by Mr Marshall in the conduct of the proceedings, that being the way the case was opened below for QBE. 42The relevant documents relied on below were clarified to be an affidavit sworn by Mr Zreika, Cell Share's solicitor and Mr Donnelly's 5 November letter to him. 43Section 190 relevantly provides: "(3) In a civil proceeding, the court may order that any one or more of the provisions mentioned in subsection (1) do not apply in relation to evidence if: (a) the matter to which the evidence relates is not genuinely in dispute, or (b) the application of those provisions would cause or involve unnecessary expense or delay. (4) Without limiting the matters that the court may take into account in deciding whether to exercise the power conferred by subsection (3), it is to take into account: (a) the importance of the evidence in the proceeding, and (b) the nature of the cause of action or defence and the nature of the subject-matter of the proceeding, and (c) the probative value of the evidence, and (d) the powers of the court (if any) to adjourn the hearing, to make another order or to give a direction in relation to the evidence." 44Mr Marshall relied on Santow J's observations in Edmunds-Jones Pty Limited v Australian Women's Hockey Association Inc [1999] NSWSC 285 as to s 190 of the Evidence Act: "19 There is no doubt that the power to dispense with the rules in exceptional cases is desirable, where this can fairly be done to both parties. Thus situations may arise which are not dealt with in the rules of evidence, requiring flexibility to meet such situations; see ALRC report 38 "Evidence" at para 1025 citing Moffitt J in the Pacific Acceptance Corporation Ltd v Forsyth (1970) 92 WN(NSW) 29. Thus, for example, the Federal Court exercised power of waiver to facilitate survey evidence; McDonald System of Australia Pty Ltd v McWilliam's Wines Pty Limited (1979) ATPR 40-136. Prima facie, electronically recorded accounting data collated to provide only the relevant material in answer to a subpoena, but not so as to render misleading or inaccurate what is represented, falls into a similar category, where strict application of the hearsay rule would otherwise work injustice. The question is whether the conditions for s190(3) are made out, such that my discretion to admit can then be exercised, with such considerations in mind." 45Here her Honour's conclusion as to the admission of the documents on which QBE relied was plainly fair to the parties. 46Below QBE relied on three documents annexed to Mr Kwong's affidavit to establish Mr Marshall's interest in the proceedings and his unreasonable and improper conduct of the proceedings on its behalf. The first was an ASIC document. What it revealed was not in issue. In any event it was a business record. 47The second was Mr Zreika's affidavit. It was before the Court when QBE sought leave to pursue a costs order against Mr Marshall by motion. There Mr Zreika outlined the instructions he had received from Mr Marshall, his knowledge as to his directorship and how he came to learn of the liquidation. It was admitted in circumstances where it was not in issue that Mr Marshall was no longer a director of Cell Share when the proceedings were commenced; that he had been giving Mr Zreika instructions on its behalf under his arrangement with Mr Nasser; and that he continued to do so, even after he became aware of Mr Donnelly's appointment. 48Mr Donnelly's 5 November letter not only set out his position as to the future of the proceedings, about which there was also no dispute, it attached various documents which were plainly business records, including correspondence he had sent to Mr Marshall in September, confirming his appointment and informing him of his obligations as a former director to provide various information to the liquidator, including in relation to the claim and the proceedings by which it was being pursued. 49The argument as to the receipt of these documents arose before Graham LCM after Townsend LCM had already made a costs order against Cell Share, when the proceedings were brought to an end, as the result of Mr Donnelly's instructions. Leave was then given to proceed against Mr Marshall, by way of motion. The costs pursued related to costs incurred after he became aware of Mr Donnelly's appointment. 50Mr Marshall's evidence did not put the matters dealt with in any of these three documents into real issue. The discretion under s 190 was plainly open and properly exercised, given the circumstances. Her Honour's approach also accorded with the provisions of s 60 of the Civil Procedure Act, as to proportionality of costs and s 59 as to elimination of delay. No error in the conclusion that Mr Marshall had an interest in the proceedings 51On appeal it was accepted for Mr Marshall that that he was not immune to an order for costs under s 98, even though he was not a director or shareholder of Cell Share. His case below and on appeal was that the costs order should not have been made against him, because he had no personal interest in the proceedings, which he had conducted under his agreement with Mr Nasser that he would conduct the proceedings, he being the person who had direct knowledge of the matters the subject of Cell Share's claim. 52The challenge to her Honour's factual findings rested on her conclusion that the evidence established that Mr Marshall had an interest in the subject of the proceedings. There were issues as to whether or not there had been any benefit to Mr Marshall. It was submitted on appeal that the evidence did not establish that he held any relevant interest, the only benefit put to him being that his wife retained a one-third interest in Cell Share. He had no personal interest in the proceedings, after he ceased being a director. It was not the case that any proceeds would end up in his pocket. Nor could it be inferred that his wife would necessarily benefit. In effect he was a volunteer, assisting Cell Share for no reward. 53This submission was not made good. Cell Share's claim arose while Mr Marshall had a shareholding in and was a director of Cell Share. Even after he ceased being a director, his wife retained her one-third shareholding. It was submitted that he then offered to continue pursuing that claim, an offer Mr Nasser accepted, because he considered that 'he still had a good claim', which he was anxious to pursue on behalf of Cell Share and later its liquidator. 54Mr Marshall's evidence as to the interest which he had in Cell Share when he agreed to pursue the litigation was that 'You know, as I said, I didn't really have any other involvement with the company other than this matter'. He suggested that his wife then had only a 'token' shareholding, which he had to concede on further cross-examination was in fact a one-third share. Mr Marshall's wife was then one of the only two shareholders of the company. 55That evidence was accepted by her Honour as establishing that Mr Marshall did have an interest in the pursuit of the proceedings, irrespective of whether or not it was likely that he or his wife would have profited from the proceeds of the litigation, if the claim was successful. That conclusion appears to be open. Mr Marshall was not simply assisting Cell Share as a disinterested volunteer. He acted in accordance with an agreement which he had reached with Mr Nasser. 56Mr Marshall's interest in the pursuit of these proceedings was such that he was intent on pursuing the claim he believed Cell Share had against QBE, irrespective of his understanding that it was a matter for the liquidator to determine whether the proceedings should be pursued and of the obligations of which he was also plainly aware he owed the liquidator. 57Mr Marshall's evidence in cross-examination was that he could have told the liquidator of the proceedings, 'but I didn't have any reason to bring it up'. That evidence could not have been accepted. It was contradicted by the explanation he had earlier given as to his experience as a director and his understanding that once a liquidator was appointed, it was for the liquidator to decide what would happen in relation to the pursuit of the proceedings on foot. He had every reason to divulge the existence of the proceedings to the liquidator, who had written to him seeking information as to such claims and proceedings. Instead of giving the liquidator that information, he concealed the litigation and continued to give instructions to Cells Share's solicitors, which resulted in it and QBE incurring further costs. That was not the result of mere disinterest on his part. No error in exercise of costs discretion established 58Even if these conclusions were not open, the submission in these proceedings that Mr Marshall had made an honest mistake, when he continued pursuing the proceedings after he became aware of the liquidator's appointment, cannot be accepted in the face of his evidence. Mr Marshall failed to respond to the liquidator's written request for the provision of the information which he was obliged by s 245 of the Corporations Act to provide, even though he was aware of the consequences which appointment of the liquidator had for the proceedings. The provision of that information would have revealed the existence of the proceedings to the liquidator and prevented Mr Marshall's continued pursuit of the litigation. 59It is in that context that the order made against him must be considered. The costs order - the applicable principles 60The applicable principles were not in issue. They were recently discussed by Bergin CJ in Eq in QBE Insurance (Australia) Limited v Hotchin [2013] NSWSC 315, to which Graham LCM referred. There it was observed at [54] - [58]: "54 In exercising its discretion the Court has "full power to determine by whom, to whom and to what extent costs are to be paid": s 98(1)(b) of the Act. The expression "full power" is often found in constitutional settings with reference to Parliament's capacity to make laws for the good governance of society: Bank of New South Wales v Commonwealth ("Bank Nationalisation Case") (1948) 76 CLR 1 at 202; Australian Communist Party v Commonwealth ("Communist Party Case") (1951) 83 CLR 1. The use of this expression in the context of s 98 of the Act is to be understood as providing the Court with power (unconstrained except to the extent that it must be exercised judicially and in accordance with the relevant legal principles: Oasis Hotel Ltd v Zurich Insurance Company (1981) 28 BCLR 230 at 237 per Lambert JA) to make a costs order that it regards as just in all the circumstances of the case. 55 The exercise of the power to make a costs order against a third party is reserved for "exceptional cases": FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA per Basten JA at [214], with whom Beazley JA and Giles JA agreed; followed in May v Christodoulou [2011] NSWCA 75; (2011) 80 NSWLR 462 at 478 [93]. It is a power that should be used "sparingly": Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation [2001] HCA 26; (2001) 179 ALR 406 at 413 [34] per Callinan J. The expression "exceptional" in this context means "no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit at their own expense": Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39; [2004] 1 WLR 2807 at 2815 [25]. 56 Section 98 is the statutory recognition of the "long asserted jurisdiction to award costs in appropriate cases against a person who is not a party to the proceedings where the person is the effective litigant standing behind an actual party" thus making the person the "real litigant" or the "real parties" rather than the "nominal party" liable for costs: Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 188 per Mason CJ and Deane J and at 202 per Dawson J. A general category of cases in which costs may be awarded against a non-party has been identified to include a receiver of a company, an insolvent person or a "man of straw", a person who has played an active role in the litigation and a person who has an "interest in the subject of the litigation": Knight v FP Special Assets Ltd at 192-193 per Mason CJ and Deane J. 57 In FPM Constructions v Council of the City of Blue Mountains Basten JA, (drawing heavily on what Mason CJ and Deane J said in Knight v FP Special Assets Ltd at 192-193) said at [210]: What is significant from a survey of the cases in which orders have been made against non-parties is that they tend to satisfy at least some, if not a majority, of the following criteria: (a) the unsuccessful party to the proceedings was the moving party and not the defendant; (b) the source of funds for the litigation was the non-party or its principal; (c) the conduct of the litigation was unreasonable or improper; (d) the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest, and (e) the unsuccessful party was insolvent or could otherwise be described as a person of straw. 58 These criteria are not closed or exhaustive: and it is not necessary for each criterion to be present before a costs order may be made under s 98 of the Act: Gore v Justice Corporation Pty Ltd [2002] FCAFC 83; (2002) 119 FCR 429 at 437 [23] and 451-452 [62]. It will depend upon the particular circumstances of the case as to whether such an order is justified." 61Her Honour considered that the evidence established this to be an "exceptional case of the kind which warranted a costs order being made against a third party". On Mr Marshall's own evidence that conclusion was plainly open. 62Contrary to the submissions advanced for Mr Marshall, Sackville J's judgment in FPM Constructions does not establish that her Honour fell into error. The circumstances there in question were different. That was a case concerned with a costs order made against the sole director and secretary of a company, the controlling mind of the company which was pursuing the litigation for its own benefit, where it was concluded that the costs order wrongly pierced the corporate veil. 63As his Honour observed at [210] there may be other cases where such an order is appropriate, including circumstances where the company is in receivership, as to which his Honour observed, before outlining the criteria set out at [60] above: "It is also true that the principle established in Knight v FP Special Assets cannot be limited to the specific circumstances of the case, the joint judgment having expressed a conclusion in more general terms. A further example, not encompassed by those identified to date, is illustrated by Gore v Justice Corporation Pty Ltd (2002) 119 FCR 429, a decision of the Full Court of the Federal Court in relation to an order sought against a litigation funder. The judgment contains an extensive analysis of the case law, including consideration of the judgment of Callinan J in Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406. It is clear that the categories of case which may attract the exercise of the power are by no means closed, nor should they be. Nevertheless, the requirements of justice should not be allowed to expand an exception to the general rule, so as to undermine the rule itself." 64No error in the exercise of her Honour's discretion has been established. The evidence here establishes that Mr Marshall was the party conducting the litigation for Cell Share under his agreement with Mr Nasser; that he became aware of the liquidation and the possibility that it did not have the funds to bear the costs he was incurring by his pursuit of the litigation; that he failed in his obligations to the liquidator, to reveal the existence of the proceedings; that he then pursued them, knowing that it was a matter for the liquidator and not him to determine whether they should be pursued. 65Mr Marshall's conduct of the litigation thereafter was both unreasonable and improper. In the result the submission that he ought not to have to bear the cost consequences of his misconduct must be rejected. 66While the power to award costs against a non-party is to be exercised sparingly in exceptional cases, this is one of them. Mr Marshall was never a party to the proceedings, but he was always the effective litigant, that is, the driving force in the litigation. 67As was submitted for Mr Marshall, the appointment of the liquidator did not stay the proceedings or bring them to an end. It was a matter for the liquidator to decide whether they should be pursued. That required him to be given notice of the proceedings. As was submitted for Mr Marshall, had he informed the liquidator of the proceedings, the liquidator could, if he wished, have offered Mr Marshall the opportunity to pursue the proceedings, if he was prepared to bear liability for the costs of the litigation. He could have taken other steps which would have permitted Mr Marshall to pursue them. What Mr Marshall was not entitled to do was to conceal the proceedings from the liquidator, causing both Cell Share and QBE to run up costs for which he was not responsible. 68Mr Marshall knew the consequences of the appointment of a liquidator and was aware of his obligations to the liquidator, as her Honour found, but contrary to that knowledge, still actively pursued the litigation, with the result that not only Cell Share, but QBE incurred costs which, he should be held responsible for. That he was entitled to act as he did, as was submitted on appeal, because he considered that he was acting in the company's interest, may not be accepted. 69Her Honour's view was well open, particularly when it is considered that his instructions to Cell Share's solicitors even included the rejection of an offer of settlement, even after he became aware of the liquidator's appointment. 70At that point his continued conduct of the litigation was entirely unreasonable and improper, as her Honour found. Mr Marshall was neither a director nor shareholder of this company. He acted as if the claim was his, even though he was not himself a party at risk of a costs order, knowing that Cell Share was in liquidation and that it thus might not have the resources to meet a costs order made against it, in respect of any further expenses it incurred, as the result of instructions which he gave, without the liquidator's knowledge or approval. 71In those circumstances, not only to incur further costs on Cell Share's behalf, without any authority, but also to cause QBE to do likewise, was entirely improper. That in his assessment, Cell Share had a good claim, is not to the point. From his own evidence he was aware that the further pursuit of the claim was for the liquidator to determine and still he failed even to reveal the existence of the proceedings to him, let alone revealing to Cell Share's solicitor or QBE of the liquidator's appointment. The result was that QBE was forced unreasonably to incur expenses which it is unlikely to be able to recover from Cell Share. 72Those circumstances provided an entirely proper basis for the costs order which her Honour made. No error established in the making of an indemnity costs 73There was no issue as to the Court's power to make an indemnity costs order against Mr Marshall. 74While not referred to below, the applicable principles are those discussed by McHugh J in Oshlack v Richmond River Council [1998] HCA 11; 193 CLR 72 at [69]: "'Misconduct' in this context means misconduct relating to the litigation: King & Co v Gillard & Co [1905] 2 Ch 7; Donald Campbell & Co Ltd v Pollak [1927] AC 732 at 812, or the circumstances leading up to the litigation: Bostock v Ramsey Urban District Council [1900] 2 QB 616. 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: Jones v McKie [1964] 1 WLR 960; [1964] 2 All ER 842; Bostock [1900] 2 QB 616 at 622, 625, 627; unnecessarily protracts the proceedings: Forbes v Samuel [1913] 3 KB 706; succeeds on a point not argued before a lower court: Armstrong v Boulton [1990] VR 215 at 223; prosecutes the matter solely for the purpose of increasing the costs recoverable: Hobbs v Marlowe [1978] AC 16; or obtains relief which the unsuccessful party had already offered in settlement of the dispute: Jenkins v Hope [1896] 1 Ch 278." 75The evidence plainly established misconduct of a kind on which the indemnity costs order which her Honour made could properly rest. 76Had Mr Marshall acted in accordance of his obligations to the liquidator, it is probable that the result would have been that QBE would not have incurred further unnecessary expense in dealing with the consequences of the instructions which Mr Marshall gave Cell Share's solicitors to reject its offer and finally to pursue the litigation. That is the proper inference to draw from the liquidator's advice to Cell Share's solicitors on 22 October, that he had no funds to pursue the proceedings. 77It is impossible to see in those circumstances that the litigation would have been pursued further, had Mr Marshall revealed the existence of the proceedings to the liquidator on 3 September, particularly when it is considered that by then, QBE had alleged that Cell Share's claim rested on a fraudulent document. While that was disputed by Mr Marshall, it provided another impediment which the liquidator would have had to consider, in deciding whether to pursue the litigation. Further, even if a decision had then been made to continue, the proper inference is that QBE's offer of settlement would have been attractive to the liquidator. Mr Marshall's conduct removed the opportunity for such a settlement to be reached. The decision to refuse the offer was not his to make. 78On appeal it was submitted for Mr Marshal that irrelevant allegations of improper purpose short of fraud had wrongly been raised below and pursued in his cross-examination, in order to attack his credit. That submission may not be accepted. QBE had advised Cell Share on 19 September of its view that the proof of payment document relied on to establish the claim was fraudulent. On 4 October, QBE served a subpoena to produce documents on Cell Share and advised that steps would be taken to amend the defence to rely on such fraud. An amended defence was later served. Those steps were all taken before it was put on notice of the appointment of the liquidator. 79While Mr Marshall never conceded in cross-examination that he had acted unreasonably in not notifying the liquidator of the existence of the proceedings, plainly he had. It did not require his admission for that to be established. 80Irrespective of whether or not the case was originally brought in good faith, the exercise of the discretion to make an indemnity costs order rested on evidence which plainly established relevant misconduct on Mr Marshall's part, of the kind discussed by McHugh J in Oshlack. That was not a matter of improper motives or a 'stench' being found. Her Honour reached no such conclusion. Rather, it rests on the evidence which establishes that after Mr Marshall became aware of the liquidator's appointment, he continued to pursue the proceedings, even though he knew Cell Share had been put into liquidation. He was not entitled to do so, or to ignore the consequences of his actions, the costs he was wrongly putting Cell Share and QBE to, a matter which cannot be overlooked, as Mr Marshall sought to do. 81The submission that Mr Marshall had in the circumstances no obligation to QBE overlooks the effect of the obligations which he had to Cell Share and the liquidator. He was not a party to the proceedings and personally had no claim against QBE. Despite this he wrongly pursued the litigation Cell Share had brought against it, in circumstances where he was well aware that his arrangement with Mr Nasser had been overtaken by events. He proceeded knowing that Cell Share was not in a position to bear those costs and that he had no right to incur them, or to put QBE in a position where it had to expend further costs in meeting the case he was actively and wrongly pressing on its behalf. 82That was unarguably a sufficient basis for the indemnity costs order which her Honour made. The result of Mr Marshall's unauthorised pursuit of the proceedings was that not only were the proceedings unnecessarily protracted, but Cell Share was also worse off than it would have been, had it accepted the offer QBE made, which was rejected on Mr Marshall's instructions. So was QBE. Misconduct of the kind discussed in Oshlack was thereby well established. 83In the result, Mr Marshall's appeal must fail. Orders 84The usual order as to costs is that they follow the event. Unless the parties approach within 7 days that will be the Court's order as to costs. 85For the reasons given, I make the following orders: 1. Leave to appeal is granted. 2. The appeal is dismissed. 3. Unless the parties approach to be heard on costs within 21 days the order as to costs will be that the plaintiff pay the defendant's costs, 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: 03 February 2014