Supreme Court New South Wales Medium Neutral Citation: In the matter of Vangory Holdings Pty Ltd [2015] NSWSC 801 Hearing dates: 21 and 22 April 2015 (last submissions as to costs 4 June 2015) Decision date: 22 June 2015 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: Order that the First Defendant pay the costs of the Plaintiff and Third and Fourth Defendants on an indemnity basis. Order that the costs of the Third and Fourth Defendants be payable forthwith. Catchwords: PROCEDURE – costs – order for costs on indemnity basis – where company unsuccessful in substantive application for leave under s 459S of the Corporations Act 2001 (Cth) – where cross-examination of director demonstrated lack of knowledge of the matters dealt with in his affidavit – whether order for indemnity costs. PROCEDURE – costs – where director joined as party to proceedings when company was deregistered – where director did not play active role in the motion – whether order for costs against director. PROCEDURE – costs – whether costs payable forthwith. Legislation Cited: - Civil Procedure Act 2005 (NSW) ss 56, 98 - Corporations Act 2001 (Cth) ss 459G, 459S, 459S(1), 459S(2), 465B - Uniform Civil Procedure Rules 2005 (NSW) rr 42.1, 42.2, 42.5 Cases Cited: - Colgate-Palmolive Co v Cussons Pty Ltd [1993] FCA 801; (1993) 46 FCR 225 - Fiduciary Ltd v Morningstar Research Pty Ltd [2002] NSWSC 432; (2002) 55 NSWLR 1 - Hamod v New South Wales [2007] NSWSC 707 - Hamod v State of New South Wales [2002] FCAFC 97; (2002) 188 ALR 659 - Lahoud v Lahoud [2006] NSWSC 126 - Liverpool City Council v Estephan [2009] NSWCA 161 - Ng v Chong [2010] NSWSC 127 - Power Infrastructure Pty Ltd v Downer EDI Engineering Power Pty Ltd (No 2) [2010] FCA 1347 - Selig v Wealthsure Pty Ltd [2015] HCA 18; (2015) 105 ACSR 552 Category: Costs Parties: First Debenture Limited (Plaintiff) Vangory Holdings Pty Ltd (First Defendant) Jeffrey Douglas Dawson (Second Defendant) Sharon McDonagh (Third Defendant) McDonagh Management Pty Ltd (Fourth Defendant) Representation: Counsel: R Glasson (Plaintiff) T Orlizki (Solicitor – First and Second Defendants) S Goodridge (Third and Fourth Defendants) Solicitors: O'Neill Partners (Plaintiff) Kent Attorneys (First and Second Defendants) Firths – The Compensation Lawyers (Third and Fourth Defendant) File Number(s): 2014/317083 Judgment 1. On 4 March 2015, the First Defendant, Vangory Holdings Pty Limited ("Vangory") filed an Interlocutory Process seeking leave under s 459S(1)(b) of the Corporations Act 2001 (Cth) to oppose a winding up application brought by the Plaintiff, First Debenture Limited ("FDL"), relying on a failure to comply with a creditor's statutory demand, on a ground that the relevant debt was disputed. That leave was required because Vangory had not filed an application to set aside the creditor's statutory demand, on the basis of any genuine dispute as to the debt, within the time permitted under s 459G of the Corporations Act. I heard that application on 21 and 22 April 2015 and delivered judgment on 12 May 2015 ([2015] NSWSC 546). I declined to grant that leave, where I was not satisfied that Vangory had established that the debt was material to proving its solvency for the purposes of s 459S(2) of the Corporations Act. I therefore ordered that the application for leave under s 459S of the Corporations Act should be dismissed with costs. The parties subsequently sought the opportunity to make further written submissions as to costs and this judgment deals with the costs of the application. Whether costs should be ordered on an indemnity basis 1. FDL submits that the First and Second Defendants in the proceedings, Vangory and Mr Jeffrey Dawson, a director of Vangory at the relevant time, should be ordered to pay FDL's costs of the application on an indemnity basis. Vangory accepts that it ought to pay FDL's costs of the application on the basis that costs ordinarily follow the event, but resists an order for costs on the indemnity basis, and Mr Dawson resists an order for costs against him. 2. FDL's application raises two questions, first, whether an order for costs should be made on an indemnity basis and, second, whether it should extend to Mr Dawson. The question whether costs should be ordered on an indemnity basis is to be determined by reference to s 98 of the Civil Procedure Act 2005 (NSW), which relevantly provides that: "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." Uniform Civil Procedure Rules 2005 (NSW) r 42.1 ("UCPR") in turn provides that, if an order is made as to costs, 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. UCPR r 42.2 states the general rule that costs payable to a person under an order of the Court or these rules are to be assessed on the ordinary basis. UCPR r 42.5 provides for orders for indemnity costs. 1. The principles as to when an order for indemnity costs can be made, by reason of the manner in which proceedings were conducted, are well-established although the parties did not direct any significant attention to them in submissions. In Colgate-Palmolive Co v Cussons Pty Ltd [1993] FCA 801; (1993) 46 FCR 225 at 232–234, Sheppard J noted that the Court ought not usually make an order for the payment of costs other than on the party and party basis and that some special or unusual feature in the case is needed to justify the Court in departing from the ordinary practice. His Honour noted several circumstances recognised in the authorities in which indemnity costs may be ordered, including the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions and observed that, ultimately (at 234): "The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis." 1. In Hamod v State of New South Wales [2002] FCAFC 97; (2002) 188 ALR 659 at [20], the Full Court of the Federal Court noted that indemnity costs: "…serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the Court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs." 1. The summary of principles in Colgate-Palmolive Co v Cussons Pty Ltd above was in turn applied in Lahoud v Lahoud [2006] NSWSC 126 at [11] and in Ng v Chong [2010] NSWSC 127 at [18]. In Liverpool City Council v Estephan [2009] NSWCA 161 at [100], Giles JA (with whom McColl JA agreed) observed that s 56 of the Civil Procedure Act adds emphasis to the occasion to depart from costs on an ordinary basis where a failure to properly conduct the proceedings has caused costs to be incurred unnecessarily, but does not override the need for a rational connection between the reason for that departure and the extent of that departure. 2. FDL submits that, notwithstanding a detailed affidavit dated 5 March 2015 sworn by Mr Dawson and filed by Vangory in support of the application for leave, Mr Dawson's cross-examination demonstrated that he had little knowledge of, and had undertaken little inquiry to ascertain the truth of, the matters set out in that affidavit, and had relied on what he had been told by another person, Mr Huxley, who appears to have had the substantial conduct of Vangory's affairs. That submission is supported by the observations that I made in my judgment in respect of Mr Dawson's evidence. I am satisfied that a substantial amount of time was wasted in the conduct of the application because Mr Dawson's evidence was led as to matters as to which he had little or no knowledge, and that course put FDL and the Third and Fourth Defendants, Ms McDonagh and McDonagh Management Pty Ltd, to the costs of a hearing over two days, which would have been significantly shorter, or would not have been required, had the evidence Vangory led from Mr Dawson not significantly overstated his knowledge of Vangory's affairs. There is also substantial force in FDL's further submission that Vangory's application could not properly have been made, at least on the basis of Mr Dawson's evidence, given his actual knowledge of Vangory's affairs, as distinct from the knowledge which his affidavit suggested that he had. 3. Vangory responds that there is no basis for a costs order being made otherwise than on the ordinary basis, and that the application under s 459S of the Corporations Act was not wholly without merit, even if, which Vangory denies, that was a basis for an order for costs on an indemnity basis. That does not seem to me to be an answer to the issues as to the manner in which Vangory conducted the proceedings to which I have referred above. 4. I am satisfied that it was unreasonable for Vangory to have conducted this application in the manner it did, particularly by its reliance on Mr Dawson's evidence, and the circumstances require that an order for indemnity costs be made to compensate FDL (and the Third and Fourth Defendants) for the resulting costs. An order for indemnity costs should be made against Vangory in respect of the hearing before me for those reasons. Whether costs should be ordered against Mr Dawson 1. The second issue raised by FDL's submission is whether a costs order should be made against Mr Dawson. FDL submits that a costs order against Mr Dawson is warranted because he was party to the proceedings in his capacity as director of Vangory, having been joined as a defendant while Vangory was deregistered, and remained a party throughout. FDL submits that, by becoming party to the proceedings, Mr Dawson accepted the risk of an adverse costs order against him. FDL also draws attention to the observations of the plurality in the High Court of Australia in Selig v Wealthsure Pty Ltd [2015] HCA 18; (2015) 105 ACSR 552 at [43] as to the circumstances in which a third party costs order may be made, where their Honours observed that: "In Knight v FP Special Assets Ltd, this court held that its discretionary power to make orders against non-parties extends to the circumstance 'where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party … has an interest in the subject of the litigation'. There is, however, no rule that where a non-party falls into this category an order for costs will necessarily follow. Rather, as Mason CJ and Deane J said, 'an order for costs should be made against the non-party if the interests of justice require that it be made'." 1. FDL also relies, in order to establish Mr Dawson's role in the proceedings, on the proposition that he must have instructed Vangory to file the application after he was made a party, and remained a party, to the proceedings. The difficulty with that proposition is that, as FDL demonstrated in cross-examination in the hearing before me, there is a real question as to the extent to which Mr Dawson in fact authorised the conduct of the proceedings. That matter is in turn the subject of another application being heard before another Judge of the Court. 2. Mr Dawson submits that he was made a defendant to the proceedings in the context of the reinstatement application and thereafter had no active involvement in the application, on his own account, although he gave evidence in it as a director of Vangory. Vangory also points out that even if it could be said that Mr Dawson had any involvement in the application under s 459S of the Corporations Act, that involvement – or, at least, I interpolate, that involvement other than in his capacity as witness – added nothing to the issues or hearing time. 3. I have noted above that FDL properly criticises Mr Dawson's evidence given in support of the application, and those criticisms have substantial merit. I am also conscious that the matters which I addressed in my judgment indicate that there is a real possibility that, as FDL points out, any costs order against Vangory may ultimately be worthless. The position as to Vangory's solvency may be further weakened because, as Mr Glasson points out, it assigned debts owed to it in its capacity as trustee of the Vangory Investments Family Trust to another entity, the day before I delivered judgment in respect of the application under s 459S of the Corporations Act, although there is a suggestion that it has taken a limited indemnity from the new trustee in respect of certain matters. However, this is not the occasion on which to determine Vangory's ultimate solvency, which is a matter to be determined by another Judge of the Court in the substantive winding up application. I am not satisfied that this matter supports an order for costs against Mr Dawson where he was not an active party in the relevant application. 4. Mr Goodridge, for the Third and Fourth Defendants, in turn submits that they were not aware of any limited role of Mr Dawson in the application, so far as he has throughout been recorded as the Second Defendant in the application. That is not sufficient to establish that Mr Dawson took an active role in the proceedings, and it does not seem to me that the Third and Fourth Defendants' lack of knowledge of the true position can provide any independent basis for a costs order against Mr Dawson. 5. I am not persuaded that a costs order against Mr Dawson is warranted in the relevant circumstances. While Mr Dawson was a party to the proceedings, having been joined a time that Vangory was deregistered and in order to bring an application to reinstate it, he did not play an active part as a party rather than as a witness in the application brought by Vangory under s 459S of the Corporations Act. That matter was properly reflected in the appearances recorded in my judgment, which noted that Vangory's solicitor appeared for it as applicant in the motion. An order for costs would not ordinarily be made against a person simply because he or she is party to proceedings, if he or she took no active role in the relevant application. I am not satisfied that Mr Dawson, as distinct from Mr Huxley and beneficiaries of family trusts associated with Mr Huxley, had an economic interest in the outcome of the proceedings, or played an active role in the conduct of the proceedings, beyond giving evidence in them, so as to warrant a third party costs order against him. Whether costs should be ordered in favour of Third and Fourth Defendants 1. The costs order that I foreshadowed in my judgment was intended to extend to the costs of the Third and Fourth Defendants in respect of the application. Vangory disputes that a costs order made in favour of them. Mr Goodridge, who appears for the Third and Fourth Defendants, contends that they have been successful in resisting Vangory's application for leave under s 459S of the Corporations Act and that costs should follow the event. 2. Vangory submits that the Third and Fourth Defendants should not have the benefit of a costs order in their favour relating to the Interlocutory Process on the basis that they were not respondents to the Interlocutory Process and were joined as Defendants in connection with a reinstatement application of FDL which was, at the relevant time, deregistered. Vangory submits that it is doubtful that the Third and Fourth Defendants have any legitimate interest in the winding up proceedings, and that any such interest did not extend to being able to be substituted as Plaintiffs, under s 465B of the Corporations Act, where the Third and Fourth Defendants have brought proceedings against Vangory, on the basis of a claim for misleading and deceptive conduct, but do not presently have judgment against it. Vangory also submits that the Third and Fourth Defendants' interests have not been affected by the outcome of the application under s 459S of the Corporations Act. Vangory submits that the ordinary principle that supporting creditors in a winding up application are entitled to their costs, if the company is wound up, is not applicable where the Third and Fourth Defendants cannot be regarded as a supporting creditor for that purpose. 3. Vangory raised none of these matters in opposition to the role played by the Third and Fourth Defendants in respect of the application under s 459S of the Corporations Act and proceeded, without objection, on the basis that they were entitled to take an active role in opposition to its application for leave under s 459S of the Corporations Act. Where Vangory has proceeded on that basis at the hearing of the application, and the Third and Fourth Defendants have been successful in the position for which they contended in the application, it seems to me now to be too late for Vangory to contend, in effect, that the Third and Fourth Defendants had no interest in achieving the result which they were successful in achieving. It also seems to me that, as a matter of substance, the Third and Fourth Defendants had a real practical interest in the outcome of the proceedings, so far as they are presently parties that have brought proceedings against Vangory, and there is a real practical difference between, on the one hand, the pursuit of such proceedings against a solvent entity that denies liability to them and, on the other, the position if Vangory is insolvent and in liquidation, where they may prove their claims in its winding up. The Third and Fourth Defendants also point out, and I accept, that Mr Goodridge's cross-examination of Mr Dawson assisted in disclosing relevant matters, including Mr Dawson's lack of knowledge of Vangory's affairs and Mrs Huxley's role as a second director of Vangory. It also seems to me that, given the complex history of dealings between FDL and Vangory, the Third and Fourth Defendants could not sensibly have assumed that FDL would protect their interests in the application, rather than acting solely in its own interests, and they needed to take an active role in the proceedings at least to protect themselves against the risk that FDL and Vangory might reach an accommodation that did not have regard to the Third and Fourth Defendants' interests. 4. Alternatively, Vangory submits that the Third and Fourth Defendants' costs should be costs in the winding up application. I do not accept that submission, because it seems to me that the Third and Fourth Defendants have been successful in respect of a distinct issue in respect of s 459S of the Corporations Act, as to which Vangory took a position that was ultimately unsuccessful, and their ultimate success as to that issue will not be affected by the outcome of the winding up application. 5. It seems to me that the costs order that I made against Vangory should extend to costs in favour of the Third and Fourth Defendants and should also be made on an indemnity basis for the reasons noted above. Whether costs should be paid forthwith 1. The Third and Fourth Defendants also seek an order that costs should be payable forthwith, having regard to the principles identified in Fiduciary Ltd v Morningstar Research Pty Ltd [2002] NSWSC 432; (2002) 55 NSWLR 1, where Barrett J noted that the cases have identified a number of categories where the Court may make an order that costs be payable forthwith and that whether such an order should be made should be determined according to the demands of justice, and pointed to relevant factors as including the fact that an application involved the determination of a separate identifiable issue or discrete aspect of the proceedings; that there was unreasonable conduct by the party against which the costs had been ordered; and that it will be a significant time before the proceedings are determined. In Hamod v New South Wales [2007] NSWSC 707 at [5], Simpson J observed that the relevant factors included whether the costs orders were relevant to a discrete, separately identifiable aspect of the proceedings; whether there had been some unreasonable conduct on the part of the party against whom the costs have been ordered; and whether the proceedings had some distance and time to run, and it may be some time. The relevant principles were also reviewed by Katzmann J in Power Infrastructure Pty Ltd v Downer EDI Engineering Power Pty Ltd (No 2) [2010] FCA 1347 and I gratefully adopt her Honour's summary of those principles. 2. In summary, an order that costs be payable forthwith is an exception, which will only be made in a case that is out of the ordinary, and it should be recognised that such an order has the capacity to stultify proceedings, particularly brought by persons with limited resources, and also has the risk of operating unfairly where, over the course of proceedings, there may be orders which are made that one or other party should pay the costs of the other from time to time. Nonetheless, the Court may order that costs be payable forthwith, at least if there is an element of unreasonableness in the conduct of the unsuccessful party, and it is likely there will be a long delay between the interlocutory proceedings and the conclusion of the principal proceeding. 3. I am satisfied that this application involved the determination of a separate identifiable issue or discrete aspect of the proceedings, so far as the Third and Fourth Defendants' (and FDL's) success in that application will subsist, irrespective of the outcome of the ultimate winding up application. The matters that support an indemnity costs order against Vangory also indicate unreasonable conduct on its part, in respect of the manner in which it relied on Mr Dawson's evidence, so as to support an order that costs be paid forthwith. The issue of the time prior to a final hearing is of lesser weight in this application, where the winding up application is listed for hearing later this year, although the repeated applications for adjournments by Vangory in these proceedings, and the range of other matters in dispute between Vangory and FDL, suggest that there can be no assurance that it will be finally determined at that time. I am satisfied that an order that costs be payable forthwith should be made in favour of the Third and Fourth Defendants. 4. Vangory submits that, so far as FDL is concerned, the assessment of costs should await the determination of the proceedings on a final basis, on the basis that any costs order could be offset against any order for costs against FDL, if Vangory is successful in establishing its solvency. There is force in that submission so far as costs ordered in favour of Vangory, rather than the Third and Fourth Defendants, is concerned. I would not make an order for costs to be paid forthwith in respect of Vangory, where the range of disputes between FDL and Vangory raises a real prospect that there will be costs orders made as between those parties which may be capable of being set-off against each other in the ordinary course. 5. Accordingly, I vacate the order as to costs made in my judgment delivered on 12 May 2015 and make the following order as to costs: 1 The First Defendant pay the Plaintiff's costs of and incidental to the application heard before me on 21 and 22 April 2015 on an indemnity basis, as agreed or as assessed. 2. The First Defendant pay the Third and Fourth Defendants' costs of and incidental to the application heard before me on 21 and 22 April 2015 on an indemnity basis, as agreed or as assessed, such costs to be payable forthwith. ********** 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: 26 June 2015