(1) Access Services Group Pty Ltd v McLoughlin [2006] NSWSC 532 | Case summary

JUDGMENT 1 I have before me two separate proceedings. The first proceeding, 1127/06, was commenced by originating process filed on 27 January 2006 by which Access Services Group Pty Ltd (the name of which is now "ACN 098 883 884 Pty Limited" and which I shall call "ASG") as plaintiff made application under s.459G of the Corporations Act 2001 (Cth) for an order setting aside a statutory demand served on it by Michael James McLoughlin, the defendant named in the originating process. The second proceeding, 1410/06, was commenced by originating process filed on 13 February 2006. The plaintiffs in that case are Mr McLoughlin and Andrew Ochudzawa. They sought, as against ASG, orders that it be wound up in insolvency and that a liquidator be appointed. 2 On 14 February 2006, Edward Gaete, the sole director of ASG, caused an administrator to be appointed under Part 5.3A of the Corporations Act. Both proceedings came before the court on 6 March 2006. Austin J ordered that the originating process seeking a winding up order in respect of ASG be adjourned to 27 March 2006. His Honour made that order by reference to s.440A. 3 Both proceedings came before me in the Corporations List on 27 March 2006. By that time, the second meeting of creditors held in the Part 5.3A administration had resolved that ASG be wound up. That company had therefore become subject to the form of creditors voluntary winding up created by s.446A. Both the pending winding up application and the pending application for an order setting aside the statutory demand were therefore seen as academic and neither was pressed. It is accepted on both sides that each proceeding should now simply be dismissed. Certain matters of costs do, however, remain alive and it is with them that I am now concerned. 4 Before referring to those matters of costs, I should observe that, in 1127/06 (the s.459G application), there had been filed by Mr McLoughlin (the initiator of the statutory demand and the defendant in those proceedings) an interlocutory process seeking an order that the originating process of ASG be struck out and an order that Mr Gaete, the sole director of ASG, pay Mr McLoughlin's costs of the proceedings. 5 The applications with respect to costs now pressed by Mr J. Chard, solicitor, on behalf of his clients are: (a) an application by Mr McLoughlin and Mr Ochudzawa, the plaintiffs in the winding up proceedings 1410/06, for an order that ASG pay their costs of that proceeding, including costs of the adjournment application determined by Austin J; and (b) an application by Mr McLoughlin, the defendant in the s.459G proceeding 1127/06, for a costs order corresponding with that sought in his interlocutory process, that is, an order that Mr Gaete pay Mr McLoughlin's costs of that proceeding. 6 As to (a) above, the fact that ASG has entered voluntary winding up via Part 5.3A has made it appropriate to order not only that the winding up application of Mr McLoughlin and Mr Ochudzawa be dismissed, but that the defendant company (ASG) pay the costs of the plaintiff in the winding up proceeding. Those are the orders typically made in such circumstances. Mr Chard acknowledges the difficulties that a party awarded such costs may have in actually recovering anything: McDonald v Deputy Commissioner of Taxation (2005) 187 FLR 461. 7 As to (b) above, Mr Chard submitted that the s.459G application was not properly constituted or commenced by ASG and, for that reason, was doomed to failure, with the result that Mr McLoughlin, as defendant, should have a costs order. Moreover, Mr Chard says, Mr Gaete, in addition to the plaintiff (ASG), should be ordered to pay Mr McLoughlin's costs. 8 These submissions made on behalf of Mr McLoughlin stem from the fact that the originating process embodying the s.459G application by which ASG sought to have the statutory demand set aside was filed and progressed without the intervention of a lawyer. It was signed by Mr Gaete "as director of the plaintiff company". 9 Mr Chard points, in this respect, to rules 7.1(2) and (3) of the Uniform Civil Procedure Rules 2005: " 7. By whom proceedings may be commenced and carried on (cf SCR Part 4, rules 4 and 4A, Part 66, rule 1; Act No 9 1973, section 43; Act No 11 1970, section 11) … (2) A company within the meaning of the Corporations Act 2001 of the Commonwealth: (a) may commence and carry on proceedings in any court by a solicitor or by a director of the company, and (b) may commence and, unless the court orders otherwise, carry on proceedings in a Local Court by a duly authorised officer or employee of the company.

(3) In the case of proceedings in the Supreme Court, subrule (2) (a) authorises a company to commence proceedings by a director only if the director is also a plaintiff in the proceedings." 10 No provision of the Supreme Court (Corporations) Rules 1999 deals with this matter, with the result that, by virtue of rule 1.3(2) of those rules, these provisions of the Uniform Civil Procedure Rules apply. It follows that a s.459G application initiated in this court by a company as sole plaintiff may not be commenced or prosecuted for the company by a director of the company. But the operation of these rules may be affected by s.14 of the Civil Procedure Act 2005: " 14 Court may dispense with rules in particular cases In relation to particular civil proceedings, the court may, by order, dispense with any requirement of rules of court if satisfied that it is appropriate to do so in the circumstances of the case." 11 If rules 7.1(2) and (3) are approached from a "requirement" perspective, it may be correct to view them as the source of a "requirement" upon a "company within the meaning of the Corporations Act 2001 of the Commonwealth" not to commence or prosecute proceedings in the Supreme Court otherwise than through the instrumentality of either a solicitor or a person who has two characteristics: first, that the person is a director of the company; and, second, that the person is a plaintiff in those proceedings; or, to put it another way, a "requirement" that the person who commences and prosecutes particular proceedings for such a company in the Supreme Court be either a solicitor or another plaintiff who is a director of the company. 12 If that is a correct construction, the "requirement" is susceptible to displacement by order of the Supreme Court itself. That is the effect of s.14 of the Act. But the court may effect a displacement only if it is satisfied that it is "appropriate to do so in the circumstances of the case". 13 In these respects, the present regime is virtually indistinguishable, in substance, from that which applied under the Supreme Court Rules 1970: see Part 4 rule 4(2) and Part 1 rule 12. The Court of Appeal considered those provisions in Bay Marine Pty Ltd v Clayton Country Properties Pty Ltd (1986) 8 NSWLR 104 where a company sought to pursue an appeal by a director and without a solicitor. Although there was a difference of opinion as to the actual result, all three judges recognised that any dispensing power would not lightly be exercised. 14 On the "requirement" question canvassed briefly above, Kirby P adopted the construction I have outlined. Samuels JA considered it not at all clear how the dispensing rule could be applied: his reservation, it seems, had to do with a difficulty in discovering the relevant "requirement". Mahoney JA was content to assume the applicability of the dispensing rule. 15 In the result, Kirby P would have allowed the company to prosecute the proceedings by its non-party director because of a number of "very exceptional circumstances" which he enumerated. They included that the director had made strenuous efforts to obtain legal representation for the company but without success, that a large sum had already been spent on the proceedings, that security for costs had been provided, that funds had been spent on the printing of appeal books, that the appeal raised arguable issues, that the court was assembled ready to hear the appeal and that senior and junior counsel for the respondent were present and ready to meet the substantive case. 16 Samuels JA observed that the dispensing power should be exercised "only with the most meticulous care". He did not see the particular circumstances as "sufficiently exceptional to justify the invocation of any such dispensation". Mahoney JA was also of the opinion that the circumstances did not warrant the exercise of any dispensing power. In the result, therefore, there was no appearance for the appellant and the appeal was dismissed with costs. 17 The submission Mr Chard made in the present matter was, in essence, that the s.459G application would have met the same fate: that, because the proceedings had not been initiated in accordance with rules 7.1(2) and (3), it likewise would have been dismissed, no doubt with costs. As a prima facie matter, I am inclined to accept that submission; but before expressing a concluded view on it, I should test the proposition that, assuming the position to be as Mr Chard submits, it would follow that the court could make an order against Mr Gaete, the director of ASG by whom that company's s.459G application had been initiated and pursued. That proposition raises issues about costs orders against non-parties and the question whether a person may be made a party merely for the purpose of becoming the object of an application for costs. 18 Section 98 of the Civil Procedure Act 2005 confers upon the court a power with respect to costs which is sufficiently comprehensive to enable it to make a costs order against a non-party. There is no reason to think that the power conferred by s.98 is any less broad than that considered by the High Court in Knight v FP Special Assets Ltd (1992) 174 CLR 178. The court's power is, however, regulated and controlled by both the Act itself and the Uniform Civil Procedure Rules. Section 99 of the Act ("Liability of legal practitioner for unnecessary costs") deals with one particular case. Of more general application is rule 42.3: " 42.3 Powers of the court generally (cf SCR Part 52A, rule 4 (2) and (5)) (1) Subject to rule 42.27, the court may not, in the exercise of its powers and discretions under section 98 of the Civil Procedure Act 2005 , make any order for costs against a person who is not a party. (2) This rule does not limit the power of the court: (a) to make an order for payment, by a relator in proceedings, of the whole or any part of the costs of a party to the proceedings, or (b) to make an order for payment, by a person who: (i) is bound by an order made, or judgment given, by the court in proceedings or is bound by an undertaking given to the court in proceedings, and (ii) fails to comply with the order or the judgment or breaches the undertaking, of the whole or any part of the costs of a party to the proceedings occasioned by the failure or the breach, or (c) to make an order for payment, by a person who has committed contempt of court or an abuse of process of the court, of the whole or any part of the costs of a party to proceedings occasioned by the contempt or abuse of process, or (d) to make an order for costs against a person who purports, without authority, to conduct proceedings in the name of another person, or (e) to make an order for costs against a person who commences or carries on proceedings, or purports to do so, as an authorised director of a corporation, or (f) to make an order of the kind referred to in rule 42.27, or (g) to make an order for costs in exercise of its supervisory jurisdiction over its own officers, including solicitors, barristers and court appointed liquidators." 19 It is clear that the undoubted power under s.98 to make a costs order against Mr Gaete in the s.459G proceedings will be available for exercise only if one of the provisions within rule affirmatively 42.3(2) permits the order to be made. Otherwise, rule 42.3(1) will preclude such an order. The provisions requiring consideration are paragraphs (d) and (e) of rule 42.3(2). 20 I do not think that the present case is within paragraph (d). Mr Gaete, as director of ASG, did not purport to conduct proceedings "in the name of" that company. He purported to be the human instrument through which ASG initiated proceedings in its own name. Furthermore, the circumstance that he was, at the relevant time, the company's sole director leaves no real room for any finding that what he caused the company to do involved any want of authority on his part. 21 Paragraph (e) of rule 42.3(2) raises the question whether Mr Gaete commenced proceedings "as an authorised director" of ASG or, at least, purported to do so. The expression "authorised director" is not defined in the Uniform Civil Procedure Rules. It is an expression that was used and defined in the Supreme Court Rules, where Part 52A rule 4(5)(g) qualified the general rule under Part 52A rule (2) (corresponding with the general rule in the present rule 42.3(1)) by preserving the power to make a costs order "against a person who commences, carries on, enters an appearance in, or defends proceedings as the authorised director of a corporation, or purports to do so." 22 Part 4 rule 4A(2) of the Supreme Court Rules gave meaning to the expression "authorised director" but only when it was used "in this rule". It was nevertheless accepted in the judgment of Spigelman CJ in Young v Hypec Electronics Pty Ltd [2003] NSWCA 181 that the meaning given to "authorised director" for the purposes of Part 4 rule 4A applied also for the purposes of Part 52A rule 4(5)(g). Under Part 4 rule 4A, a corporation was permitted to commence or carry on proceedings by a director if certain conditions were satisfied. Satisfaction of those conditions in relation to a director brought the director within the "authorised director" designation. 23 It seems clear enough that the relevant provisions of the Uniform Civil Procedure Rules are intended to continue, as regards this court, the position that previously pertained under the Supreme Court Rules. I am accordingly of the opinion that rule 42.3(2)(g) of the Uniform Civil Procedure Rules does not permit the court to make a costs order against a director of a company in particular proceedings unless that company is, by rule 7.1(2) and (3), authorised to commence and carry on the proceedings by that director. Only then, I think, will the director be an "authorised director". Such a position does not exist unless the director is also a plaintiff in the proceedings that is, unless the company and the director who acts for it are both plaintiffs. That is not the position in relation to the s.459G application. In that proceeding, ASG is the sole plaintiff. 24 It follows from what I have just said that, in the s.459G proceeding, rule 42.3(2)(g) does not overcome the rule 42.3(1) prohibition so as to permit the court to make against Mr Gaete (a non-party) the costs order sought by Mr Chard on behalf of the defendant, Mr McLoughlin. 25 The next question raised by Mr Chard's submissions is whether Mr Gaete could himself be joined as a party to the s.459G proceeding so that the rules as to the making of costs orders against non-parties no longer apply to the costs application Mr Chard seeks to press. 26 Rule 2.13(3) of the Supreme Court (Corporations) Rules confers a limited power to join defendants in proceedings to which those rules apply. The rule allows joinder of a creditor, contributory or officer of a corporation. It is obviously concerned with a corporation which is the subject of a proceeding to which the rules apply. In a s.459G case, the relevant corporation is the company on which the statutory demand has been served and which seeks to have it set aside - here, ASG. Rule 2.13(3) is accordingly a source of power to join Mr Gaete as a defendant to the present s.459G proceeding, he being an "officer" of ASG within the s.9 definition of that term. 27 As I observed in Roach v Winnote Pty Ltd [2006] NSWSC 231, the Supreme Court (Corporations) Rules are silent as to the criteria to which regard is to be had upon a joinder application based on rule 2.13(3), with the result that, in conformity with rule 1.3(2) of those rules the "other rules of the Court" are to be applied. As Ms Oakey, solicitor, submitted on behalf of Mr Gaete, it is therefore necessary to consider rule 6.26 of the Uniform Civil Procedure Rules which, so far as relevant, is as follows: "(1) Except to the extent to which these rules expressly provide, a party may not join another person as a party to any proceeding for the purpose of making an application for costs against the other person. (2) This rule does not apply: (a) if the other person would otherwise be a proper party to the proceedings, …" 28 Rule 6.26(2)(a) directs attention to the general criteria for the joinder of parties. These are found in rule 6.24(1): "If the court considers that a person ought to have been joined as a party, or is a person whose joinder as a party is necessary to the determination of all matters in dispute in any proceedings, the court may order that the person be joined as a party." 29 Joinder of Mr Gaete as a defendant in the s.459G application for the purpose of seeking a costs order against him would thus not be precluded by rule 6.26(1) (because permitted by rule 6.26(2)(a)) if the joinder were consistent with rule 6.24(1). It is therefore necessary to decide whether Mr Gaete "ought to have been joined" as a defendant in that proceeding or alternatively whether such joinder would have been "necessary to the determination of all matters in dispute in" that proceeding. 30 The nature of a s.459G application is made clear by that and related sections of the Corporations Act. Section 459G(1) permits a company on which a statutory demand is served to apply for an order setting aside the statutory demand. That the person who served the statutory demand is to be the defendant is made clear by s.459G(3)(b) which contemplates service on that person of a copy of the application and a copy of the supporting affidavit. The susceptibility of that person to an order for costs in favour of the company where the demand is set aside (s.459N) confirms that the person is intended to be the defendant. Neither the Corporations Act provisions nor allied provisions of the Supreme Court (Corporations) Rules require or envisage that there will be any other defendant in a s.459G proceeding. Furthermore, given the nature and purpose of the application, there is no reason to think that it would be necessary or convenient to join as a defendant a director of the company which, as plaintiff, seeks to have the statutory demand set aside. 31 It follows that, in the present case, there is no basis on which the court would, at any stage of the proceeding, have ordered or allowed that Mr Gaete be joined as a defendant in the s.459G application made by his own company, ASG. He was in no sense a proper party. It follows that rule 6.26(2)(a) of the Uniform Civil Procedure Rules does not displace the rule 6.26(1) prohibition upon his joinder as a party. 32 In the result, therefore, the rules of court allow in proceeding 1127/06 neither the making of the costs order sought by Mr McLoughlin against the non-party Mr Gaete nor joinder of Mr Gaete as a defendant for the purpose of subjecting him to an application for a costs order. 33 The orders of the court are as follows:

In proceedings 1227/06: A. Order that the originating process be dismissed. B. Order that the plaintiff pay the defendant's costs of the proceedings.

(1) Access Services Group Pty Ltd v McLoughlin;

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