Agricultural & Rural Finance Pty Ltd v Atkinson

Judgment

1. HER HONOUR: In this case the plaintiff, Guangming Xing, is a former director of the defendant, Awesome Rubber Pty Ltd. He is also one of several defendants in proceedings brought by Awesome Rubber in the General List of the Equity Division (Equity proceedings). In these proceedings, Mr Xing sought an order under section 1303 of the Corporations Act 2001 (Cth) to compel immediate inspection of the books of Awesome Rubber under section 198F(2) of the Act for the purpose of the Equity proceedings. Section 1303 provides: If any person in contravention of this Act refuses to permit the inspection of any book or to supply a copy of any book, the Court may by order compel an immediate inspection of the book or order the copy to be supplied.
2. The records have since been provided, and the question is what order for costs, if any, should be made in respect of these proceedings. Mr Xing seeks an order for indemnity costs for part or all of the proceedings while Awesome Rubber says it is appropriate that each party bear their own costs.

Facts

1. In March 2019, Mr Xing sought to inspect the records in question, being 9 categories of documents. From 10 to 12 April 2019, detailed correspondence ensued as to whether Mr Xing was entitled to the records under section 198F in the circumstances: reliance was placed on the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill and case law; the relevance of the documents sought to the Equity proceedings was disputed and pressed; the breadth of the requests was canvassed; and arguments were put as to the interaction between a director's right to inspect records under section 198F(2) and Practice Note SC Eq 11. It is not necessary for me to determine any of these varying contentions. In the midst of this correspondence, Mr Xing advised that, if Awesome Rubber failed to comply with his request, he would take action under section 1303 and seek costs on an indemnity basis.
2. On 18 April 2019, Mr Xing commenced these proceedings supported by an affidavit of his solicitor detailing the correspondence to which I have referred. The matter first came before the Court for directions on 2 May 2019, by which time Awesome Rubber had retained a new solicitor. By consent, the Court made the following orders: 1. The Court notes that the: a. [Awesome Rubber] agrees to permit [Mr Xing], in accordance with s 198F(2) of the Corporations Act 2001 (Cth), to inspect and copy the books of [Awesome Rubber] referred to in paragraphs 1(a) to 1(i) of the originating process filed 18 April 2019. b. [Awesome Rubber] will provide such inspection on 20 May at a place to be agreed in Sydney. 2. The proceedings are stood over until 27 May 2019. That is, Awesome Rubber agreed to permit Mr Xing to inspect the nine categories of documents without demur.
3. On 24 May 2019, Mr Xing's solicitor inspected the documents but, on 27 May 2019, advised that the production was considered inadequate and sought an explanation. On 7 June 2019, Awesome Rubber's solicitor replied, essentially saying that no further documents existed. Clarification was sought the same day by Mr Xing's solicitor, with no reply and followed up on 14 June 2019, with no reply. On 20 June 2019, the matter was before the Court for directions and there was no appearance by Awesome Rubber.
4. On 24 June 2019, Mr Xing's solicitor swore a second affidavit setting out Mr Xing's concerns as to inadequate production and, on 16 July 2019, wrote to Awesome Rubber's solicitor suggesting that the matter be listed for hearing on the next occasion. On 18 July 2019, Awesome Rubber's solicitor replied that the director of Awesome Rubber, Sigmund Sha, had received poor advice from his former legal representatives as to the company's obligations under section 198F but was now aware of those obligations, did not oppose the substantive orders sought in the proceedings and would ensure that Awesome Rubber complied with its obligations. Somewhat at odds with this, the next day on 19 July 2019, Awesome Rubber's solicitor wrote again advising that he was instructed to oppose the orders sought in the Originating Process, provided further documents and advised that he expected that the company would complete production in accordance with the agreement noted on 2 May 2019 as soon as the company's accountant had completed preparation of the company's financial statements. On 21 July 2019, financial statements for the company were completed but not signed.
5. On 22 July 2019, the matter was listed before Ward CJ in Eq and Awesome Rubber's solicitor informed the Court of his efforts to obtain instructions and documents and sought a further seven days to provide any remaining documents. Further documents were provided that day, although not the unsigned financial statements for the company which had been prepared on 21 July 2019.
6. On 24 July 2019, Mr Xing's solicitor pressed for further production and, noting its repeated request for documents, advised that Mr Xing would seek indemnity costs as a result of Awesome Rubber's conduct. Awesome Rubber produced further documents on 26 July 2019 and, on 29 July 2019, Mr Sha swore an affidavit describing the production made and explaining why other documents which had been sought by Mr Xing did not exist. Mr Sha exhibited some 278 pages of documents to his affidavit, largely comprising the documents supplied to Mr Xing. On 2 August 2019, Awesome Rubber's solicitor confirmed that the company had now supplied all of the documents and thus suggested that Mr Xing's further application was unlikely to succeed, in particular, because it was said that the Court's jurisdiction to make an order under section 1303 depended upon a finding that the company had contravened the Act by refusing to permit the inspection of its books.
7. On 5 August 2019, Mr Xing's application was heard. Mr Sha was cross-examined. It became apparent that Mr Sha had not made adequate searches for the documents sought by Mr Xing. In part, this appeared referable to an understanding by Mr Sha that the documents had already been provided to Mr Xing in the form of an exhibit to Mr Sha's affidavit in the Equity proceedings. Certainly, that exhibit - comprising 383 pages - appears to contain some financial records and some lease documents. Second, Mr Sha appears to have proceeded on the assumption that many of the documents sought were already in the possession of Mr Xing and thus he was not obliged to provide them. Third, Mr Sha said that certain documents, such as financial statements and tax returns, did not exist when the request was made and he had been in the course of having those documents prepared. Mr Sha had provided those documents as and when they became available. This does appear to have been the case for some of the documents sought but not others, such as the financial statements to which I have referred. Fourth, Mr Sha appears to have understood the description of the categories in a more limited way than he ought, in particular, where Mr Xing sought documents which recorded or referred to a particular document, Mr Sha considered it sufficient to produce the particular document rather than to search for any other documents which recorded or referred to it. Finally, there appears to have been a degree of hostility between the parties arising from the Equity proceedings which depleted his willingness to attend to the task.
8. It was agreed by Mr Sha, during the course of his evidence, that the parties' legal representatives would further confer and agree upon what additional documents needed to be provided, and when. On 7 August 2019, I made orders in Chambers by consent in respect of further production. On 16 September 2019, Awesome Rubber produced further documents comprising 589 pages.

Submissions

1. Mr Xing submitted that the appropriate order is that provided by Uniform Civil Procedure Rules 2005 (NSW), rule 42.1: Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs.
2. As to what was the "event" here, Mr Xing pointed to Hansen t/as Derrawee Pastoral Company v Monterey (Coolah) Pty Ltd [2012] NSWSC 1383 at [29]: It follows that how the Rule operates in a particular case, depends on what "the event" in question is. This requires consideration to be given to the practical outcome of the proceedings, that is, by reference to who the successful party in the proceedings was, having in mind the matters over which the parties joined issue and who succeeded on them. In this case, it was submitted that the "event" was a dispute as to whether Awesome Rubber had in fact complied with the agreement recorded by the Court on 2 May 2019 or not. It was submitted that it was apparent from Mr Sha's evidence and subsequent production that it had not and thus Mr Xing prevailed in the matter over which the parties joined issue.
3. Mr Xing submitted that Awesome Rubber had both capitulated and persisted in an unmeritorious position, relying on One.Tel Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548; [2000] FCA 270 at [6]; Agricultural & Rural Finance Pty Ltd v Atkinson (No 3) [2014] NSWSC 1627 at [15]; Chaina v Alvaro Homes Pty Ltd [2008] NSWCA 353 at [107]. As to capitulation, it was submitted that Awesome Rubber had capitulated by agreeing at the first return date to provide all categories of documents sought, and thus Mr Xing should be entitled to his of the proceedings to that date on this basis alone. As to unreasonable resistance to that point in time, it was submitted that Awesome Rubber's refusal to provide the documents was based on an untenable view of the law warranting an indemnity costs order. However, I was not asked to determine whether Awesome Rubber's view of the law was right or wrong - let alone untenable.
4. It was further submitted by Mr Xing that Mr Sha capitulated again on 5 August 2019 in his evidence and subsequently agreed to consent orders on 7 August 2019 to produce further documents. Those further documents included signed tax returns, financial reports, ledgers, bank statements and a draft lease, and it was submitted that they should have been provided earlier. It was submitted that Awesome Rubber's conduct was unreasonable as it had no prospects of success at the hearing on 5 August 2019 and, properly advised, would have produced the documents earlier and not put Mr Xing to the costs of the hearing.
5. Awesome Rubber submitted that each party should pay their own costs on the basis that the proceedings had effectively be resolved by consent by the agreement noted by the registrar on 2 May 2019 and the consent orders of 7 August 2019 and no judicial determination was required, relying on Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624-5; [1996] HCA 6; ISIS Projects v Clarence Street [2006] NSWSC 190; One.Tel Ltd v Deputy Commissioner of Taxation; Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 at [5]; Ralph Lauren 57 Pty Ltd v Byron Shire Council (2014) 199 LGERA 424; [2014] NSWCA 107 at [108].
6. It was also submitted that Awesome Rubber acted reasonably, agreeing at the first return date, with its new legal representative, to consent orders, notwithstanding that it had a reasonably arguable defence that the jurisdiction of the Court to make an order under section 1303 required the Court to make a finding of fact that Awesome Rubber had contravened the Act by refusing to permit the inspection of any book or to supply a copy of any book, and the Court made no findings in that regard. Awesome Rubber acted reasonably, it was saod, in providing such documents as were readily available to it. Further, Mr Xing could have obtained the documents in the Equity Proceedings by the usual means available to parties to litigation, although I note this is at odds with the position that Awesome Rubber had taken before the commencement of these proceedings.

Consideration

1. In considering this application, I note the comments of Allsop P, with whom Beazley and Campbell JJA agreed, in Baulderstone Hornibrook Engineering (No 2) v Gordian Runoff Limited [2009] NSWCA 12 at [5]: Three things need be borne in mind in a judgment such as this on costs: the desirability of avoiding unnecessary recitation of cases (abounding as they are in this area); the desirability of not restating, in different terms, approaches to the broad discretion that have been well settled; and the desirability of dealing with the arguments without over-elaboration, if this is possible.
2. In respect of whether a costs order should be made at all given the manner in which these proceedings have been resolved, the default position is as described by McHugh J in Lai Qin at 624-5: If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. His Honour was there considering the principles which govern an application for costs "when a party elects not to pursue an action because he or she has achieved the relief sought in the action either by settlement or by extra-curial means": at 624. However, McHugh J also noted that such an order may be made where the Court is able to conclude that one of the parties has acted so unreasonably that the other party should obtain the cost of the action, or a judge may feel confident that, although both parties acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried: at 625.
3. The Court of Appeal's consideration of Lai Qin in such circumstances is helpfully collated by Payne JA in Nichols v NFS Agribusiness Pty Ltd (2018) 97 NSWLR 681; [2018] NSWCA 84 at [26]-[29]. A recent example of the application of these principles is Shellharbour City Council v Minister for Local Government [2017] NSWCA 256 where the Council commenced proceedings challenging the Minister's amalgamation of local government areas. Two days before the hearing of the appeal, the Minister decided not to proceed with the amalgamations. The appellant discontinued the appeal and sought an order for costs on the basis that the Minister's abandonment of the proposed amalgamation was "a complete capitulation" and, if the appeal had proceeded, the Council would "almost certainly" have succeeded. Whilst the Court of Appeal agreed that, if either characterisation was correct, the Court could award costs against a party who has capitulated, the Court did not find the descriptions by the Council to be correct. The Court found that, whilst the Council obtained the result it sought in the litigation as a result of a political decision by the Government, the resistance by the Minister to the proceedings was not unreasonable and there was no basis to make a different costs order.
4. It is also important to note the distinction drawn by Burchett J in One.Tel Ltd v Deputy Commissioner of Taxation at [6]: In my opinion, it is important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the Court's discretion otherwise than by an award of costs to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs.
5. Properly characterised, these proceedings were not resolved by settlement or extra-curial means. Rather, Mr Xing having commenced proceedings, Awesome Rubber immediately agreed to allow access to the documents he had been seeking, but then failed to provide many of the documents sought, such that Mr Xing continued to a hearing - which was contested. After cross-examination of Mr Sha, Awesome Rubber agreed to and did produce further documents, many of which should have been produced earlier, albeit that some were only brought into existence after these proceedings had been commenced, but before the hearing. It seems to me that this is a case where the Court is able to conclude that one of the parties acted so unreasonably that the other party should obtain its costs of the action, or where the Court may feel confident that one party was almost certain to have succeeded if the matter had been fully tried. As such, having regard to the history of these proceedings as earlier described, I consider it appropriate that Mr Xing have his costs of these proceedings.
6. As to whether Mr Xing should have his costs on an indemnity basis, section 98(1)(c) of the Civil Procedure Act 2005 (NSW) provides: Courts powers as to costs (1) Subject to rules of court and to this or any other Act: … (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis.
7. In In the matter of Indoor Climate Technologies Pty Ltd [2019] NSWSC 356, Black J recently summarised the applicable principles relating to the making of indemnity costs orders at [8]: The principles on which an order for indemnity costs may be made are also well established. Section 98(1)(c) of the Civil Procedure Act 2005 (NSW) permits the Court to order costs on an ordinary or indemnity basis. Rule 42.2 of the Uniform Civil Procedure Rules 2005 (NSW) provides that, unless the Court otherwise orders or the rules otherwise provide, costs payable are to be assessed on an ordinary basis. Rule 42.5 of the Uniform Civil Procedure Rules deals with an order for costs on an indemnity basis. Costs are awarded on the ordinary basis unless there are exceptional circumstances: Leichhardt Municipal Council v Green [2004] NSWCA 341. An order for indemnity costs is not made to punish an unsuccessful party for persisting with a case that fails, but to compensate a successful party fully for costs incurred, when the Court takes the view that it was unreasonable for the other party to have subjected the successful party to the expenditure of costs: Hamod v New South Wales [2002] FCAFC 97; (2002) 188 ALR 659 at [20]. Whether an indemnity costs order should be made depends, at least in part, on whether there was a relevant delinquency on the part of the unsuccessful party: Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 7) [2008] NSWSC 199; (2008) 65 ACSR 324 at [24]; Cabport Pty Ltd v Marinchek (No 2) [2013] NSWCA 131 at [6]. That is to be determined by reference to the conduct of the proceedings, not the conduct that is the subject of the substantive dispute.
8. I do not think it is accurate to describe Mr Sha's evidence on 5 August 2019 as a capitulation. Nor should his agreement to enter into further discussions with Mr Xing's legal representatives and produce further documents be treated as an exceptional circumstance providing the basis for an indemnity costs order. The Court does rely on parties continuing to negotiate and resolve matters of detail, particularly in respect of document production, so that the Court does not have to go through each document and each category of documents sought and ascertain with precision what has been, has not been and should be produced. Having said that, it is clear that Awesome Rubber's production of documents had not been timely or comprehensive to that point in time. Weighing all of these matters, I consider it appropriate to make the usual costs order.

Orders

1. For these reasons, I make the following orders: 1. Order the defendant to pay the plaintiff's costs of these proceedings. 2. Otherwise dismiss the proceedings.

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