- Al Khaled v Jacaranda Property Developments Pty Ltd & Ors

Supreme Court of NSW|2014-11-27|Before: Black J

Solicitors: Etheringtons (Plaintiff) Mathew Jessep Lawyers (Defendants) File Number(s): 2013/385193

Judgment

On 3 February 2015, I delivered judgment ([2015] NSWSC 16) in respect of an application by the Plaintiff, Mr Michael Hourican, for an order under s 237 of the Corporations Act 2001 (Cth) granting leave to him to bring derivative proceedings on behalf of Imperium Projects Pty Limited ("Company") claiming specified relief. I held, in summary, that Mr Hourican had established that he should be granted leave in respect of some, but not all, of the matters for which he sought such leave, namely the expenditures for building works and personal loans in respect of the Second Defendant, Mr Mahaffy, but not the Third Defendant, Mr Lord, and the entry into directors' loan agreements with Mr Mahaffy and Mr Lord. I did not grant leave in respect of certain other matters raised by Mr Hourican, although I noted that it would be open to him to rely on them in an oppression claim which he brings in the same proceedings. I directed that the parties bring in agreed Short Minutes of Order to give effect to the judgment, including as to costs, within 14 days, or, if they were unable to reach agreement, their respective draft Short Minutes of Order and short submissions as to the differences between them.
Each of the Plaintiff and the Defendants submitted proposed orders and the parties differ in respect of the form of several orders. However, the Plaintiff did not advance substantive written submissions as to that matter within the timetable that I had directed for such submissions, and noted that he "anticipated that the parties will need to be heard on the matter" and invited the Court to list that matter for that to occur, and indicated that he proposed to serve written submissions within 7 days. The parties had already had the opportunity to be heard on the matter, by lodgement of written submissions in accordance with my directions, and I do not consider it necessary to relist the matter for an oral hearing. With some reluctance, I extended the time for written submissions by the parties and have had regard to their further submissions in that regard.

Form of orders

The Plaintiff initially sought, in order 1, an order that he have leave to bring proceedings in respect of several paragraphs of the relief sought in the Originating Process. The Defendants' formulation of proposed order 1 provides that leave be granted under s 237 of the Corporations Act to the Plaintiff to bring proceedings on behalf of the Company against Messrs Mahaffy and Lord in respect of the relief claimed in paragraphs 10 and 11 of the Originating Process dated 23 December 2013. Those paragraphs sought orders under s 1317H of the Corporations Act that Messrs Mahaffy and Lord compensate the Company for damage to it resulting from contraventions of ss 181 - 182 of the Corporations Act. The Defendants' proposed order did not extend to leave that had been sought in the Originating Process in respect of declarations under s 1317E of the Corporations Act, as formulated in paragraphs 5 - 9 of the Originating Process. By amended draft orders submitted on 25 February, the Plaintiff limited the leave sought to the relief claim in paragraphs 10 - 11 of the Originating Process. Leave should be limited in that manner where, as I had noted in my judgment, declarations under s 1317E of the Corporations Act may only be sought on application by the Australian Securities and Investments Commission, and were not pressed at the hearing before me. Paragraph 1 of the proposed orders should also be further limited to reflect the limited aspects of the claim as to which I have granted leave, namely the expenditures for building works and personal loans in respect of Mr Mahaffy, but not Mr Lord, and the entry into directors' loan agreements with Mr Mahaffy and Mr Lord.
The parties initially agreed as to the form of proposed orders 2 - 5, namely that the Company be joined as the Second Plaintiff in the proceedings; that the Company file and serve an Amended Originating Process and Statement of Claim on or before 20 February 2015; that the Defendants file any application for security for costs by 13 March 2015 and that the Defendants file and serve their Defences on or before 20 March 2015. By amended draft orders submitted on 25 February, the Plaintiff adjusted the dates set out in those orders, as a result of the delay arising from the time allowed for submissions.
I will make those orders, in substance. However, it seems to me that an order should also be made that the Company be removed as a defendant to the proceedings, once it is joined as a plaintiff, since it will be bound by the result of the oppression claim so far as it is a plaintiff, and is not bringing derivative proceedings against itself. By his amended orders, the Plaintiff also provided that Defences were to be filed only by Messrs Mahaffy and Lord and not by the Company. That amendment is appropriate, where the Company will now be a plaintiff not a defendant in the proceedings. I should also make clear that I express no view as to the utility of a security for costs application, where oppression proceedings are brought by a natural person, Mr Hourican; the issues raised in the derivative claim are also raised in the oppression proceedings; and Mr Hourican has, pursuant to the terms on which leave for the derivative action was brought, indemnified the Company for the costs of the derivative action.

Costs

In paragraphs 7 and 8 of the Plaintiff's proposed Short Minutes of Order, Mr Hourican initially sought orders that Messrs Mahaffy and Lord jointly and severally pay his costs of the application under s 237 of the Corporations Act forthwith and that Messrs Mahaffy and Lord pay to Imperium its costs of the application under s 237 of the Corporations Act forthwith. The Defendants submit that there be no order as to costs or that the costs of the application should be costs in the cause. In his amended orders submitted on 25 February, the Plaintiff sought an order that his costs of the leave application be paid by the Second and Third Defendants if the derivative action brought by leave is determined in favour of Imperium and did not press the order for payment of Imperium's costs by the Second and Third Defendants.
Section 98(1) of the Civil Procedure Act 2005 (NSW) provides that costs are in the discretion of the Court and r 42.1 of the Uniform Civil Procedure Rules 2005 provides that, subject to Part 42, 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 those costs. Section 242 of the Corporations Act also deals specifically with orders for costs in respect of an application for leave under s 237 of the Corporations Act, and provides that the Court may at any time make orders it considers appropriate about the costs of, inter alia, the person who applied for or was granted leave, the Company or any other party to the proceedings or application, and that an order under that section may require indemnification for costs.
The costs for interlocutory proceedings that are inextricably connected to a primary action are usually dealt with by an order for costs in the cause; UCPR r 42.7 and Ritchie's Uniform Civil Procedure NSW [42.7.5]. That approach has also been adopted in several applications for leave to proceed under s 500 of the Corporations Act where costs have been treated as costs in the cause: for example, Latimer v Cutwood Panels Pty Ltd (in liq) [2012] WASC 408; Al Khaled v Jacaranda Property Developments Pty Ltd & Ors [2012] NSWSC 755 at [42].
In Cassegrain v Gerard Cassegrain & Co Pty Ltd [2008] NSWSC 1159 at [19], dealing with an application for leave to bring proceedings under s 237 of the Corporations Act, Sackville AJA observed that: "In my view, the appropriate course is to make costs orders analogous to those commonly made in interlocutory proceedings, whereby the costs of the party succeeding on an interlocutory application are designated as that party's costs in the proceedings. If that party ultimately succeeds in the action and obtains an order that the opponent pay the costs of the proceedings, the final order will cover the costs of the interlocutory proceedings. If, however, the party does not ultimately succeed in the proceedings, it will effectively be required to bear its own costs of the interlocutory proceedings, but will not be required to pay the opponent's costs of the interlocutory proceedings." I followed that approach in In the matter of Staway Pty Ltd (in liquidation) (receivers and managers appointed) (Supreme Court (NSW), Black J, 13 August 2013, unrep), observing that the applicants for leave in that case should not be entitled to recover their costs of their participation in the application for leave, unless the substantive proceedings were successful.
It seems to me that the proper order for costs in this application is that a portion of the costs of the application be the Plaintiff's costs of the substantive proceedings, so that the Plaintiff would recover those costs if the derivative proceedings are successful. I will explain the reason for limiting that order to a portion of those costs below.
So far as the extent of costs which should be the subject of such an order is concerned, the Defendants submit that the Plaintiff was only partially successful in respect of the claim for leave to bring the derivative action and that the general proposition that costs follow the event may be displaced (or, I interpolate, limited) where the losing party succeeds on particular issues, at least where those issues were dominant or separable. I reviewed the relevant principles applicable to a discounting of costs for issues as to which a successful party was not successful, at some length, in Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 1509 at [6]ff and noted (at [9]) that there may be sufficient justification to depart from the usual order to reflect a party's failure on particular issues if a particular issue or group of issues on which a successful party failed was clearly dominant or separable, or took up a significant part of the trial, either by way of evidence or by argument. I also noted (at [10]) that, where a successful party failed on particular issues, it may be reasonable that it bear the expense of litigating that portion of the case on which it failed and may not only be deprived of the cost of those issues but also ordered to pay the other party's costs of them. I observed at ([11]) that, as the Defendants also point out, some cases have expressed the view that the principle that a successful party may be deprived of costs and ordered to pay the other party's costs, in respect of issues lost by the successful party which are clearly dominant or severable, operates more strongly against a successful plaintiff.
It seems to me that the Plaintiff had only partial success in respect of the application for leave to bring derivative proceedings, and it does not seem to me that there would be a proper basis for ordering that the Defendants jointly and severally pay the costs of the entirety of that application, without adjustment to reflect that matter. The Defendants submit, and I accept, that the Plaintiff's claim in respect of work undertaken for a client of the Company, and as to the allocation of expenses incurred by the Company, were discrete issues which took up a significant portion of time at the hearing of leave to bring the derivative action, and that the costs incurred in respect of those matters need to be taken into account in any order for costs in favour of the Plaintiff. A substantial part of the hearing time was also devoted to cross-examination about, and submissions about, issues as to financial information upon which the Plaintiff failed to obtain leave to bring derivative proceedings. I do not consider that that warrants an order for costs in favour of the Defendants, where at least part of the time spent in exploration of those issues appears to have resulted from errors in the Company's records, or incomplete information contained in them at the time they were produced to the Plaintiff. However, it also does not seem to me that an order for costs should be made in favour of the Plaintiff in respect of the costs of those matters.
On balance, and accepting questions of this character cannot be resolved with mathematical certainty, it seems to me that an order should be made that the Defendants pay 50% of the Plaintiff's costs of the leave application, as agreed or as assessed, if the derivative action brought pursuant to the leave is determined in favour of the Company. No submission was put that I should distinguish the position of Messrs Mahaffy and Lord in that regard, where they were represented by the same Counsel and solicitors. That order will, however, be subject to further order of the Court, so that it may be modified by the trial judge if appropriate in light of the outcome of the substantive proceedings. That may be appropriate, for example, if any "success" of Imperium in the proceedings involved any recovery of nominal damages at significant costs to all parties. Given the form of that order, no question of an order that costs be paid forthwith, as initially sought by the Plaintiff, arises. I would add that an order that costs be paid forthwith is the exception rather than the rule, and I am not satisfied that the basis for such an order would have been established in this matter in any event.
The Defendants submitted that no basis was articulated by the Plaintiff for his submission that they should pay the Company its legal costs of the application under s 237 of the Corporations Act, and I note that application is not now pressed. However, I should note that the proceedings involve a dispute between shareholders, in which the Company has no obvious interest, and any use of Company funds to support the interest of one group of shareholders as against another raises matters of potential difficulty.
In paragraph 9 of the Plaintiff's initial short minutes of order, he initially sought an order that Messrs Mahaffy and Lord indemnify Imperium in respect of "any costs". That order did not make clear the costs which were intended to be its subject, and I do not propose to make an order in that form. If the suggested order that Messrs Mahaffy and Lord indemnify the Company in respect of its costs is intended to apply to the costs of the proposed derivative proceedings, then it is inconsistent with the basis on which leave was granted, namely that Mr Hourican indemnify the Company in respect of costs arising out of any leave of the Court given in respect of those proceedings. That order is also not now pressed.
Accordingly, I make the following orders:
Grant leave pursuant to section 237 of the Corporations Act to the Plaintiff to bring proceedings on behalf of Imperium Projects Pty Ltd ("Imperium") against the Second Defendant in respect of the relief claim in paragraphs 10 - 11 of the Originating Process dated 23 December 2013, limited to the claims in respect of expenditures for building works, personal loans and entry into a director loan agreement in respect of the Second Defendant and limited to the claim in respect of entry into a director loan agreement in respect of the Third Defendant.
Imperium be joined as the Second Plaintiff and removed as the First Defendant.
Direct the Plaintiff file and serve an Amended Originating Process and Statement of Claim by 3 March 2015.
Leave to the Defendants to file any application for security for costs by 24 March 2015, returnable on 13 April 2015.
Direct that the Second and Third Defendants file and serve their Defences by 31 March 2015.
The proceedings be listed for directions on 13 April 2015 in the Corporations List.
Subject to further order of the Court, the Second and Third Defendants pay half of the Plaintiff's costs of the leave application, as agreed or as assessed, if the derivative action brought pursuant to the leave granted in paragraph 1 is determined in favour of Imperium.

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: 04 March 2015

Corporations Act 2001(Cth)ss 181, 182, 237, 242, 500, 1317E, 1317H

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