Al Maha Pty Ltd v Coplin [2024] NSWSC 248 | Case summary

The claim for a third party costs order against Mr Huo

As I noted above, Mr O'Brien now seeks a third party costs order against Mr Huo in respect of the costs order made against Noda in these proceedings on 17 January 2024.
The relevant principles are well established, and have been addressed by the parties in submissions, and I have been taken at some length to the applicable cases.
I should add to the review of the cases in my oral ex tempore judgment that, in Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 192-193; [1992] HCA 28 ("Knight v FP Special Assets"), Mason CJ and Deane J (with whom Gaudron J agreed at 205) observed that: "For our part, we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non-party … That category of case consists of circumstances 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, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made."
In a separate judgment in Knight, Dawson J observed (at 202) that: "The cases therefore establish a long-asserted jurisdiction to award costs in appropriate cases against a person who is not a party to the proceedings where that person is the effective litigant standing behind an actual party or where there has been a contempt or abuse of the process of the Court."
Ms King, who appears for Mr O'Brien, refers to the well-known summary of the applicable principles in FPM Construction Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 ("FPM Construction") at [210], where the Court of Appeal referred to the High Court's analysis of the relevant issues in Knight v FP Special Assets. Basten JA there identified several elements arising from the case law, as relevant to whether an order for costs should be made against a non-party, namely that the unsuccessful party to the proceedings was the moving party and not the defendant; the source of funds for the litigation for the non-party or its principal; the conduct of the litigation was unreasonable or improper; and the non-party, or its principal, had an interest which was equal to or greater than that of the party or if financial, was a substantial interest; and the unsuccessful party was insolvent or could otherwise be described as a person of straw. Basten JA then noted that cases where such orders had been made against non-parties were typically cases where some, if not a majority, of those criteria were satisfied. Ms King here contends that each of those criteria were satisfied, and I will return to that question below.
I also recognise that these factors should not be treated as a from of statutory test for making a third party costs order. As Basten J also there observed (at [214]): "The criteria identified in Knight v FP Special Assets should not ultimately be treated as separate and independent factors. Each requires an evaluative assessment of factors which will clearly tend to interact. Nor should it be forgotten that the power is only to be exercised in exceptional cases. In many cases involving individuals in the superior courts the parties may lack the resources to meet the costs of the litigation if unsuccessful. Similarly, there will frequently be a non-party, be it a company officer or solicitor, who will be active in the conduct of the litigation and who will obtain some direct or indirect financial benefit from its success. The fact that it is entirely proper for legal practitioners to runs cases on a speculative basis, so long as satisfied that they have reasonable prospects of success, demonstrates that care must be taken not to apply the criteria mechanically. Careful attention is required to the conduct of the party said to be involved in the litigation and the nature of the "interest" in its outcome or subject-matter."
Mr Krochmalik in turn refers to the decision in Yu v Cao (2015) 91 NSWLR 190; [2015] NSWCA 276 at [150], where reference was made to the decision in Symphony Group PLC v Hodgson [1994] QB 179, which referred to the relevance of whether a non-party had notice of the prospect that a costs order would be made against it, at least in circumstances that that non-party gave evidence in the proceedings. I will assume, without deciding, that that is a relevant matter, although I also recognise that costs orders have been made against third parties in many cases where there is no suggestion that had occurred. Here, there is no suggestion that Mr Huo had been given notice that a third party costs order would be sought against him.
Mr Krochmalik draws attention to the review of the relevant case law by Leeming JA (with whom McColl and Basten JJA agreed) in PM Works Pty Ltd v Management Services Australia Pty Ltd trading as Peak Performance PM [2018] NSWCA 168, at [26]ff, where his Honour also referred to the High Court's reasoning in Knight v FP Special Assets and to the earlier decisions to which the High Court referred. His Honour there emphasised, by reference to authority including FPM Construction, that third party costs orders were the exception rather than the rule. His Honour also there observed at [36] that it would ordinarily not be sufficient basis to make a third party costs order merely that the unsuccessful party was the moving party; that the source of funds for the litigation was the non-party or its principal; and that the unsuccessful party was insolvent or could otherwise be described as a person of straw since, if a third party costs order were ordinarily made in that situation, the jurisdiction would lose its "exceptional" character. I proceed on the basis that that proposition is generally true, and that it will ordinarily be necessary to establish something further, likely including the other matters identified in FPM Construction, that the conduct of the litigation was unreasonable or improper or that the non-party had a substantial interest in the litigation, or possibly both. I also recognise that, as Mr Krochmalik pointed out, Leeming JA also emphasised (at [39]) the need to avoid the third party cost rule "swallowing up" the general rule, by too readily making such an order.
I also recognise that, in Mistrina Pty Ltd v Australian Consulting Engineers Pty Ltd [2020] NSWSC 633 ("Mistrina"), Hammerschlag J (as the Chief Judge in Equity then was) reviewed the relevant case law and emphasised that the factors specified in that case law are not to be treated as separate and independent factors and that an evaluative assessment of all of those factors should be made. His Honour also emphasised (at [25]), that: "The discretion is at large. In determining whether to exercise its discretion to make such an order, the court will have regard to all the relevant circumstances. If those circumstances warrant making the order because it is just to do so, giving it the description exceptional does not add much. The description exceptional is not some additional criteria".
His Honour went on to observe that, in that case, a third party costs order should be made against a litigation funder, where the funding of the proceedings was the litigation funder's business, and where that funder funded the proceedings to serve its own commercial and financial ends rather than to facilitate access to justice in any abstract sense. His Honour also observed (at [39]) that: "Justice dictates that the successful defendant against the impecunious plaintiffs funded by the commercial funder should not be left with an empty costs order against persons of straw".
For completeness, I note that I also reviewed the relevant principles in Redman v JTS Investment Holdings Pty Ltd [2012] NSWSC 1575, which was approved by Hallen J in Tanamerah Estates Pty Ltd v Tibra Capital Pty Ltd (No 2) [2013] NSWSC 616 at [70], and in Riva NSW Pty Ltd v The Official Trustee in Bankruptcy [2023] NSW 896 at [36] - [37].
Ms King submits that the matters necessary for a third party costs order against Mr Huo are established on a simple basis, and it seems to me that, notwithstanding the elaborate and detailed submissions made by Mr Krochmalik, the matter is a simple one. Ms King submits that, here, Noda was the moving party in the proceedings; Noda was not the source of the funds for the litigation, not having a bank account; the proceedings were dismissed as a result of Noda failing to secure an amendment that it sought on the day of the hearing; Mr Huo had a direct interest in the proceedings, and she refers to a previous transaction which it is not necessary for me to address in that respect; and Noda is a "person of straw". She also submits, by reference to several additional decisions, that it is in the interests of justice that Mr Huo be liable for the costs of the proceedings, and I will return to that proposition below.
It seems to me that each of those factors is satisfied, while I recognise that the case law to which I have referred above does not necessarily require that all of them be satisfied in order to establish the basis of a third party costs order. Noda was the moving party in the proceedings, to the extent that that is a necessary element for such an order. I understand Mr Krochmalik to have accepted, fairly, that Mr Huo funded the proceedings, rather than Noda having done so.
Mr Krochmalik, perhaps surprisingly, contested the proposition that Noda's conduct of the litigation (in fairness, at a point where he was not appearing for Noda) was unreasonable and sought to characterise the matter as one where Noda had simply failed in obtaining the relief that it sought. That characterisation does not seem to me to properly reflect events, in two respects. First, this is not a situation where Noda had simply failed to obtain the relief that it had sought, where it abandoned its claim to that relief on the day on which the matter had been listed for final hearing, having put Mr O'Brien and H&H Funding to the cost of reaching that final hearing. Second, Noda's abandonment of that claim occurred in circumstances that, as I noted above, Noda had initially sought to establish its substantive entitlement as a secured creditor of H&H Funding; then abandoned its attempt to do so (likely recognising that question could not practically be determined until the liquidator had completed the investigations he was then undertaking); then sought, notwithstanding its previous abandonment of that claim, to reinsert it at the hearing on 17 January 2024; and then, having unsurprisingly failed to reverse its previous position, abandoned the proceedings and accepted that it was liable for the costs of the proceedings. It seems to me that, on any view, that conduct amounted to unreasonable conduct of the proceedings, and, if it were necessary to do so, I would find that it was inconsistent with Noda's obligations under s 56 of the Civil Procedure Act 2005 (NSW) in respect of the just, quick and cheap resolution of the real issues in dispute in the proceedings. In those circumstances, the third element recognised in the cases as one that will support a third party costs order is satisfied.
Fourth, the case law has recognised a question whether the non-party, or its principal, had an interest that was equal to or greater than that of the party or, if financial, was a substantial interest. Mr Krochmalik here accepts that at least aspects of that proposition are established, where Mr Huo is the sole director and sole shareholder of Noda. He points out, consistent with the case law to which I have referred above, that that is not sufficient, in itself, to support a non-party costs order, where that would deprive such an order of its "exceptional" character. However, the position is here not only that Mr Huo was the director and sole shareholder of Noda, but he was also, by inference from the fact that Noda does not have a bank account, the funder of the proceedings and, also by inference from the fact that Noda does not have a bank account, is likely to have funded other expenditures of Noda, and obtained the benefit of other payments to Noda, whether personally or through associated entities, since that is the only way in which those funds could have passed through the financial system. The proceedings were also brought so as to seek to force Mr O'Brien to pay funds held by H&H Funding to the receivers appointed by Noda, before the liquidator completed the investigations which were then under way and (in one of its versions noted above) without determination of the substantive validity of Noda's security. It seems to me that Mr Huo had a substantial interest in that result, where he would have benefitted from any payment to the receivers appointed by Noda, and then, notionally, to Noda, which could only have been made to a bank account held by Mr Huo or his associated entities where Noda had no such account.
The fifth element identified in the case law is that the unsuccessful party was insolvent or could otherwise be described as a "person of straw". Again, perhaps surprisingly, that proposition was contested by Mr Krochmalik. It seems to me that that proposition is plainly established. The fact that Noda did not have a bank account supports inferences that Noda did not have funds in a bank account from which any liabilities could be paid and was dependent on Mr Huo or his associated entities paying such liabilities. That inference could only be displaced by evidence led by Noda of other presently available assets, not of a monetary character, which could be realised in order to meet such liabilities. Noda did not lead such evidence and, in those circumstances, I can properly infer that any evidence that it could have led as to other assets that were presently available to it would not have assisted it to displace the inference that it was impecunious and dependent on funding of its liabilities by Mr Huo or his associated entities. Mr Krochmalik also submitted, by reference to claims that Noda has upon H&H Funding, and claims that H&H Funding in turn has upon Bridgeland Second, that Noda can expect to receive substantial recoveries from the liquidation of Bridgeland Second. It seems to me that that proposition does not assist Noda or Mr Huo. The potential of future recoveries by Noda or Mr Huo on its account, however substantial, does not have the consequence that Noda is not now a person of straw.
In these circumstances, it seems to me that all of the factors referred to in the case law, as supporting a non-party costs order against Mr Huo are satisfied. It also seems to me that Hammerschlag J's observations in Mistrina, while directed to the position of a litigation funder, could equally be applied to the position of Mr Huo as Noda's sole director and sole shareholder who chooses to fund the conduct of proceedings by a company with no apparent funds, in order to advance his commercial ends in achieving a recovery by that company which will in turn benefit himself as its sole shareholder.
I have not neglected a further submission by Mr Krochmalik that there is less reason to make a third party costs order here because orders for costs had been made against the receivers appointed by Noda, who had accepted that they would be bound by such orders, and that there is no reason to doubt that they have the capacity to meet an order for costs against them. I proceed on the basis that there is no reason to think that the receivers do not have the ability to meet a costs order against them. However, it escapes me why that would be a reason to decline to make a third party costs order against Mr Huo, in circumstances that that order would otherwise be justified, so as to leave the receivers exposed to costs which could otherwise properly be borne by Noda but for its lack of funds, and by Mr Huo if such an order is made. To put that proposition differently, it seems to me that there is no less reason to make a third party costs order, where one plaintiff is impecunious, because other plaintiffs could be left to bear a share in the costs which they would not have to bear, but for the fact that that plaintiff was impecunious.
For these reasons, I am comfortably satisfied that an order should be made that Mr Huo be personally liable for the costs order made on 17 January 2024 against Noda.

Payment of security for costs out of Court

Mr O'Brien also sought an order that the amount of $70,000 paid into Court on 13 December 2023 by Noda, or perhaps more likely by Mr Huo on Noda's behalf, be paid to Mr O'Brien and H&H Funding on account of their costs in the proceedings. The basis on which that order was sought was straightforward. As I understand it, Mr O'Brien simply contends that an order was made by consent that an amount be paid into court for security for costs; an order for costs has now been made, although I accept that those costs have not been assessed or agreed or the subject of a gross sum costs order; the evidence led by Mr O'Brien is such that, on any view, the costs that he and H&H Funding incurred are likely to substantially exceed the amount that has been paid into Curt; and that is sufficient reason for the order sought to be made.
Mr Krochmalik puts more complex submissions in response. In particular, Mr Krochmalik submits that an "entitlement" to set off is available as between Noda and H&H Funding which means that, after setting off the amounts owing, Noda is a net creditor and not a net debtor of H&H Funding. Mr Krochmalik points to several forms of set off on which Noda relies in the circumstances, including set off under s 21 of the Civil Procedure Act, equitable set off or the exercise of an inherent power of the Court to permit set off with respect to judgments and costs. Mr Krochmalik also referred to observations of White J in Australian Beverage Distributors v Evans and Tate Premium Wines Pty Ltd (2006) 58 ACSR 22 which dealt with the circumstances in which set off may be available, in respect of orders for costs, and the observations of Kunc J in Al Maha Pty Ltd v Coplin [2018] NSWSC 1623 and Meek J in Riva NSW Pty Ltd v Key Nominees Pty Ltd [2023] NSWSC 711 in that regard.
Mr Krochmalik submitted that Noda is a substantial creditor of H&H Funding, where it claims the amount of the judgment in the previous proceedings to which I referred above, which will be provable in the winding up, irrespective of whether Noda is entitled to prove as a secured creditor in that respect. He also submits that Noda is also owed a gross sum costs amount as a result of the costs order made in the earlier proceedings, Mr Krochmalik submitted that that debt was not a provable debt for the purposes of s 553 of the Corporations Act, because it is a post liquidation debt, where the costs order was made after Noda was placed in liquidation, although it related to costs that were incurred prior to the appointment of the liquidator to H&H Funding. Mr Krochmalik expressly did not seek to establish a set-off for the purposes of s 553C of the Corporations Act 2001 (Cth) on the basis that there were mutual debts as between Noda and H&H Funding, possibly because he recognised that the factors emphasised by the High Court in Metal Manufacturers Pty Ltd v Morton (2023) at 406 ALR 711; [2023] HCA 1 would cause substantial difficulty for such a claim. In particular, the High Court there rejected the proposition that a set-off was available between a creditor's claim against a company in liquidation and a liquidator's preference claim in the liquidation, where, inter alia, the dealings were not mutual, because one was between the creditor and the company and the other was for the benefit of persons entitled to payment under the statutory provisions for the proof and ranking of debts and claims in a liquidation, rather than for the benefit of the company.
Mr Krochmalik also drew attention to observations of Wright J in Romani v State of New South Wales (No 2) [2023] NSWSC 1044 at [39], which emphasised that the Court's inherent discretion to order a set-off was exercised by matters including the public interest, the efficient administration of justice, the conduct of the parties, the solvency of the parties, and fairness. Mr Krochmalik here submitted that that tended in favour of a set-off, and declining an order for payment of the amount of security out of Court, because otherwise Noda would be left to prove its claim in the liquidation, while H&H Funding (and, importantly, the liquidator in his capacity as liquidator) would have his costs of these proceedings met.
I am here comfortably satisfied that an order should be made for the payment to the liquidator and H&H Funding of the amount of $70,000 paid into Court, for several reasons, and the matters identified by Mr Krochmalik do not have the contrary result. First, an order was here made by consent that the amount be paid by Noda as security for Mr O'Brien's and H&H Funding's costs of these proceedings, and the intent of that order was, as it plainly provided, that the moneys be paid into Court and then used for that purpose. It seems to me that there is nothing unjust, and nothing contrary to the public interest, in allowing funds that were expressly paid into Court under a consent arrangement as security for costs to be used for the very purpose for which they were paid into Court.
Second, it seems to me that Mr Krochmalik's submissions ultimately did not come to grips with the fact that, here, Mr O'Brien was joined personally as a party to these proceedings, and I have referred above to the relief which was sought against him, plainly, personally, albeit in his capacity as liquidator of the company. I recognise that neither party led evidence as to how Mr O'Brien's and H&H Fundings' costs of the proceedings were paid, whether directly by Mr O'Brien or from funds held by H&H Funding, or whether they had not yet been paid. However, it is plain enough that Mr O'Brien was, albeit in his capacity as liquidator, joined as party to these proceedings and substantive relief was sought against him. The fact that the proceedings were brought against Mr O'Brien, and not only H&H Funding, tends against the Court treating any set-off of a debt owed by H&H Funding to Noda to which he was not party as now preventing a claim against the monies paid into Court as security for costs.
Further, it seems to me that, here, the Court should approach the question of any set-off, to the extent that it involves a matter of discretion, having regard to the factors to which the High Court referred in Metal Manufacturers. Even if the costs of the proceedings were payable, or paid, by H&H Funding rather than by Mr O'Brien, the dealings between Noda and H&H Funding were not mutual in the relevant sense, adopting the language of Metal Manufacturers, since H&H Funding's principal debt to Noda and the costs of the earlier proceedings were referable to dealings between Noda and H&H Funding prior to the appointment of the liquidator, whereas the costs of these proceedings was recoverable for the benefit of the liquidator or at least for the benefit of persons now entitled to payment under the statutory provisions for the proof of debts and claims in a liquidation, rather for the benefit of the company. It also seems to me that the public interest; the efficient administration of justice; the conduct of the parties, including the fact that security for costs was provided in the first place; the solvency of the parties, viewed by reference to the different interests to which I have referred; and fairness, all support an order that the security for costs be paid out of Court so that Mr O'Brien and H&H Funding's creditors are not left out of funds in that respect.
I have not neglected the fact that the amount of costs payable by Noda to Mr O'Brien and H&H Funding has not been assessed, and there has been no agreement or gross sum costs order made in that respect. It seems it me plain, however, that the amount of costs recoverable by Mr O'Brien and H&H Funding will substantially exceed the amount of $70,000 paid into Court as security for costs. The amount of the costs incurred, when discounted by the percentage that is commonly seen by this Court in gross sum costs applications and in costs assessments, would substantially exceed the amount of funds held in Court, and the one expenditure challenged by Mr Krochmalik, in submissions, would not alter that result.

Al Maha Pty Ltd v Coplin

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