Alsop Wilkinson (a firm) v Neary

The Sargon Capital parties' submissions 10 The Sargon Capital parties submitted that they were put to significant cost in contesting the claims by GrowthOps and Diversa respectively, and the respective outcomes of these disputes had a direct and potentially significant bearing on the amount that the Sargon Capital parties would be entitled to receive from the Retained Proceeds. If GrowthOps' claim was successful, any amount of the Retained Proceeds awarded to the Sargon Capital parties would have decreased by around $969,000 (on the facts found by the Court). If Diversa succeeded on its claim for an equitable vendor's lien, the return to Sargon Capital would have decreased by around $1,280,000 (on the facts found by the Court). 11 Mr Sloan's affidavit annexed a summary of the fees and disbursements billed by Ashurst Australia to the Sargon Capital parties in the proceeding which totalled $1,852,449.38 excluding GST. That amount excluded disbursements incurred in respect of the Sargon Capital parties' valuation expert. Mr Sloan deposed that, having reviewed the time sheets submitted by Ashurst Australia staff working on the proceeding, he was satisfied that the time spent by staff was reasonable and proportionate, having regard to the complexity of the legal issues that were in dispute between the parties. Mr Sloan stated that the timesheets covered the period between 30 April 2020 (the date on which the plaintiffs originally sought relief from the Court under ss 442C and 447A of the Act to complete the Cloverhill Sale) and 21 April 2021 (the date on which the Court handed down orders and reasons for judgment with respect to the distribution of the Retained Proceeds). I infer that the summary of the fees and disbursements billed by Ashurst Australia related to that same period. 12 Mr Sloan deposed that the time spent by Ashurst staff on the proceeding was recorded to different phase codes (or categories) as follows: (a) general phase codes entitled "FCA Proceeding" and "General", which were created for recording time spent on issues in the proceeding that could not be separated into a party-specific phase; and (b) separate phase codes in respect of each of the parties to the Cloverhill Proceeding (being the plaintiffs, Westpac, GrowthOps and Diversa). 13 Mr Sloan said that, from his review of the timesheets: (a) to the extent possible, all time spent working on discrete issues relating to GrowthOps and Diversa were recorded to their respective phase codes; (b) less than one hour was recorded as against Westpac; and (c) a significant portion of time was spent on issues that related to GrowthOps and Diversa but could not be separated by party (including for example attendance at trial), which was recorded to the "FCA Proceeding" and "General" phase codes. 14 Having reviewed Ashurst's time sheets and invoices issued to the Sargon Capital parties, Mr Sloan estimated that approximately 20% of the total fees and disbursements were attributable to the dispute with GrowthOps and 10% were attributable to the dispute with Diversa. Having regard to the Federal Court of Australia Costs Practice Note and the general principles applicable to claiming costs on a standard basis, Mr Sloan applied a 30% discount to the total fees and disbursements, resulting in a discounted total of $1,296,714.56. On the basis of these calculations, the Sargon Capital parties seek to recover by way of costs: (a) from GrowthOps, $259,342.91 representing 20% of the Sargon Capital parties' discounted total costs; and (b) from Diversa, $129,671.46 representing 10% of the Sargon Capital parties' discounted total costs. 15 The Sargon Capital parties submitted that this approach is consistent with the authorities indicating that the Court should take a "broad brush approach" to arriving at the quantum of lump sum costs, which is one of "estimation or assessment and not of arithmetic" and that "the Court should avoid, in effect, carrying out a taxation under the guise of performing a lump sum costs assessment", relying on Bayley & Associates Pty Ltd v DBR Australia Pty Ltd [2014] FCA 346 at [17] and the authorities collected in Zafra Legal Pty Ltd v Harris (Liq) (No 3) [2021] FCA 441 at [116]-[121].

GrowthOps' submissions 16 GrowthOps submitted that costs should lie where they fall as between it and the Sargon Capital parties for the following reasons. 17 First, the genesis of the proceeding was a suit brought by administrators under s 442C of the Act in order to facilitate a sale of encumbered property, so as to create a fund. The initial proceeding was similar to an application for directions or judicial advice by a liquidator (or another insolvency practitioner, or a trustee), where the costs of the liquidator - and also of contradictors - are usually borne by the estate or fund, regardless of the outcome or the success of their arguments: McDermott & Potts; re Lonnex Pty Ltd (in liq) (No 2) (2019) 57 VR 238 (McDermott & Potts) at [15]. The proceeding then continued as a claim upon the fund (which the administrators had realised) by various interested parties who claimed a portion of the sale proceeds, including GrowthOps and the Sargon Capital Parties. The continued proceeding was similar to a trust dispute, which has been brought to court by a liquidator (or some other insolvency practitioner or a trustee), where the costs of the liquidator and of contradictors "are treated as necessarily incurred for the benefit of the estate and are ordered to be paid out of the fund": Sons of Gwalia Ltd (Subject to Deed of Company Arrangement) v Margaretic [2006] FCAFC 92; 232 ALR 119 (Sons of Gwalia) at [7] (Finkelstein J). 18 Second, GrowthOps' participation was necessary because it was served as an interested party as the potential owner of assets to be sold. The plaintiffs recognised GrowthOps as a potential owner of the intellectual property by proposing to pay the proceeds of the Cloverhill Sale into a controlled money account to be disbursed by order of the Court. The only means for GrowthOps to assert its interest as a potential owner of those assets was to take part in the proceeding. 19 Third, GrowthOps' participation in the proceeding was reasonable in order to protect its asserted interest in the sale proceeds. Before the proceeding was commenced, the plaintiffs sent the Sargon Capital parties the final terms of an offer upon which Sargon Capital could participate in the sale, which included a payment of $4,000,000 to the Sargon Capital parties for the intellectual property, and $800,000 to be paid to GrowthOps (Re Holdco (No 2) at [240]). GrowthOps was prepared to accept $800,000, however the Sargon Capital parties were not prepared to accept $4,000,000. The 'in principle' settlement recognised GrowthOps' financial interest in a portion of the sale proceeds by providing for a $800,000 payment to GrowthOps, which would have been lost entirely unless GrowthOps participated in the proceeding. It was the pre-proceeding conduct of the Sargon Capital parties, in rejecting the 'in principle' settlement, which placed GrowthOps in the situation of having to participate in the proceeding. Although GrowthOps' claim against the fund was ultimately unsuccessful, the Sargon Capital parties also achieved an outcome which was less than the sum offered to them by the administrators. 20 Fourth, the application of the Personal Property Securities Act 2009 (Cth) to intangibles such as intellectual property had not been considered previously by the courts. This was not a case where GrowthOps had access to an existing body of clear authority on the legal issues, which it could and should have reviewed and considered to arrive at a conclusion that it was unlikely to succeed in its argument. It brought its claim unguided by case law. 21 Fifth, whilst effectively 'trapped' within the proceedings, GrowthOps was continually concerned about the costs being incurred by all parties. Accordingly, GrowthOps chose not to file any expert evidence regarding the value of assets the subject of the sale, being the only party not to do so. 22 Sixth, unlike the Sargon Capital parties (or Westpac or the plaintiffs), GrowthOps has no ability to recoup its own legal costs out of the fund. It has to put its hand into its pocket to pay its own legal costs. 23 Having regard to those matters, and the 'small footprint' with which GrowthOps litigated, GrowthOps submitted that it would be unjust to require it (on top of funding its own legal costs) also to meet the costs of the Sargon Capital parties. 24 GrowthOps submitted in the alternative that, if the Court were to order costs against it, the amount sought by the Sargon Capital parties overstates the appropriate amount in two respects. First, the 30% discount applied by the Sargon Capital parties for party/party costs is not high enough and a discount of 40% is more appropriate. Second, GrowthOps should bear no more than 5% of the lump sum costs incurred by the Sargon Capital parties (calculated after deducting the costs associated with the valuation experts) given the small proportion which the GrowthOps' claim took up in the wider context of the proceeding. In that respect, GrowthOps noted that: (a) GrowthOps only called one lay witness, Mr McMenamin, who was not cross-examined; (b) GrowthOps did not adduce any expert evidence and supported the Sargon Capital parties' position on valuation; and (c) GrowthOps' claim took up very little time at trial and consisted of legal argument which was addressed at trial only very briefly in opening and closing submissions by GrowthOps, the Sargon Capital parties and Westpac. 25 GrowthOps submitted that the affidavit of Mr Sloan did not provide a sufficient evidentiary basis for the Sargon Capital parties' claim that GrowthOps should pay 20% of their costs.

Diversa's submissions 26 Diversa accepted that it was appropriate for costs to be awarded against it in respect of its dispute with the Sargon Capital parties in relation to the existence of an equitable lien over certain shares, and that costs should be awarded on a lump sum basis. However, it submitted that the affidavit of Mr Sloan did not state with satisfactory precision how the figure of 10%, said to be attributable to Diversa's lien argument, had been arrived at. It was not clear from the affidavit whether the figure of 10% was arrived at as a result of estimating the proportion of time entries applied to each of the three 'FCA Proceeding', 'General', and 'Diversa' time sheet phase codes which related to work undertaken on the lien issue or, alternatively, estimating the proportion of time entries applied to each of the two 'FCA Proceeding' and 'General' phase codes relating to the lien issue and then adding that to all time entries under the 'Diversa' phase code. Diversa submitted that if the latter approach was taken, the 10% figure may include work billed to the 'Diversa' phase code which did not relate to the lien argument (such as work stemming from Diversa's expert evidence). If this was the case, the figure of 10% was likely to overstate the costs attributable to the lien issue. That conclusion was supported by the fact that the time spent by the Sargon Capital parties addressing the lien argument occupied a very small component of its written and oral submissions at trial.

Consideration 27 Under s 43(2) of the Federal Court of Australia Act 1976 (Cth) (FCA Act), an award of costs is in the discretion of the Court. The discretion is unconfined, but must be exercised judicially, that is according to relevant considerations and taking account of the contextual features and facts of the litigation: Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCAFC 86 at [98]; Kazar (Liquidator) v Kargarian; In the matter of Frontier Architects Pty Ltd (In Liq) (2011) 197 FCR 113 at [4]. 28 Ordinarily, costs will follow the event: Idenix Pharmaceuticals LLC v Gilead Sciences Pty Ltd (No 2) [2018] FCAFC 7 at [3]. However, as the Full Court held in Les Laboratoires Servier v Apotex Pty Ltd (2016) 247 FCR 61 at [301] (see also Davies v Lazer Safe Pty Ltd (No 2) [2019] FCAFC 118 at [5]-[6]): … the wide discretion in awarding costs has led to circumstances where a successful party who has failed on certain issues may be ordered to pay the other party's costs of them (as discussed in Hughes v Western Cricket Association (Inc) [1986] ATPR 40-748 per Toohey J), although warnings have been stated that care should be taken in such a course and consideration be given to whether the issues on which the successful party failed are clearly dominant or separable (Waters v PC Henderson (Australia) Pty Ltd (1994) 254 ALR 328 at 330 to 331 per Mahoney JA) and to whether the issues involved different factual enquiries in the one proceeding or multiple causes of action, even if based on a common substratum of fact. 29 In making an award of costs in this proceeding, it is necessary to have regard to the different phases of the proceeding.

First phase of the proceeding 30 The first phase of the proceeding was commenced by the plaintiffs on 30 April 2020 seeking urgent relief under ss 442C and 447A of the Act. Specifically, the plaintiffs sought leave of the Court to dispose of various assets of the Sargon group of companies (in respect of which the plaintiffs were, at that time, voluntary administrators) in connection with a sale that had been negotiated by the plaintiffs and referred to in the evidence as the Cloverhill Sale. The orders were needed by reason of various disputes as to ownership and security interests in certain of the assets to be sold. The application was principally opposed by the Sargon Capital parties. On 1 May 2020, the Court made orders over the opposition of the Sargon Capital parties, and the costs of that part of the proceeding were reserved: see Re Holdco. 31 GrowthOps submitted that the initial proceeding was similar to an application for directions or judicial advice by a liquidator where the costs of the liquidator - and also of contradictors - are usually borne by the fund, regardless of the outcome or the success of their arguments. As the Victorian Court of Appeal said in McDermott & Potts at [12], in the context of applications by liquidators for directions, it is generally desirable that liquidators, like trustees, should use the resources of the court to seek directions as to the discharge of their responsibilities. While liquidators (and administrators) have no automatic right to costs out of the assets of the company in liquidation (or administration), the liquidators are usually entitled to recover costs that are reasonably and honestly incurred: see also Silvia v Brodyn Pty Ltd [2007] NSWCA 55; 25 ACLC 385 at [49] - [54] per Hodgson JA (with whom Ipp and Basten JJA agreed); Chand v Azurra Pty Ltd (in liq) [2011] NSWCA 58; 82 ACSR 383 at [16]. As to interested parties and contradictors, their position will usually depend upon the position they take in the application for directions and their success or failure on the application. 32 In the present case, the plaintiffs were successful in their application on the first phase of the proceeding, and there was no dispute in relation to the plaintiffs' claim for costs out of the Retained Proceeds. The Sargon Capital parties, who opposed the application, were unsuccessful. In my view, they should bear their own costs of the first phase of the proceeding. None of the other interested parties made any claim for payment of their costs of the first phase of the proceeding. It follows, in my view, that there should be no order for costs in favour of the interested parties in respect of the first phase of the proceeding.

Second phase of the proceeding 33 The second phase of the proceeding began with the filing of notices of claims by the plaintiffs and the interested parties on 15 May 2020. As mentioned above, the second phase involved four principal areas of dispute. No party seeks costs in respect of the Valuation dispute or the Sargon IP dispute. The Sargon Capital parties seek costs in respect of the GrowthOps and Diversa disputes respectively. Those disputes are largely defined by the notices of claim filed by GrowthOps and Diversa respectively, but excluding all valuation issues. 34 GrowthOps submitted that the second phase of the proceeding was analogous to a trusts dispute where costs are typically ordered to be paid out of the fund. In Sons of Gwalia, Finkelstein J considered the principles to be applied in awarding costs in the context of disputes over trust property. His Honour identified four broad categories of dispute (at [5]-[10]), amalgamating the categories identified by Kekewich J in Re Buckton; Buckton v Buckton [1907] 2 Ch 406 at 414-415 (Re Buckton) and Lightman J in Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220 at 1223-1224: (a) the first category is where there is a dispute between beneficiaries relating to the construction of the trust instrument or some other question arising in the course of an administration, and an application is brought by the trustee to resolve the dispute - costs of all parties are typically treated as necessarily incurred for the benefit of the estate and are ordered to be paid out of the fund; (b) the second category is where an application is made by someone other than the trustee (usually a beneficiary) but raising similar issues to the first category - typically, the same rule as to costs applies as for the first category; (c) the third category is where a beneficiary brings a hostile claim against the trustees (for example as to the propriety of any action taken or omitted to be taken) or another beneficiary - as between the parties, the costs in this kind of case are treated in the same way as in ordinary litigation, that is, they follow the event; and (d) the fourth category is a dispute between the trustees and persons, otherwise than in their capacity as beneficiaries, in respect of rights and obligations assumed or incurred by the trustees in the course of administering the trust - as between the parties, the costs are typically borne by the unsuccessful party but the trustee will be entitled to look to the estate for their costs if the action is properly brought or defended for the benefit of the trust estate. 35 GrowthOps sought to draw an analogy between this proceeding and the first two categories of trusts dispute referred to above. In my view, the analogy is not appropriate having regard to the nature of the issues in dispute between the Sargon Capital parties and GrowthOps and Diversa respectively. In McDonald v Horn [1995] 1 All ER 961, after referring to the three categories of trusts disputes identified by Kekewich J in Re Buckton ((a)-(c) above), Hoffmann LJ (with whom Hirst and Balcombe LJJ agreed) observed (at 971): Kekewich J acknowledged that it is often difficult to discriminate between cases of the second and third classes, but said ([1907] 2 Ch 406 at 415): ' ... when once convinced that I am determining rights between adverse litigants I apply the rule which ought, I think, to be rigidly enforced in adverse litigation, and order the unsuccessful party to pay the costs.' I should add that it is also sometimes difficult to discriminate between the first and third categories. Not all proceedings commenced by trustees for the determination of some question affecting entitlement to the fund are within the first category. Particularly in a case which does not involve the construction of a trust instrument but rather a dispute over the beneficial ownership of the trust property, the proceedings may be more akin to an interpleader. 36 In Re Cunningham; Sproule v Quested (1914) 31 WN (NSW) 44, a case where an issue arose between the beneficiaries of a trust, Simpson CJ in Eq remarked (at 45) that as the parties were in the position of hostile litigants, and the defendants were unsuccessful, the usual costs rule should apply (cited in Greenham v Greenham (No 2) [2020] VSC 850 at [25]; see also Gonzales v Claridades (2003) 58 NSWLR 188 at [59]). Likewise in liquidation, if there is a claim in respect of property or a security interest, costs usually follow the event. 37 In the present proceeding, if the Court had not made the orders in the first phase authorising the sale of assets by the plaintiffs, it would have been necessary to resolve the disputed claims to ownership of, or security over, the relevant assets. That dispute would have been a regular inter partes dispute and would warrant costs being awarded according to the usual principles. The Court instead made orders authorising the sale of the assets and relocating the dispute to one on the fund. Ultimately, though, the same issues required resolution. 38 For those reasons, I do not accept GrowthOps' submission that the second phase of the proceeding was analogous to a trusts dispute where costs are typically ordered to be paid out of the fund. I consider that the GrowthOps and Diversa disputes should be characterised as ordinary inter partes disputes between the Sargon Capital parties and GrowthOps and Diversa respectively, to which the usual costs principles should apply. 39 GrowthOps' submission that its participation in the proceeding was necessary, because it was served as an interested party as the potential owner of assets to be sold, is not a reason not to award costs. Contrary to its submission, GrowthOps was not 'trapped' within the proceeding. It was not compelled to take an active part in the proceeding. It filed a notice of claim and chose to litigate its claimed interest in the Retained Proceeds. It was unsuccessful on that claim and, in my view, there is no reason why the usual order for costs should not follow. 40 I accept GrowthOps' further submission that its participation in the proceeding was reasonable, in the sense that it advanced a reasonable claim to part of the Retained Proceeds. I also accept GrowthOps' submission that it participated in the proceeding in a reasonable manner. However, those matters affect the quantum of costs to be awarded and are not a reason not to award costs. 41 In the circumstances, the Sargon Capital parties are entitled to an award of costs in respect of the GrowthOps and Diversa disputes incurred in the second phase of the proceedings, as defined by their respective notices of claim (but excluding all valuation issues). It is necessary to consider the appropriate method of calculating those costs and their quantum in this proceeding. 42 As noted above, the second phase of the proceeding involved four primary disputes. The Valuation dispute was the largest dispute, in terms of complexity, evidentiary materials and argument, by a considerable margin. The three other disputes, the Sargon IP dispute, the GrowthOps dispute and the Diversa dispute, involved limited evidentiary materials and principally raised legal issues. The Valuation dispute can also be regarded as the central dispute in the second phase of the proceeding and was principally a dispute between Westpac and the Sargon Capital parties (although Diversa also adduced expert valuation evidence). Westpac and the Sargon Capital parties had ownership or security interests in various of the assets sold, and they made competing claims to the Retained Proceeds based on their competing assessment of the relative value of the assets sold. 43 It follows, in my view, that the second phase of the proceeding would have been conducted regardless of whether GrowthOps and Diversa made claims to part of the Retained Proceeds. In those circumstances, the GrowthOps and Diversa disputes added to the costs of the proceeding incurred by the Sargon Capital parties, but only incrementally. As such, I consider that the Sargon Capital parties should receive the incremental costs incurred by the GrowthOps and Diversa disputes on a party/party basis. By incremental costs, I mean those costs that would not have been incurred by the Sargon Capital parties but for the GrowthOps and Diversa disputes (excluding all issues of valuation). 44 Each of the Sargon Capital parties, GrowthOps and Diversa agreed that, if an award of costs were to be made, it should be made on a lump sum basis. Rule 40.02(b) of the Federal Court Rules provides that a party entitled to costs may apply to the Court for an order that costs be awarded in a lump sum instead of, or in addition to, any taxed costs. The purpose of such a rule is "to avoid the expense, delay and aggravation involved in protracted litigation arising out of taxation": Beach Petroleum NL v Johnson (No 2) (1995) 57 FCR 119 at 120. The assessment of costs under a lump sum order does not require a process similar to taxation: Ginos Engineers Pty Ltd v Autodesk Australia Pty Ltd [2008] FCA 1051; 249 ALR 371 (Ginos Engineers) at [23]. While the assessment involves the "application of a much broader brush than that applied on taxation" and "is one of estimation or assessment and not of arithmetic calculation or precision", the approach is one which must be "logical, fair and reasonable": Nine Films and Television Pty Ltd v Ninox Television Ltd [2006] FCA 1046 at [8]. It is common for the court to take as its starting point the evidence of the charges for professional costs incurred and disbursements made by the lawyers of the party awarded costs, and to discount that figure to take account of the acceptability of the charges made, the conduct of the proceeding and the measure of success on issues, to arrive at a figure which as a matter of judgment is neither over-compensatory nor prejudicial to the successful party: Ginos Engineers at [24]; Telstra Corporation Ltd v Phone Directories Co Pty Ltd [2011] FCA 1463 at [5]. The Court is entitled to take into account the evidence that is before it, its own observations of the proceeding and the judge's own experience: Fewin Pty Ltd v Burke (No 3) [2017] FCA 693 at [61]; see also Bobb v Wombat Securities Pty Ltd (No 2) [2013] NSWSC 863 at [10]. 45 The Costs Practice Note issued by the Court on 25 October 2016 provides guidance to litigants about the approach to the assessment of costs that will be undertaken by the Court in accordance with the FCA Act and the Federal Court Rules. Relevantly, paragraphs 3.3 and 4.1 advise litigants that: 3.3 For those costs issues that are unable to be resolved by negotiation and require the involvement of the Court, the Court's preference is to avoid, where possible, the making of costs orders that lead to potentially expensive and lengthy taxation of costs hearings. Rather, the Court will seek to adopt, and will encourage parties to utilise, the appropriate use of sophisticated costs orders and procedures, including lump-sum costs orders, consolidated costs orders, estimate of costs processes and Alternative Dispute Resolution ("ADR"). Taxation of costs hearings should be the exception and be confined to those matters that have genuinely been unable to be otherwise resolved or determined. 4.1 The Court's preference, wherever it is practicable and appropriate to do so, is for the making of a lump-sum costs order. 46 Each of GrowthOps and Diversa submitted that the Sargon Capital parties' apportionment of their total costs, and the discount applied to arrive at an appropriate party/party costs figure, were inappropriate. Diversa made the further submission that the precise methodology applied in Mr Sloan's affidavit to apportion costs was opaque. I accept those submissions in the following respects. First, Mr Sloan's affidavit indicates that the Sargon Capital parties' total costs have been determined on the basis of both phases of the proceeding. For the reasons indicated above, I consider that the costs award should be limited to the incremental costs occasioned by the GrowthOps and Diversa disputes in the second phase of the proceeding. Second, Mr Sloan's affidavit provides evidence at such a high level of generality that it is not possible for the Court to be confident that his calculations accord with the methodology for determining costs that I consider to be appropriate (on an incremental costs basis). The absence of any detailed cost data in Mr Sloan's affidavit makes it impossible for the Court to undertake its own assessment of an appropriate lump sum to be awarded. Third, based on my own observation of the second phase of the proceeding, I would expect that the incremental costs occasioned by the GrowthOps and Diversa claims (excluding valuation issues) to be no more than 20% of the total costs of the Sargon parties. 47 In the absence of sufficient evidence to make a lump sum award of costs, it will be necessary to refer the quantification of costs to a Registrar of the Court for determination. The parties are encouraged to mediate the determination of the quantum of costs, either independently of the Court or with the assistance of the Registrar, and in that way minimise the further costs that may be incurred by them.

Conclusion 48 In conclusion, I will make orders that each of GrowthOps and Diversa pay the costs of the proceeding of the Sargon Capital parties which: (a) were incurred on and after 15 May 2020; (b) relate to the issues raised by the notice of claim filed by each of GrowthOps and Diversa respectively (excluding all valuation issues); and (c) would not have been incurred but for the notice of claim filed by each of them respectively. 49 I will also order that, if not agreed, the costs will be awarded in a lump sum pursuant to rule 40.02(b) of the Federal Court Rules and that the quantification of the costs will be referred to a Registrar of the Court for determination. I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Bryan.