Arktos Pty Ltd v Idyllic Nominees Pty Ltd

REASONS FOR JUDGMENT 1 On 11 April 2003 I made orders in this matter that the first respondent ("Idyllic") pay to the first applicant ("Arktos") $188,173.91 and to the second applicant ("Ms Davies") $31,946.16. It was also ordered that Idyllic pay 95 percent of the costs of Arktos and Ms Davies, taxed as one set, and indemnify them in respect of any liability they may have to the fourth respondent ("Skycorp"). The following reasons are to be read with the reasons delivered on 11 April 2003 in respect of the foregoing orders. 2 On 7 May 2003 Arktos and Ms Davies made application for an order that the second respondent ("Moore"), third respondent, ("Price") and Jennifer Anne Price ("Mrs Price"), being the directors of Idyllic at all material times, pay the costs payable by Idyllic under the orders made on 11 April 2003. It is to be assumed that it was comprehended by the application that Mrs Price would be joined as a party to the proceeding for the purpose of the order. The application also sought a direction to the Registrar, as taxing officer, that claims for disbursements for fees payable to expert witnesses be accepted notwithstanding that the applicants had not yet paid those fees. On the hearing of the application the counsel who had appeared for Idyllic, Price and Moore at trial appeared for Price and Mrs Price, instructed by different solicitors from those who had instructed counsel at trial. There was no appearance on behalf of Idyllic or Moore, although the solicitors representing those parties remained on the record. 3 At material times Idyllic was the trustee of two discretionary trusts established for the benefit of the interests of Price and Moore and was engaged in trade or commerce as the proprietor of a business carried on as a bakery shop and delicatessen ("the business"). The liability of Idyllic under the judgment was incurred in its capacity as trustee of the trusts. 4 On 30 June 2000 Idyllic sold the business to Arktos for a price of $320,000 of which $230,000 was allocated to goodwill, $80,000 to plant and equipment and $10,000 to stock. The sale agreement provided for the purchase price to be made by instalments, the first instalment to be paid on 30 June 2000 in the sum of $130,000 by bank cheque payable to Idyllic as trustee of the Price family trust. The remainder, said to be $180,000, was to be paid by three equal instalments on 15 January 2001, 15 January 2002 and 15 January 2003 by bank cheques payable to Idyllic as the trustee of the Moore family trust. It appears that the sum of $130,000 paid on 30 June 2000 was distributed by Idyllic to the Price family trust upon receipt of that sum. 5 The financial statements prepared for Idyllic for the year ending 30 June 2000 showed the net worth of Idyllic at that time to be $130,627, represented by "Partners' Capital" held as to $55,619 by the Price family trust and as to $75,008 by the Moore family trust. In broad terms the assets of Idyllic were current assets - cash on hand ($16,143) and stock ($10,000); fixed assets ($103,635); and intangible assets - goodwill ($130,000). Fixed assets included the plant and equipment purchased by Arktos under the contract for the sale of the business. The written down value of that plant and equipment as at 30 June 2000 was $51,476. Also included in fixed assets was the cost of improvements effected to the leased premises occupied by the business, the written down value of that expenditure as at 30 June being $52,159. The principal current liabilities of Idyllic were two debts of $65,000, owed to Price and to Moore respectively. 6 It can be seen, therefore, that upon sale of the business and distribution of part-payment of the purchase price to the Price family trust, Idyllic's principal remaining asset was the liability of Arktos to pay $190,000 to Idyllic for the balance of the purchase price. By reason of the refusal of Idyllic to retake possession of the business premises and to resume conduct of the business after Arktos rescinded the sale agreement, it may be assumed that the assets represented by plant and equipment and the cost of improvements to the business premises lost a significant part of their value, or became wasted, when the lessor of the premises, Skycorp, terminated the lease and re-entered the premises. 7 It appears that upon the sale of the business to Arktos, Idyllic ceased activity as a trading corporation. If, at the time the sale agreement was rescinded, the cash recorded in the financial statements as a current asset had been expended by Idyllic, or distributed to the trusts, no other current asset, apart from the amount able to be realized from the sale of plant and equipment, would have been available to meet any judgment for which Idyllic may have been liable thereafter. Under the trust instruments Idyllic may have had a right to be indemnified by the trusts but the extent to which Idyllic was able to recover monies distributed to the trusts, or obtain indemnity from the beneficiaries of the trusts, was not addressed in the submissions of the parties to the application. 8 The affidavits filed in support of the application disclosed that when Arktos and Ms Davies demanded payment from Idyllic of the sums payable under the judgment, the solicitors for Idyllic replied that Idyllic had no money or assets from which it could meet the judgment. Arktos and Ms Davies, therefore, seek an order supplementary to the orders made under the judgment that the directors pay the costs payable by Idyllic. On the hearing of the application the parties appeared to accept that Idyllic was now an entity of straw. 9 Prior to judgment being entered, Arktos and Ms Davies made no application to the Court for an order that Idyllic provide security for costs. Their failure to do so is a matter to be taken into account in determining if the order now sought should be made but, if it is otherwise just that such an order be made, the absence of an application for security for costs, is not a bar to the making of that order. (See: Knight v F P Special Assets Ltd [1992] 174 CLR 178 per Mason CJ, Deane J at 190‑191; Kebaro Pty Ltd v Saunders [2003] FCAFC 5 at [59].) 10 Counsel for Price and Mrs Price submitted that by reason of the contents of the financial statements referred to above, Arktos and Ms Davies had notice of Idyllic's insolvency, and by implication, of the need to make application for security for costs. I am unable to agree that those documents revealed to Arktos and Ms Davies that Idyllic became insolvent after 30 June 2000. Furthermore, Arktos and Ms Davies were entitled to assume that if at any time in the course of the proceeding the directors of Idyllic formed the view that Idyllic had become insolvent they would disclose that fact to Arktos and Ms Davies and not allow the proceeding to be continued against an insolvent corporation. It may be assumed that the directors of Idyllic were aware of the company's financial position at all material times, and of any provision made by Idyllic against the risk that judgment could be entered against it in the proceeding. 11 It was also the case that Arktos and Ms Davies did not give notice to Price, Mrs Price and Moore that if Arktos and Ms Davies succeeded in obtaining an order for costs against Idyllic the applicants would seek an order that Price, Mrs Price and Moore pay those costs if Idyllic failed to pay that sum. That omission by Arktos and Ms Davies is a matter to be considered in determining the order to be made on their application but the failure to give notice in itself would not be a reason to deny the order sought unless by reason of that default it would be unjust to make the order. (See: Gore v Justice Corporation Pty Ltd (2002)119 FCR 429 at [52]; Kebaro at [140]); HPM Pty Ltd v Fear [2002] WASCA 249 at [9]-[10].) 12 Furthermore, in the case of Price and Moore, each was a party to the litigation at the commencement of the proceeding and a director of Idyllic. By reason of their joinder as parties they were closely involved in the conduct of the proceeding, both personally and on behalf of Idyllic, and were able to assess at any time whether a risk had arisen that an application for orders against them may be made if Idyllic were unable to satisfy any judgment for costs entered against it. It should be inferred that if Price and Moore were aware that Idyllic could not discharge a judgment debt, they would have been aware that an unsatisfied judgment for costs could present the risk, as directors of Idyllic, that an order may be sought against them for payment of those costs. 13 The jurisdiction of the Court to make such an order after the entry of final judgment in a proceeding was confirmed and explained in Caboolture Park Shopping Centre Pty Ltd (in liq) v White Industries (Qld) Pty Ltd (1993) 117 ALR 253 at 264-265. As pointed out in Caboolture Park, s 43 of the Federal Court of Australia Act 1976 (Cth) confirms that the court has jurisdiction to award costs in all proceedings before the Court. The jurisdiction possessed by the Court is a further or separate jurisdiction, the intent of Parliament being that the Court have sufficient jurisdiction and powers to quiet all controversies arising in proceedings brought before the Court. The following express powers provided in ss 22 and 23 of the Act are relevant. '22. The Court shall, in every matter before the Court, grant, either absolutely or on such terms and conditions as the Court thinks just, all remedies to which any of the parties appears to be entitled in respect of a legal or equitable claim properly brought forward by him in the matter, so that, as far as possible, all matters in controversy between the parties may be completely and finally determined and all multiplicity of proceedings concerning any of those matters avoided. 23. The Court has power, in relation to matters in which it has jurisdiction, to make orders of such kinds, including interlocutory orders, and to issue, or direct the issue of, writs of such kinds, as the Court thinks appropriate.' 14 It follows that the Court has available to it a broad discretion and the widest of powers in respect of the making of orders for costs. It is, of course, a discretion to be exercised judicially but it is not a discretion confined by specific rules. As Lloyd LJ said in Taylor v Pace Developments Ltd [1991] BCC 406 at 408: "There is only one immutable rule in relation to costs, and that is that there are no immutable rules." 15 In respect of supplementary orders in respect of costs Mason CJ and Deane J said as follows in Knight v F P Special Assets Ltd at 192-193: 'For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. 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.' 16 In Symphony Group PLC v Hodgson [1994] QB 179 at 191-192 Balcombe LJ listed the headings under which courts had ordered a non-party to pay the costs of proceedings and observed that such a category was neither rigid nor closed. (See also: Duskwood Pty Ltd v Bellara Willows Pty Ltd [2001] WASC 281.) 17 Before an order is made for the payment of costs by a non-party, or by a party not otherwise subject to such an order, it must be shown that the person concerned has had an important connection with the proceeding that makes it just for such an order to be made (See: Kebaro at [114]). Such a connection may be found in a matrix of circumstances. Although, ordinarily, an order for the payment of costs will not be made against a director of an insolvent company merely because he or she caused the company to defend proceedings brought against it whilst knowing, or suspecting, that the company may not be able to meet an order for costs, that may not be the result where the conduct of the director caused the litigation to be commenced against the company, or where the director has a financial interest in the outcome of the litigation. (See: Carborundum Abrasives Ltd v Bank of New Zealand (No. 2) [1992] 3 NZLR 757 per Tompkins J at 764‑765; Pope v DRP Nominees Pty Ltd (No 2) [2000] SASC 65 per Olsson J at [64]-[65].) 18 In the instant matter no connection of that nature can be established against either Mrs Price or Moore and no order for costs should be made against either of them on the facts as they now stand. 19 The relevant circumstances for Price, however, are different in significant respects. First, as I held in the reasons delivered on 11 April 2003, the acts of Price on behalf of Idyllic constituted the conduct of Idyllic for which it became liable under the judgment to compensate Arktos and Ms Davies for the loss suffered by them by reason of that conduct. Further, as a director who participated in providing instructions on behalf of Idyllic to defend the claims of Arktos and Ms Davies, Price caused Idyllic to incur the costs awarded against it. (See: Bischof v Adams [1992] 2 VR 198; Symphony Group PLC v Hodgsonper Balcombe LJ at 191). Second, Price had a financial interest in the proceeding. The monies sought to be recovered by Arktos, being the part-payment of the purchase price of the rescinded bargain, had been distributed by Idyllic to the Price family trust. It should be inferred that Price had a financial interest in avoiding Idyllic being made subject to a judgment that may result in Idyllic seeking to recover any part of the sum so distributed. (See: Yates v Boland [2000] FCA 1895.) Alternatively, if, as indicated in the financial statements, Idyllic was indebted to Price, Price had a financial interest in the litigation as a significant creditor of Idyllic. (See: Carborundum Abrasives at 765). 20 Counsel for Price submitted that the order sought by Arktos and Ms Davies could not be made against a person already a party to the litigation, nor against a party involved in defending, as opposed to prosecuting, an action. Although in the usual course of events it may be expected that a supplementary order of this nature would be sought against a non-party there is no reason why a person who is already a party should not be liable to an order for costs on the principles set out above. Similarly, the discretion available to the Court is not restricted to orders against parties involved with unsuccessful applicants or plaintiffs and orders may be made against parties involved with unsuccessful respondents or defendants. (See: TGA Chapman Ltd v Christopher [1998] 1 WLR 12; Carborundum Abrasives at 765). 21 Accordingly, having regard to the foregoing circumstances, which disclose the required degree of connection between Price and the incurring by Idyllic of the liability to pay costs to Arktos and Ms Davies, and being satisfied that such an order would not work an injustice upon Price, I am further satisfied that it is in the interests of justice that Price be ordered to pay the costs payable by Idyllic under the judgment, such payment to discharge the liability of Idyllic. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lee.