Asahi Holdings (Australia) Pty Ltd v Pacific Equity Partners Pty Ltd

Judgment

1. HER HONOUR: On 25 February 2022, I gave judgment in this matter: In the matter of Hot Frog Pty Ltd [2022] NSWSC 6. In short, Hot Frog Pty Ltd (the Company) sued former director, David Barker, for compensation of some $118,000 for breach of directors' duties and fiduciary obligations, which claim Mr Barker denied in its entirety. In the result, I gave judgment in the amount of $7,760.10. Given the result, I made directions for the parties to provide affidavits and submissions as to an appropriate costs order. I have since received an affidavit by the plaintiff's solicitor, Mark Smith, and the defendant's solicitor, Matthew Twyford, together with written submissions. According to these affidavits, the Company's legal costs were $71,770.25 excluding GST while Mr Barker's legal costs were $67,735.44 including GST.

UCPR Rule 42.34 and the Corporations Act

1. An initial question arises as to whether these proceedings should have been brought in this Court at all. The Company submitted that it was bound to pursue its action in this Court, having claimed breaches of the Corporations Act 2001 (Cth) and seeking equitable relief for breaches of fiduciary obligations, such that rule 42.34 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) would not prohibit a costs order in this case. Mr Barker submitted that there were no jurisdictional issues which prevented hearing these proceedings in the District Court where the Company sought a monetary sum under section 1317H of the Corporations Act but no declaratory relief that would otherwise justify bringing the proceedings in this Court. The Company's alternative claim for equitable compensation was said to fall squarely within the District Court's jurisdiction under section 134(1)(h) of the District Court Act 1973 (NSW) and fell within the District Court's jurisdictional limit for commercial matters of $750,000: section 44(1)(c), District Court Act. The Company's case was not complex and a lower court was capable of determining the matter such that this Court should not make a costs order in the Company's favour.
2. Rule 42.34 of the UCPR provides: (emphasis added) 42.34 Costs order not to be made in proceedings in Supreme Court unless Court satisfied proceedings in appropriate court (1) This rule applies if - (a) in proceedings in the Supreme Court … a plaintiff has obtained a judgment against the defendant … in an amount of less than $500,000, and (b) the plaintiff would, apart from this rule, be entitled to an order for costs against the defendant …. (2) An order for costs may be made, but will not ordinarily be made, unless the Supreme Court is satisfied that - (a) for proceedings that could have been commenced in the District Court - the commencement and continuation of the proceedings in the Supreme Court, rather than the District Court, was warranted ...
3. According to Ritchie's Uniform Civil Procedure NSW, the clear policy of the provision is an endeavour to preserve an appropriate degree of proportionality between the costs of the proceedings and the amount in issue; factors that have been take into account in concluding that pursuit of the proceedings in the judgment court was "warranted" include the nature of the claims (including unsuccessful claims), their factual complexity, the potential judgment amount and uncertainty that the matter fell within the jurisdiction of the other court, "Nevertheless, unless the judgment court is affirmatively satisfied that the pursuit of the proceedings in that court was 'warranted' the rules must be applied to disentitle a successful party from recovering an order for costs where the judgment amount is less than the threshold amount": at [42.34.5].
4. As to jurisdiction for claims for relief pursuant to the Corporations Act, section 1337E of that Act provides: (emphasis added) (1) … jurisdiction is conferred on each State … court that is a lower court with respect to civil matters (other than superior court matters) arising under the Corporations legislation. (2) The jurisdiction conferred on a lower court by subsection (1): (a) is subject to the court's general jurisdictional limits, so far as they relate to: (i) the amounts; or (ii) the value of property; with which the court may deal; but (b) is not subject to the court's other jurisdictional limits.
5. That is, the jurisdiction of lower courts, including the District Court of New South Wales, is subject to an express limitation: the matter must not be a "superior court matter". Section 9 of the Corporations Act contains the following definitions: (emphasis in original) superior court means the Federal Court of Australia, the Supreme Court of a State or Territory, the Federal Circuit and Family Court of Australia (Division 1) or a State Family Court. superior court matter means a civil matter that this Act clearly intends (for example, by use of the expression "the Court") to be dealt with only by a superior court.
6. Similarly, section 58AA of the Corporations Act provides: 58AA Meaning of court and Court (1) Subject to subsection (2), in this Act: court means any court. Court means any of the following courts: (a) the Federal Court; (b) the Supreme Court of a State or Territory; (c) the Family Court of Australia; (d) a court to which section 41 of the Family Law Act 1975 applies because of a Proclamation made under subsection 41(2) of that Act. (2) Except where there is a clear expression of a contrary intention (for example, by use of the expression "the Court"), proceedings in relation to a matter under this Act may, subject to Part 9.6A, be brought in any court.
7. Accordingly, whether this Court or the District Court has jurisdiction is generally indicated by whether the provision of the Corporations Act on which the action is brought refers to court or Court. For example, in Taxa Australia Pty Ltd v Wang [2018] NSWSC 1668, Black J accepted that a claim for relief from oppression under section 233 of the Corporations Act ("The Court can make any order under this section that it considers appropriate …") could only be determined by a "Court" and thus the District Court did not have jurisdiction to determine the claim: at [21].
8. Here, the Company sought compensation pursuant to section 1317H of the Corporations Act where the section provides: (emphasis added) A Court may order a person to compensate a corporation… for damage suffered by the corporation…
9. Reference to "a Court" in section 1317H indicates an intention that compensation orders be made only by superior courts. Accordingly, it was necessary for the Company to bring its claim in this Court. It therefore follows that the defendant's submissions in respect of rule 42.34, UCPR cannot be accepted.

Facts

1. As noted in my principal judgment, these proceedings got off to a slow start. The Company ceased business operations in October 2017 and Mr Barker ceased to be a director of the Company in February 2018. In August 2018, Mr Hedison, the continuing director of the Company, raised concerns about the use of the Company's funds at a meeting with Mr Barker. On 13 November 2018, the Company's solicitor sent a letter of demand to Mr Barker and his wife, querying a number of transactions totalling some $71,900. Demand for repayment of the money was sought. On 23 November 2018, Mr Barker's solicitors replied: any liability was denied; immediate withdrawal of the demand was sought.
2. One year later, on 13 November 2019, a second letter of demand was sent, seeking repayment of monies used to pay Mr Barker's home electricity account, hire purchase payments on his ute, unauthorised transfers of some $12,000, ATM withdrawals of some $2,000 and cash withdrawals of some $67,000, the purpose of which was uncertain. On 20 November 2019, demand was made for some $122,000 to be repaid. On 18 December 2019, Mr Barker's solicitor responded in detail, denying the allegations.
3. Nine months later, these proceedings were commenced in September 2020. After pleadings had closed, Black J made consent orders in November 2020 for the parties to participate in an informal mediation. Presumably, that occurred. On 21 December 2020, the Company made a settlement offer to accept $45,000 in full settlement of its claim. By my calculations, the Company had then incurred some $17,400 in solicitor's and counsel's fees, including GST. The Company was thus offering to accept some $27,600 in settlement of its claim, being some 20% of its claim, albeit still more than ultimately established. The offer was not accepted.
4. In February 2021, Black J made orders for the service of evidence. In April 2021, the Company's evidence was served and, in July 2021, Mr Barker's evidence was served. On 30 July 2021, Black J made consent orders for the parties to participate in an informal settlement conference before the next directions hearing. His Honour's orders also noted that Mr Barker had recently discovered further documents containing the Company's records and wished to put on a further affidavit.
5. In August 2021, Mr Barker served a second affidavit. Mr Barker also made a settlement offer, being a "walk-away" offer. The offer was said to represent a very substantial compromise on his part, where Mr Barker's legal fees were estimated to be $30,000 plus GST at the time.
6. In September 2021, Mr Hedison served an affidavit in reply. On 3 September 2021, Black J listed the matter for hearing for two days in November 2021 and, by consent, ordered the parties to undertake a further informal settlement conference at least four weeks before the hearing date.
7. In November 2021, Mr Barker swore a third affidavit and, on 24 and 25 November 2021, the Company's claim was heard. Mr Hedison and Mr Barker both gave evidence and were cross-examined, with evidence concluding on the second day of the hearing, followed by the plaintiff's closing oral submissions. Mr Barker provided written closing submissions on 2 December 2021, the Company provided submissions in reply on 9 December 2021, and I gave judgment on 25 February 2022. Mr Smith said that at no stage in the proceedings did Mr Barker offer to pay any amount to the Company.

Plaintiff's submissions

1. The Company submitted that, despite not succeeding on the entirety of its claim, it was faced with the decision to either bring these proceedings or simply allow Mr Barker to retain the unauthorised benefit of the AGL electricity payments. Mr Barker's position at all times was that he was not liable for any of the unauthorised expenditure claimed. In contrast, the Company acted reasonably in making an offer which, albeit higher that it ultimately achieved at trial, acknowledged the difficulty in proving the totality of its claim. The Company's costs were modest. Much of these costs would have been expended even if the Company only pursued the AGL bills.
2. The Company acknowledged that the Court may, although it is not bound to, deprive the plaintiff of the whole or part of its costs where a plaintiff has succeeded on only one of a number of severable or dominant issues: Dee-Tech Pty Limited & Anor v Neddam Holdings Pty Ltd (No 2) [2012] NSWSC 517 at [27]-[34]. Courts do not usually apportion costs between issues, but act on the outcome of the proceedings as a whole, without attempting to differentiate between particular issues on which the successful party may not have succeeded: Cretazzo v Lombardi (1975) 13 SASR 4 at 12. As the High Court cautioned in Firebird Global Master Fund II Ltd v Republic of Nauru (No 2) [2015] HCA 53; (2015) 327 ALR 192 at [6], there are "good reasons not to encourage applications regarding costs on an issue-by-issue basis, involving apportionments based on degrees of difficulty of issues, time taken to argue them and the like".
3. As such, the Company submitted that it should have a costs order in its favour, albeit reduced to a percentage of its costs given its modest success but without attempting to differentiate between particular issues on which the Company did not succeed: Cretazzo v Lombardi at 12. Where there is a mixed outcome in proceedings, the question of apportionment is very much a matter of discretion and mathematical precision is illusory. The exercise of the discretion depends upon matters of impression and evaluation: James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWCA 296 at [36], citing Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261 at 272. In Waterman v Gerling Australia Insurance Co Pty Ltd (No 2) [2005] NSWSC 1111 at [10], Brereton J (as his Honour then was) noted that a Court embarks on apportioning the costs of a successful plaintiff where there has been mixed success with some hesitancy, citing Mobile Innovations Limited v Vodafone Pacific Limited [2003] NSWSC 423 at [4]; Cretazzo v Lombardi at 16; Dodds Family Investments; Trade Practices Commission v Nicholas Enterprises Pty Ltd (No 3) (1979) 28 ALR 201; (1979) 42 FLR 213; Waters v P C Henderson (Aust) Pty Ltd (Court of Appeal (NSW), 6 July 1994, unrep); NRMA Limited v Morgan (No 3) [1999] NSWSC 768.
4. The Company also sought a gross sum costs order given the realistically modest amount of any costs order, the need for finality and the disproportionate costs of engaging in any further assessment process over what will be, at best, a modest costs order. The Company submitted that the Court should deprive it of some portion of its costs due to its mixed success, being no more than 60% given the costs that would have been incurred in any event to run a hearing restricted only to the disputed electricity payments. A further 30% should be discounted from the solicitor costs and 10% from counsel's fees to reflect a discount on assessment. The result was $34,127.61, which the Company accepted the Court may further reduce to $30,000 in a fair, logical and reasoned approach to a gross sum costs order.
5. The Company also sought pre-judgment interest pursuant to section 100 of the Civil Procedure Act 2005 (NSW) from 1 February 2018 (being the final unauthorised payment to AGL) until the date of judgment. I did not give leave to make submissions on this issue and decline to make such an order.

Defendant's submissions

1. In sharp contrast, Mr Barker sought an order that the Company pay his costs of the proceeding on an indemnity basis or, failing that, the Company pay 90% of his ordinary costs. In addition, Mr Barker sought an order that his costs be paid by Mr Hedison personally.
2. As to why the Company should pay his costs, notwithstanding that it had succeeded against him in part, Mr Barker submitted that the Company had largely failed. The Court should treat each claim as a separate event for the purposes of rule 42.1 of the UCPR: Pesec v Consolidated Builders Ltd (No 4) [2021] ACTSC 188; Australian Trade Commission v Disktravel [2000] FCA 62 at [3]; Monie v Commonwealth (No 2) [2008] NSWCA 15 at [63]-[66] (per Beazley JA). While the general rule is that costs follow the event (rule 42.1), the 'event' refers not merely to the existence of a judgment but to the practical result of a particular claim: Sze Tu v Lowe (No 2) [2015] NSWCA 91 at [39]. It did not follow that success on a limited basis justified a costs order against the defendant: Silversea Cruises Australia Pty Ltd v Abellanoza (No 2) [2020] NSWCA 37 at [7]. The Company was successful on only $7,760.10 of its $118,000 claim. This was said to equate to being unsuccessful on some 143 of the Company's 147 claims (I take this numbering to be the tally of each of the payments challenged in the proceedings rather than the five topics of ATM withdrawals, Tosca Seafood, Bunnings, Mr Barker's electricity bills and payments for his ute). Mr Barker submitted that the proceedings clearly went in his favour; the Company's successful claim was said to be financially insignificant in the context of the entire proceedings: McInnes v Rheem Australia Pty Limited [2021] NSWCA 89.
3. As to why the Company should pay Mr Barker's costs on an indemnity basis, it was said that, from the outset, the Company "exhibited no interest in genuinely resolving the dispute, but rather, just pressing on with its claims irrespective of the lack of evidentiary support, despite warnings to the effect". Further, "the vast majority of the Plaintiff's claims were groundless, including the serious allegations of misappropriation, and ought not to have been made". (A finding that I was not satisfied to the requisite standard that Mr Barker misappropriated the Company's funds does not equate to a conclusion that the Company's claims were "groundless").
4. Further, the Company's claims were said to have been made for the ulterior purpose of trying to elicit money from Mr Barker, motivated by personal dislike after the deterioration in their relationship. In particular, Mr Barker pointed out that both letters of demand were issued in November of 2018 and 2019, when Mr Hedison was said to have known that Mr Barker would soon be earning the bulk of his yearly income in the seafood trade. It was submitted that the Company and Mr Hedison pursued the claim in an "unnecessarily adversarial and intimidatory fashion from the outset". (The evidentiary basis for this submission was unclear and, indeed, absent; nor did I observe any animosity from Mr Hedison when giving evidence.)
5. Finally, it was said that the Company had failed to respond to Mr Barker's replies to the allegations and been responsible for "inordinate delay" in bringing the proceedings. (It was certainly the case that there were long pauses between the Company's letters of demand and the commencement of these proceedings, although the delay was perhaps not "inordinate").
6. Mr Barker also sought a personal costs order against Mr Hedison under section 98(2) of the Civil Procedure Act 2005 (NSW), where the Company no longer traded and had no assets and Mr Hedison had been the driving force in the litigation: Knight v FP Special Assets Ltd (1992) 174 CLR 178. Otherwise, any costs order in Mr Barker's favour would be worthless. In the event that the Court awarded costs to the Company, Mr Barker opposed a gross lump sum, preferring to opt for a costs assessment.

Conclusion

1. The principles are not in dispute and are fairly summarised in the parties' submissions. I note the comments of Allsop P (as his Honour then was) in Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (No 2) [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. The facts, confirmed by the parties' submissions, suggest that the Company embarked upon these proceedings with some hesitation, presumably given the small quantum and difficulties of proof. Soon after the proceedings were commenced, the Company made an offer to accept some 20% of its claim, which may be thought reasonable, but the offer was rejected. Given Mr Barker's complete denial of the Company's allegations, the Company had to decide whether to pursue the matter or simply walk away.
3. The Court made directions on no less than three occasions for the parties to participate in alternative dispute resolution, with no commercial compromise achieved. So far as the evidence reveals, Mr Barker never offered to pay any amount to the Company in respect of its claim, notwithstanding that the Company sought to be reimbursed for the use of Company funds to pay Mr Barker's home electricity bill. Mr Barker's denial of any liability, particularly in light of this allegation, was unreasonable. As I observed in my primary judgment at [3]: Mr Barker ultimately accepted that the Company paid electricity bills for his home, but blamed his ex-wife. I got the impression that it only became apparent to him in the witness box that the electricity bills related to his home rather than the business premises, although it was a little surprising that, over the course of these proceedings, he had been unable to work out this out from the electricity bills. His denial of this part of the case damaged his credibility.
4. Mr Barker's vehement defence of the proceedings is reflected in the submissions now made on his behalf in respect of costs, to which I have already responded in part. No doubt this is partly referable to the allegation of misappropriation, which was serious and presumably offensive. But the Court still expects that a defendant is such a position will endeavour to resolve the proceedings on acceptable terms if that can be done. Mr Barker does not appear to have been minded to compromise beyond a 'walk away' offer.
5. The Company ultimately failed to prove that Mr Barker had misappropriated company funds due, by and large, to a lack of business records. But Mr Barker is not without responsibility on this score either. As described in my primary judgment, Mr Barker ran the business whilst Mr Hedison, the other director and shareholder of the Company, provided a supporting and minor role. Mr Barker was responsible for managing business operations including accounting, purchasing and cashflow management, albeit his then wife was employed part time to keep the books, using a combination of MYOB and Excel spreadsheets: at [7], [9] and [16]. The accounting practices of the Company appeared to have been poor. The remaining records were incomplete. In the result, I concluded at [96]: Ultimately, I am not satisfied to the requisite standard that Mr Barker misappropriated the Company's funds, this being a serious allegation. It is apparent that the Company was run informally and operated in a cash environment. Few records survive. Now that the directors have parted ways, Mr Hedison is asking the Court to conclude that, if the accounting entry or business record does not clearly confirm that the expenditure was for a particular and company purpose, then it was misappropriated by Mr Barker. But having left it to Mr Barker to run the Company at the time, largely without interference or comment, it is difficult for Mr Hedison to now hold Mr Barker to standards which were not in place at the time and where Mr Hedison had the ability, as a director, to kerb Mr Barker's authority or monitor day-to-day business transactions if he wished. As a consequence of how the Company was run then - with Mr Hedison's agreement - the Company does not now have enough evidence to discharge its onus of proof.
6. That is, both directors contributed to the fact that these proceedings were brought at all, and the final result of the proceedings. Mr Hedison contributed by failing, as a director of the Company, to ensure that the Company was run properly at the time. Mr Barker, to whom the responsibility was given to run the Company, failed to implement proper accounting procedures, in what appears to have been largely a cash business. The way in which the Company was run by Mr Barker made it difficult for Mr Hedison to later work out what had happened; it also made it difficult for the Company to establish any claim in that regard.
7. Overall, having regard to: the modest judgment sum ultimately obtained when compared with the relief sought; the Company's effort to resolve the proceedings at an early stage through a reasonable offer of settlement; Mr Barker's unreasonable insistence that he bore no liability whatsoever; and Mr Barker's greater responsibility in ensuring that proper accounts were kept in the first place, I consider that Mr Barker should pay the Company's costs in a reasonable amount commensurate with the size of the judgment sum.
8. Section 98(4)(c) of the Civil Procedure Act provides: Courts powers as to costs (4) In particular, at any time before costs are referred for assessment, the court may make an order to the effect that the party to whom costs are to be paid is to be entitled to: … (c) a specified gross sum instead of assessed costs …
9. As Giles JA noted in Harrison v Schipp (2002) 54 NSWLR 738; [2002] NSWCA 213 at [21], considering the predecessor to section 98(4): The power … of [section 98(4)] is not confined, and may be exercised whenever the circumstances warrant its exercise. It may appropriately be exercised where the assessment of costs would be protracted and expensive, and in particular if it appears that the party obliged to pay the costs would not be able to meet a liability of the order likely to result from the assessment …
10. I consider that this is an appropriate case to specify a gross sum instead of putting either the Company or Mr Barker to the further time and expense involved in an assessment of legal costs in circumstances. As to the sum to be fixed, the principles are summarised in Idoport Pty Ltd v National Australia Bank Ltd [2007] NSWSC 23 at [9], cited with approval in the Court of Appeal: Hamod v New South Wales [2011] NSWCA 375 (per Beazley JA, with whom Giles and Whealy JJA agreed) at [793]. In Hamod, Beazley JA observed at [816]: … the factors that merit particular consideration include: the relative responsibility of the parties for the costs incurred … the degree of any disproportion between the issue litigated and the costs claimed; the complexity of proceedings in relation to their cost; and the capacity of the unsuccessful party to satisfy any costs liability… See also Hamod at [820], and Baychek v Baychek [2010] NSWSC 987 at [11] (per Ball J).
11. Having regard to the matters referred to at [34] and the costs incurred by the Company, I consider a fair sum to reflect the Company's legal costs is $15,000 plus Court fees, including transcript. For these reasons, I make the following orders: 1. Order the defendant to pay the plaintiff's costs of the proceedings. 2. Order pursuant to section 98(4)(c) of the Civil Procedure Act 2005 (NSW) that the plaintiff is entitled to a specified gross sum in the amount of $15,000 (excluding GST) and court fees, including transcript, in respect of its costs of these proceedings.

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