Australian Securities and Investments Commission, in the matter of GDK Financial Solutions Pty Ltd (in liq) v GDK Financial Solutions Pty Ltd

REASONS FOR JUDGMENT 1 Western Retirement Village Management Pty Ltd (in liq) (WRVM) applied in advance of trial for an order that it be indemnified for the costs it will incur in prosecuting an action against AVS Property Pty Ltd and Rental Fleets Australia Pty Ltd. The action was brought to determine, among other issues, what amount (if any) is secured by the second mortgage that AVS and Rental Fleets held over a parcel of real estate known as the Mews land. It is unusual to make a costs order of any kind until the outcome of the litigation is known. But there are a range of orders, often referred to as prospective costs orders, which courts make before the final disposition of an action. These include orders to the effect that: (i) a party will have its costs paid by another party or out of a fund whatever the outcome of the trial; (ii) a party will not be exposed to an order for costs if it loses at trial; (iii) a party will have its costs capped at a certain amount if it loses at trial; and (iv) there will be no order for costs whatever the outcome of the trial. While all are prospective, the first type of order may usefully be (and often is) called a pre-emptive costs order and the remaining three are better described as protective costs orders. In this instance, WRVM applied for a pre-emptive order that its costs be paid out of a fund. It was clear that the order should go and, accordingly, I acceded to the application. What follows are my reasons. 2 WRVM was a participant in an unregistered managed investment scheme set up to construct a retirement village. The scheme was wound up on the application of the Australian Securities and Investments Commission: Australian Securities and Investments Commission, in the matter of GDK Financial Solutions Pty Ltd v GDK Financial Solutions Pty Ltd [2006] FCA 1415. Messrs Brian McMaster and Mark Mentha of Korda Mentha were appointed the receivers of the scheme to oversee its winding up. They were also appointed as liquidators of WRVM upon its subsequent winding up. 3 The Mews land, which was registered in the name of WRVM, was the only substantial asset of the scheme, no village ever having been constructed. The receivers took possession of the land and found a purchaser to whom, with court approval, WRVM sold the land. As AVS and Rental Fleets refused to discharge their mortgage, it was necessary to make an order to that effect so that the sale could be completed. The order was made on the application of Messrs McMaster and Mentha: Australian Securities and Investments Commission, in the matter of GDK Financial Solutions Pty Ltd (in liq) v GDK Financial Solutions Pty Ltd (in liq) (No 3) [2008] FCA 448. The receivers were also ordered to hold the net proceeds of sale pending the resolution of all claims on those proceeds. 4 The order appointing the receivers had directed them to conduct several inquiries and report the results to the court. One enquiry the receivers were required to conduct was to assess and report on the validity and quantum of claims of prior encumbrancers. For that purpose there were discussions between the receivers and the second mortgagees concerning the amount secured by the second mortgage. AVS initially claimed it was owed about $4 million but later increased its claim to approximately $14 million. The action was commenced in part for purposes of testing that claim. Another purpose was to obtain the discharge of the second mortgage. In substance, the action is a claim by a mortgagor for the taking of accounts. By reason of the nature of the claims made by the second mortgagees, the relief sought is in the form of declarations on issues that will resolve those claims. 5 WRVM brought the action as there was no doubt about its standing. On the other hand WRVM has no direct interest in the outcome. Subject to the rights of prior encumbrancers, the proceeds of sale belong to Mews Village Nominees Pty Ltd to be held on behalf of the investors in the managed investment scheme. Mews Village Nominees had purchased the Mews land from WRVM in April 2000 and paid the purchase price. It did not, however, take a transfer of the land, which remained registered in the name of WRVM. Mews Village Nominees is entitled in equity to the proceeds of sale. 6 That this action was commenced by WRVM is something of an historical accident. If it had not been brought by WRVM, it would have been necessary for the second mortgagees to ask for the net proceeds to be paid to AVS. The general rule is that a fund under the control of a court appointed receiver can only be paid out in pursuance of an order. An application for payment is usually made by the person beneficially interested in the fund and not by the receiver, although, in some circumstances, the application can be made by the party who obtained the receiving order or by the receiver himself. On an application by the second mortgagees some person, either the seventh defendant (who was appointed to represent one class of investors) or some other suitable person, would have been permitted to oppose the claim. 7 I made the pre-emptive costs order because I was of opinion that WRVM would, in due course, be entitled to an order that its costs be paid out of the proceeds. There are at least two independent bases upon which such an order would be made notwithstanding that the proceeds may belong to AVS. 8 The first basis arises from the fact that WRVM received the proceeds as trustee, albeit that upon receipt the proceeds were placed under the control of the receivers. The ordinary rule is that if a trustee, beneficiary, or personal representative (I will refer to them collectively as "representative parties") brings an action relating to the construction of the trust instrument or some other issue arising in the administration of the trust, or as regards the propriety of any action taken or to be taken by the representative party, his costs are paid out of the fund: In re Buckton; Buckton v Buckton [1907] 2 Ch D 406. The same rule may apply if the representative party is involved in a hostile action to defend the trust estate: Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220, 1224, 1226; McDonald v Horn [1995] ICR 685, 697. The costs to which the representative party is entitled are to be paid on an indemnity basis: Bishop of London v College of William and Mary in Virginia [1790] 1 Ves Jun 243 [30 ER 323]; Cotterell v Stratton (1872) 8 Ch App 295; In re Jones; Christmas v Jones [1897] 2 Ch D 190. It matters not whether the representative party wins or loses the suit, provided he has acted reasonably: In re Llewellin; Llewellin v Williams (1887) 37 Ch D 317, 327; How v Earl Winterton (No 4) (1905) 91 LT 763, 766; National Trustees Executors and Agency Company of Australasia Ltd v Barnes (1941) 64 CLR 268, 279. 9 In cases where there is doubt about a representative party's right to bring or defend an action and recover his costs out of a fund, the usual practice is for him to apply to the court for directions: In re Beddoe; Downes v Cottam [1893] 1 Ch D 547. If the representative party is authorised to bring or defend a particular action he will be indemnified for his costs, unless he has acted unreasonably in the prosecution or defence (as the case may be) or has failed to make full disclosure at the time the Beddoe order was obtained. 10 The principles which the Chancery Courts developed in relation to representative parties can be extended by analogy to others. They can be extended, for example, to receivers, liquidators and administrators. It is appropriate that the court adapt its procedures so that, as far as possible, those persons, and others who hold similar office, can approach the court in the same way and for the same purpose. 11 The second basis for making the order arises because WRVM is being wound up and its liquidators are entitled to an order that the costs incurred by them in investigating and having determined in hostile litigation to whom the proceeds should be paid ought to come out of the proceeds. A similar application was considered in Re Westdock Realisations Ltd (1988) 4 BCC 192. The receivers of two companies had surplus funds and applied to the court for directions as to whom the surplus should be paid. There were two claimants: the companies themselves which, by then, had been placed into liquidation and a government department. The liquidators were without funds. They sought an order that their costs be paid out of the funds regardless of the result of the application. Sir Nicholas Browne-Wilkinson VC made the order sought. He said (at 196) it was appropriate to do so because he was satisfied that following the trial the judge would likely have made an order to that effect. He pointed out that there are many cases in which it is essential for the due administration of a liquidator's or receiver's duties to obtain a decision from the court. He said (at 197) that where there are large groups of creditors, contributories or other claimants, it is frequently the case that a representative respondent is appointed to argue the point on behalf of the class and that his costs are paid out of the fund. Of particular importance to the Vice Chancellor was the possibility that a claimant of a fund could take it by default if there was no-one to put a contrary argument. The Vice Chancellor went on to say (at 197) that even in hostile litigation, where costs usually follow the event, it may be appropriate to make a pre-emptive costs order in favour of a liquidator or a receiver. For example, such an order should be made when the case was essential for the due administration of the liquidator's or the receiver's duties to obtain a decision from the court. See also Re Ciro Citterro Menswear PLC; Thakrar v Johal [2002] BPIR 903. 12 In Re Biddencare Ltd [1993] BCC 757 the liquidators of a company sought a direction that their costs of investigating and dealing with certain proprietary claims against assets held by the company should be paid in priority to the proprietary claims. The order was refused. In the course of giving her reasons, Ms (now Lord Justice) Arden QC, sitting as a Deputy High Court Judge, said (at 764) that the factors which were relevant in deciding whether to make a pre-emptive costs order of the kind under consideration were: (1) the merits of the claim; (2) the likely order for costs at trial; (3) the justice of the case; and (4) the existence of any special factors. See also National Anti-Vivisection Society Ltd v Duddington (The Times, 23 November 1989). In McDonald [1995] ICR at 696-697, the Court of Appeal held that the second requirement is more strict. Hoffman LJ said that it must appear that the judge at trial could properly exercise his discretion only by ordering that the applicant's costs be paid out of the fund. When the case involves a dispute over the title to a fund, I would add to the list of considerations which Re Biddencare Ltd says must be taken into account the following matters: (1) the impact on the secured creditors if the application is allowed; (2) the impact on the other creditors of not allowing the application; and (3) the impact on the proceeding if the application is denied. 13 While a Beddoe order and a pre-emptive costs order will result in indemnity for costs out of a fund, they are distinct orders. The distinction was explained in Weth v Attorney-General [2001] WTLR 155, 179: In a Beddoe application for directions as to whether a claim should be pursued the court will take into account the potential benefits to the trust, the prospects of success and the likely costs involved in the light of the resources available: the court may limit its blessing of proceedings up to a certain point, such as discovery. The criteria for the grant of a pre-emptive costs order recognise the potential cost to the object of the order by emphasising the importance of the interests of justice. But in each case the prospects of success are an important factor in the balance. 14 The cases to which reference has been made so far concern orders that costs be paid out of a fund. The principles have, however, been extended beyond fund cases. For example in Wallersteiner v Moir (No 2) [1975] 1 QB 373, a minority shareholder bringing a derivative action was held to be entitled to be indemnified for his costs out of the company's assets, even if his action failed. In McDonald [1995] ICR 685 the court applied the principles to a member of a contributory pension scheme who brought an action to compel the trustees of the scheme to account. 15 The jurisdiction to make a prospective costs order is not limited to fund cases or analogous proceedings. The jurisdiction may be exercised in any civil proceeding. Obviously the circumstances in which an order will be made in ordinary civil litigation will be different from a fund case. The cases in which such orders have been made can be traced back to Jones v Coxeter (1742) 2 Atk 400 [26 ER 642]. There Lord Hardwicke invoked the "intirely discretionary" equitable jurisdiction to order that the defendant pay the costs of the plaintiff before the trial "to empower her to go on with the cause." 16 The leading English case is R (Corner House Research) v Secretary of State for Trade and Industry [2005] 1 WLR 2600, a decision of the Court of Appeal. That was an application for judicial review brought by Corner House Research, a non-government organisation concerned with preventing bribery and corruption in the award of major contracts in international trade. It challenged the decision of the Secretary of State for Trade and Industry to amend the anti-bribery and anti-corruption practices of the Export Credits Guarantee Department, a body that provides finance and security to UK exporters. Corner House applied for a protective costs order that it would not be liable, if its application was unsuccessful, to pay the defendant's costs. The costs application was refused. That decision was overturned on appeal. The Court of Appeal laid down the principles that govern such applications. The Court said (at 2625): A protective costs order may be made at any stage of the proceedings, on such conditions as the court thinks fit, provided that the court is satisfied that: (i) the issues raised are of general public importance; (ii) the public interest requires that those issues should be resolved; (iii) the applicant has no private interest in the outcome of the case; (iv) having regard to the financial resources of the applicant and the respondent(s) and to the amount of costs that are likely to be involved, it is fair and just to make the order; and (v) if the order is not made the applicant will probably discontinue the proceedings and will be acting reasonably in so doing. 17 While the Court of Appeal recognised the existence of the jurisdiction to make a protective costs order it denied that there was power to make a pre-emptive costs order. In that connection the Court said (at 2626): "In this jurisdiction we do not consider that a court would have any power to make the type of order which was made in British Columbia (Minister of Forests) v Okanagan Indian Band [[2003] 3 SCR 371], whereby the defendants were obliged to finance the claimant's costs at first instance as the litigation proceeded. This would be to trespass into judicial legislation in a way which was proscribed by the House of Lords". 18 British Columbia (Minister of Forests) v Okanagan Indian Band, to which the Court of Appeal referred, was also a public law case in the sense that the litigation was between citizens and the government. Four respondent Indian bands had begun logging on Crown land without authority. The Minister served the bands with stop work orders and commenced proceedings to enforce those orders. The bands claimed that they had aboriginal title to the lands and were entitled to log them. They sought what the court referred to as an "interim costs order" to enable them to fight the case. The precise order sought was that the Crown pay their legal fees and disbursements in advance of trial and regardless of the outcome. The trial judge refused to grant the order, but his decision was overturned by the British Columbia Court of Appeal, which ordered "that the Crown, in any event of the cause, pay such legal costs of the Bands … as the Chambers judge orders from time to time". The Minister appealed to the Supreme Court. The Supreme Court, in dismissing the appeal and upholding the pre-emptive order, acknowledged that there was an inherent jurisdiction to make the interim costs order. Reference was made to the practice in matrimonial and family cases. The court also said (at 395) that such orders had been made in "certain trust, bankruptcy and corporate cases, where they are awarded for essentially the same reason - to avoid unfairness by enabling impecunious litigants to pursue meritorious claims with which they would not otherwise be able to proceed." 19 The court then described (at 396-397) the circumstances in which an interim costs order could be made: There are several conditions that the case law identifies as relevant to the exercise of this power, all of which must be present for an interim costs order to be granted. The party seeking the order must be impecunious to the extent that, without such an order, that party would be deprived of the opportunity to proceed with the case. The claimant must establish a prima facie case of sufficient merit to warrant pursuit. And there must be special circumstances sufficient to satisfy the court that the case is within the narrow class of cases where this extraordinary exercise of its powers is appropriate. 20 The issue has also been considered in New Zealand in Berkett v Cave [2001] 1 NZLR 667. That was an application by beneficiaries of the Hutt Mana Energy Trust for declarations that trustees had exceeded their powers in specified respects and had improperly exercised certain other powers. The trust had been established to allow the benefits of ownership of shares in an electricity company to be conferred to its customers. The plaintiffs had obtained an order requiring the trust to pay indemnity costs to the plaintiffs as the litigation proceeded irrespective of the result. The order was made in an early stage of the litigation and was to apply to the rest of the proceeding. There was an appeal from that order. The Court of Appeal accepted that the judge had jurisdiction to make the order but, in the event, declined to uphold that order. The court said (at 670) that the starting point was that costs were normally awarded after trial and generally followed the event. However, the court noted (at 670) that in exceptional circumstances a prospective costs order could be made. What an applicant "must, as a minimum, show [is that]: (1) The case mounted is clearly arguable. (2) There is a substantial public interest in obtaining a decision of the Court on the point or points at issue, irrespective of the result. (3) It would be unduly onerous for the plaintiff to be expected to fund the litigation even in the interim". The court went on to explain that ultimately the outcome of an application will depend on the judge's appreciation of whether it is appropriate, against all relevant factors, for such an order to be made. 21 It is apparent from these cases that in ordinary civil proceedings a protective costs order will only be made in exceptional circumstances. However, the refusal by the Court of Appeal in Corner House Research [2005] 1 WLR 2600 to extend the jurisdiction to pre-emptive orders on the basis that to do so would be an impermissible use of judicial power is, in my respectful opinion, not convincing. A pre-emptive costs order is no more an example of "judicial legislation" than is an award of costs against a non-party, the power to make that kind of order having been recognised by the House of Lords in Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965, 979-980 and by the High Court in Knight v FP Special Assets Ltd (1992) 174 CLR 178. 22 Returning to the case at hand, making the order sought by WRVM was, on one view, rather straightforward, perhaps even unnecessary, in the light of what had occurred earlier. Before the completion of the sale of the Mews land, it had become apparent that there was to be a dispute about the amount secured by the second mortgage. This provoked Messrs McMaster and Mentha to apply for directions. They made the application in their capacities as receivers of the scheme and liquidators of WRVM. They sought directions as to whether they might properly allow payment out of the proceeds of the full amount claimed by the second mortgagees or take proceedings to have determined what in fact was due under the second mortgage. The order made was that Messrs McMaster and Mentha in their capacity as receivers were justified in taking proceedings "to prevent payment out of the proceeds of sale of the Mews land" and for that purpose they were given leave to, among other things, "commence and prosecute any such proceedings in the name 'Mark Francis Xavier Mentha and Brian Keith McMaster in their capacities as Receivers of the Mews Scheme' on behalf of one or more of the Mews Scheme, the third defendant [WRVM] and the WRVM liquidators". 23 There are two curiosities about this order. First of all, it is not clear what the judge had in mind in permitting Messrs McMaster and Mentha to bring an action "on behalf of … [WRVM] [or] the WRVM liquidators". Secondly it is not clear why permission to bring the proceeding was not given to Messrs McMaster and Mentha in their capacity as liquidators of WRVM, especially when it appears to have been in the contemplation of the judge that such an action might be taken. Perhaps the confusion came about because the application was made by Messrs McMaster and Mentha in several capacities. 24 However that may be, in my view when giving permission to bring the proceeding the judge had in mind (as he would in a Beddoe application) that Messrs McMaster and Mentha would recover their costs and expenses out of the proceeds regardless of the outcome of the proposed litigation. The judge knew that if the second mortgagees succeeded there were no other assets to which Messrs McMaster and Mentha could have recourse. 25 The existence of the direction was the key factor to which I had regard in making the pre-emptive costs order. I would, in any event, have made the order for the following reasons. So far as the merits were concerned there was a strong prima facie case that AVS was not entitled to all of the proceeds: GDK Financial Solutions (No 3) [2008] FCA 488 at [23]-[31]. This was a proper case for the trial judge to make an order that WRVM should recover its costs from the proceeds. The second mortgagees had argued that if their claim was successful and AVS was found to be entitled to the proceeds, it would be unfair that they fund WRVM's case. That may be true up to a point, but it is less fair to allow the second mortgagees' claim to go untested. Investors have put millions of dollars into an illegal scheme. They stand to get back very little. I did not think it realistic to expect them to fund the application. Yet someone had to oppose the second mortgagees' claim. If not WRVM, then the seventh defendant or some other representative would have been asked to do so and his costs would have been covered. In any event, the costs involved are likely to be inconsiderable compared to the size of the fund, which stands at approximately $12.75 million. 26 These reasons seemed to me to be sufficient to warrant the relief granted. I certify that the preceding twenty-six (26) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.