Australian Securities and Investments Commission (ASIC) v Krecichwost

Australian Securities and Investments Commission (ASIC) v Krecichwost - [2020] NSWSC 1248 - NSWSC 2020 case summary — Zoe

Facts

As noted in In the matter of Emu Group Pty Ltd [2020] NSWSC 602, Emu Group was the developer of a property in Fairfield. On 12 December 2018, the plaintiff commenced proceedings in the Technology and Construction List of this Court against Emu Group in respect of defective building work. In September 2019, the plaintiff served its evidence, including an expert report quantifying rectification costs in respect of the building defects at $4,235,802. Emu Group did not file any evidence in response.
On 1 April 2020, Mr Lakomy and Mr Walker were appointed as voluntary administrators of Emu Group. On 3 April 2020, the administrators sent a circular to creditors but, due to an oversight, did not send the circular to the plaintiff. On 15 April 2020, the first meeting of creditors took place. The plaintiff did not attend as it was not aware of the meeting. On 28 April 2020, the administrators sent an email to the plaintiff's solicitor notifying of their appointment and requesting that the plaintiff submit a proof of debt. The plaintiff's solicitor called the administrators and enquired why the plaintiff had not received notice of the first meeting of creditors and was advised that, when the circular to creditors was prepared, the administrators had not received the solicitor's file. On 29 April 2020, the administrators forwarded the plaintiff's solicitor the minutes of the first creditors' meeting and advised, "A second meeting of creditors pursuant to section 493A of the Corporations Act 2001 is scheduled to be held on or around 15 May 2020 …".
On 1 May 2020, the plaintiff's solicitor submitted a proof of debt for $4,235,802. As matters stood on 15 May 2020 at least, if the proof of debt was admitted, then the plaintiff would be the largest creditor of Emu Group. The plaintiff's solicitor also provided the administrators with material supporting concerns expressed by the plaintiff as to the transfer of property by Emu Group to related parties and preferential payments. The plaintiff also expressed a wish to appoint its own administrator, but the incumbent administrators advised that they would not be withdrawing.
On 4 May 2020, Mr Lakomy apologised for failing to alert the plaintiff to the first meeting of creditors. Mr Lakomy suggested that the fact that the administrators' staff were all working from different locations due to COVID-19 may have contributed to the error, but he nonetheless accepted full responsibility for all actions undertaken by his office and team. Mr Lakomy set out in detail the work undertaken by his staff to that point in time; noted that no deed of company arrangement was being proposed and the company would be placed into liquidation at the second meeting of creditors; and suggested that there was no benefit in replacing the administrators prior to the second meeting of creditors having regard to the work which had been and was being undertaken, the fact that the creditors could propose a resolution to replace the administrators at the second meeting, and the company would be placed into liquidation at the second meeting.
On Thursday 7 May 2020 at 5.56 pm, the administrators circulated a report to creditors in advance of the second meeting of creditors scheduled at 11.00 am, 15 May 2020. On Friday, 8 May 2020, the plaintiff's solicitor sought confirmation from the administrators that the plaintiff's proof of debt had been accepted for the purposes of the second meeting of creditors. On Monday, 11 May 2020, the administrators replied that, as the plaintiff's claim was the subject of ongoing legal proceedings, the plaintiff's claim would be admitted for $1 only for voting purposes at the meeting.
On Tuesday, 12 May 2020, the plaintiff's solicitor inquired as to the administrators' decision in respect of the proof of debt completed by a director of Emu Group about whom the plaintiff had expressed concerns. The plaintiff does not appear to have received a response. The administrators note that the proof of debt completed by the director was only dated on 14 May 2020. Further, in any event, in his report to creditors of 7 May 2020, Mr Lakomy advised, "based on the 2019 financial accounts provided by the Company's Former Accountant the Director is not owed any monies from the Company. This needs to be further reviewed, and a liquidator (should one be appointed) can undertake further review of the Director's claim".
On 14 May 2020, the plaintiff commenced these proceedings seeking orders restraining the second meeting of creditors. Orders for short service were made by Black J. On 15 May 2020, the administrators filed in Court an affidavit of Mr Lakomy, who described the tasks undertaken as administrator and addressed some of the criticisms made by the plaintiff. Further, Mr Lakomy deposed that, given the proxies which had been received from creditors including the plaintiff, it was inevitable that a liquidator would be appointed to Emu Group at the second meeting of creditors: no deed of company arrangement has been put forward; and creditors had indicated by their proxies that they all wished to have a liquidator appointed.

[4]

Submissions

The administrators submit that by no later than 29 April 2020 the plaintiff was aware of the date and time for the second meeting of creditors, to be held at 11 am on 15 May 2020. The plaintiff had a copy of the administrators report to creditors dated 7 May 2020 which noted the absence of any deed of company arrangement and that the administrators recommended winding up. But it was not until the afternoon of 14 May 2020 that the plaintiff approached the Corporations List Judge for short service to have the application heard on 15 May 2020, that is, only a few hours before the meeting. This was said to be unreasonable: Fiduciary v Morningstar Research (2002) 55 NSWLR 1; [2002] NSWSC 432 at [12]. In order to defend the application at short notice, the administrators prepared, finalised, swore and served a substantive affidavit by Mr Lakomy and retained counsel. Prior to the hearing, the administrators provided a chronology, relevant cases and further documents for tender.
Noting section 98 of the Civil Procedure Act 2005 (NSW) and rules 42.1 and 42.7 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), the administrators submitted that the usual result as to costs upon dismissal of an application for interlocutory injunction is that the plaintiff must pay the defendant's costs of the application: Rosewood Advertising Pty Ltd v Hannah Marketing Pty Ltd [2000] NSWSC 1034 per Hamilton J at [14]; Tjiong v Tjiong [2007] NSWSC 216 per Hamilton J at [19]; Australian Securities and Investments Commission (ASIC) v Krecichwost (2008) 72 NSWLR 498; [2008] NSWSC 855 per Young CJ in Eq at [16]. Only costs on an ordinary party/party basis were sought. It was not submitted that the costs should be immediately payable. The application for an interlocutory injunction was said to be a discrete application and the costs incurred were separately identifiable and not costs which would be of benefit in relation to the substantive proceedings: see Hamod v New South Wales [2007] NSWSC 707 at [12]-[13] per Simpson J; Richards v Kadian (No 2) [2005] NSWCA 373 at [6]-[7] per Hodgson JA; Traderight (NSW) v Bank of Queensland (No 2) [2008] NSWSC 589 at [7] per Palmer J.
Whilst regrettable, the fact that the plaintiff did not receive notice of the first creditors meeting did not cause any actual prejudice to the plaintiff and was not a proper basis to deprive the administrators of an order for costs of the hearing on 15 May 2020, nor was the administrators' non-response to the plaintiff's query about how the administrators proposed to treat a proof of debt lodged by a director of Emu Group.
The plaintiff submitted that the proper order should be that each party pays its own costs of and incidental to the application. The suggestion that the plaintiff was aware of the second meeting of creditors fixed for 15 May 2020 by no later than 29 April 2020 was said to be incorrect. On 29 April 2020, the administrator advised the solicitor for the plaintiff that a second meeting of creditors was to be held "on or around 15 May 2020". Nothing was set in concrete. The plaintiff was advised of the actual date on 7 May 2020. Moreover, early on 8 May 2020 the solicitor for the plaintiff wrote to the administrators requesting information as to the quantum to be attributed to the plaintiff's claim at the meeting and received a response only on Monday, 11 May 2020 to the effect that the accepted debt was one dollar for the purposes of the meeting. It was this response which actuated the application and led to it being brought on an urgent basis. Had the administrators given earlier notice of the meeting and earlier advice as to the view that was to be taken of the acceptance of the plaintiff's debt, no application may have been brought at all.
The forwarding of correspondence on 4 May 2020 and the provision of an update concerning the administration does not excuse the administrators' error in failing to invite the plaintiff to the first meeting of creditors. The plaintiff, for that reason alone, legitimately lacked confidence in the administrators. Recourse to the current COVID-19 pandemic did not begin to resolve such a fundamental mistake. It could not be suggested that the plaintiff was not the subject of genuine prejudice by its failure to be invited to the first meeting of creditors. Had it been so invited, events may well have played out quite differently. It was said to be a perfectly rational basis not to award costs to the administrators.

[5]

Consideration

The costs of interlocutory applications are dealt with by rule 42.7 of the Uniform Civil Procedure Rules 2005, which provides: Interlocutory applications and reserved costs (1) Unless the court orders otherwise, the costs of any application or other step in any proceedings … are to be paid and otherwise dealt with in the same way as the general costs of the proceedings. (2) Unless the court orders otherwise, costs referred to in subrule (1) do not become payable until the conclusion of the proceedings.
As explained in Australiawide Airlines Ltd t/as Regional Express v Aspirion Pty Ltd [2006] NSWCA 365 per Bryson JA (with whom McColl and Basten JJA agree), albeit in the context of a different costs rule in the UCPR, such rules create a starting point as to what the costs order is to be unless that outcome is displaced by a discretionary decision: at [48]. In this case, the starting point is that the costs of the motion are the parties' costs in the cause. Australiawide Airlines makes plain that the Court should observe the starting point in the relevant rule and only make a different order if that starting point is displaced by a discretionary decision. As I said in Mundi v Hesse [2018] NSWSC 1548 at [58]: … Rule 42.7 appears to be directed to discouraging parties from expending further resources on such costs disputes and to focus on the substantive proceedings. If I might use an imperfect sporting analogy: if litigation is compared to a sporting match, then r 42.7 indicates that the normal result after an interlocutory application is that the parties should "play on" until the final hearing.
As Pepper J elaborated in Verde Terra Pty Limited v Central Coast Council (No 5) [2020] NSWLEC 48 at [20]-[21]: [20] Of course, circumstances can arise where there is some aspect of the conduct of the proceedings by one or more parties that, to extend the sporting analogy adopted [in Mundi v Hesse], requires the referee to blow the whistle and award a free kick. It is for this reason that a broad discretion is retained in r 42.7 by the words "unless the court orders otherwise". [21] Rule 42.7 of the UCPR is therefore the starting point in determining the appropriate cost order in interlocutory applications (or in relation to "other steps in the proceedings"). The default position of costs in the cause may, however, be displaced by the express discretionary power contained in that rule. That power, although unfettered (His Eminence Metropolitan Petar, Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand v Macedonian Orthodox Community Church St Petka Incorporated (No 2) [2007] NSWCA 142 at [28]), must be exercised judicially having regard to established principle (Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at [134]).
Even before the appointment of administrators, it would appear that the plaintiff had concerns about Emu Group and its directors. The fact that the plaintiff was not made aware of the appointment of administrators for a month appears to have fuelled those concerns, despite Mr Lakomy's efforts to reassure the plaintiff that he was attending to the administration properly and with dispatch. As the largest creditor, by far, of Emu Group, and having been informed that its proof of debt would be admitted for voting purposes at $1, the plaintiff appears to have been keen to ensure that the director's proof of debt was similarly treated. The administrators do not appear to have responded to the plaintiffs request for clarification for two days and this may have been one of the reasons the plaintiff applied to the Court for an injunction.
True it is that the plaintiff failed in its application, in part because Mr Lakomy tendered the proxies which he had received and also because he gave evidence of the costs of calling the meeting which would be wasted if the meeting was injuncted. I think there is also some merit in the plaintiff's suggestion that, if the administrators had gone about things differently, then the application may not have been brought at all. Whether the evidence and issues canvassed in the interlocutory process have any ongoing significance for the substantive proceedings is not before me.
Overall, there is nothing in the recitation of events which prompts me to depart from the default position prescribed by rule 42.7(1) of the UCPR. Rather, I consider that the costs should abide the outcome of the proceedings, that is, be each party's costs in the proceedings. I decline to make the costs orders sought by either party.

At a glance

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Judgment (6 paragraphs)

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Legislation Cited (2)

Cases Cited (16)