The Plaintiff, Financialstrategy.com.au Pty Ltd ("FSC"), sought leave to proceed against Bailey Roberts Group Pty Ltd (in liq) ("BRG") in oppression proceedings commenced in 2021. In these proceedings, FSC also sought leave to bring claims on behalf of BRG against the Second and Third Defendants, in respect of the alleged diversion of BRG's business to a new company while the 2021 proceedings were ongoing. FSC contends that it proposed to lead valuation evidence that valued its claims in excess of $1.68 million, although the admissibility or cogency of that expert evidence has not been tested. The application for leave in respect of the 2021 proceedings and the application for leave to bring the derivative proceedings was listed for hearing on 14 March 2023 and, in the course of that hearing, the liquidator of BRG entered into a binding agreement with the Defendants to compromise BRG's claims against them for the amount of $100,000. On 24 April 2023, FSC's application for leave to bring derivative proceedings was dismissed by consent, and the question of costs was to be dealt with on the papers.
FSC relies on the affidavit dated 1 May 2023 of its solicitor, Mr Wallman, which sets out the history of the proceedings in support of its costs application. By its initial submissions as to costs, FSC sought an order that BRG's liquidator, who was not a party to the proceedings, pay its costs of the proceedings. Unsurprisingly, BRG's liquidator objected to that application being brought on the papers where he had no advance notice of it and no opportunity to lead evidence or make submissions about it and sought an opportunity to respond, and the Court indicated that it would allow that opportunity before making any order adverse to the liquidator. By an email dated 4 May 2023, FSC's solicitors then advised that FSC sought a costs order against the Company rather than the liquidator personally and that references in its submissions to the liquidator should be understood "accordingly." That proposition had the difficulty that those submissions referred to steps taken by the liquidator, rather than the Company.
FSC submits that it was the only substantial creditor of BRG at the time the liquidator compromised the proceeding with the Defendants and indicates that it was willing to have provided security for an indemnity in favour of BRG against any adverse costs order in the proceedings that it sought leave to bring on BRG's behalf. As events have developed, the adequacy of any such indemnity or security offered by FSC has not been determined. FSC points to the fact that the liquidator did not commence the proceedings that it sought to bring on BRG's behalf and refers to an affidavit of a legal representative engaged by the liquidator, filed shortly before the hearing, which indicated that the liquidator had not then been able to form a view as to the merits of FRC's proposed derivative action so as to consider whether to seek third party funding or entry into a conditional costs agreement to fund the claims. FSC complains that the liquidator compromised the claim without informing FSC that it was considering that course or exploring whether FSC would pay more than the amount of $100,000.00 to take an assignment of the claims. FSC contends that that compromise benefited only the liquidator, in respect of costs in the liquidation and points to the lay compromise of the claims, on the day of the hearing.
The compromise reached by the liquidator plainly involved a modest recovery for BRG, by comparison with the size of the claim that FSC sought to bring on its behalf, and there is no evidence of the steps that the liquidator had taken to assess he strength of BRG's claims before entering into that settlement. However, FSC took no steps to seek a review of the liquidator's decision to compromise the proceedings under the Insolvency Practice Schedule (Corporations) at the time it was made and now makes no attempt to identify a basis for which the Court would make an order for costs against the liquidator, as a third party to the proceedings, and indicates that such an order is now not sought against the liquidator. FSC also does not explain how the criticisms that it makes of the liquidator's decision-making warrant an order for costs against BRG, which was the company on whose behalf it sought to bring the proceedings. I am not satisfied that it has established a basis for an order for costs against BRG.
BRG, which was the First Defendant in the proceedings, in turn seeks an order for costs against FSC, presumably on the liquidator's instructions. BRG refers to r 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") in support of the proposition that an unsuccessful party would ordinarily be liable for the costs of the litigation unless some other order should be made. This is not, of course, a case where FSC was unsuccessful on the merits in the litigation. Instead, a supervening event, namely the settlement reached between the liquidator and the Defendants, removed any practical benefit of the relief that FSC initially sought and rendered its claim moot.
Rule 42.20 provides that, on the dismissal of proceedings, unless the Court orders otherwise, the plaintiff must pay the defendant's costs of the proceedings to the extent to which they have been dismissed. In McNamara v San [2010] NSWSC 809 at [12], Hallen AsJ (as his Honour then was) summarised the principles applicable to this rule as including that:
"(c) Rule 42.20 of the UCPR does not give rise to a presumption that costs will be ordered against the [p]laintiff: Fordyce v Fordham [2006] NSWCA 274; (2006) 67 NSWLR 497; Foukkare v Angreb Pty Limited [2006] NSWCA 335 at [65]; Pentroth Pty Ltd v Kirschild Pty Ltd (2006) 96 SASR 129; Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [53]; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32. However, the rule does create a starting point by requiring "… the plaintiff must pay the defendant's costs of the proceedings …" unless that outcome is displaced by a discretionary decision ("unless the court otherwise orders");
(d) Generally, there must be some proper justification, sound positive ground, or a good reason, for departing from the ordinary position: Fordyce v Fordham at [2] per Santow JA; Australiawide at [54] per Bryson JA; circumstances in which it has been held appropriate to depart from the ordinary position include where the proceedings have been rendered unnecessary by circumstances beyond the plaintiff's control; where the plaintiff achieved practical success in the proceedings, or where costs have been significantly increased by the unreasonable conduct of the defendant.
(e) The [p]laintiff should be the moving party on an application for an alternative costs order: Bitannia at [70] per Basten JA. If facts are to be relied upon to found the court making a different order, the [p]laintiff will bear the onus of proving the relevant facts;
(f) Where the proceedings are dismissed prior to any hearing on the merits, "the Court cannot try a hypothetical action between the parties" to determine the question of costs: Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201; Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 at 624; Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2007] NSWSC 1120 at [35];
(g) It may be necessary to analyse the whole of the proceedings to determine the appropriate costs order: Fordyce at [67] per McColl JA. A relevant consideration is whether the [p]laintiff acted reasonably in commencing the proceedings and whether the defendant acted reasonably in defending them: Australian Securities Commission v Aust-Home Investments Ltd at 201 (cited with approval in Foukkare); all the relevant circumstances, and not just the fact of dismissal, should be considered;
(h) It is also important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event, or settlement, so removes, or modifies, the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the court's discretion otherwise than by an award of costs by the successful party. It is the latter type of case that usually creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs: One.Tel Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548 at 553; cited with approval in Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 per Davies AJA (with whom Mason P and Meagher JA agreed) at [5];
(i) The distinction between the two categories referred to above is often helpful in exercising the costs discretion, notwithstanding that neither category can be precisely defined, the boundary between them is unclear and other factors may be relevant: Bitannia per Basten JA at [79]-[81]; Perre v State of New South Wales [2009] NSWLEC 51 at [49];
(j) The rule requires the court to make such order as it thinks just in the particular circumstances of the case."
That summary was cited with approval by Kunc J in Spatt v Benson [2019] NSWSC 1195 at [64] and I followed it in Parlby v Blair [2013] NSWSC 100 at [13]ff, Re Myao Travel Pty Ltd [2020] NSWSC 1672 at [7]ff, Australian Unity Funds Management Ltd v NorthWest Healthcare Australia RE Ltd [2021] NSWSC 1039 at [15]ff and in Davis v Certain Lloyd's Underwriters [2022] NSWSC 131 at 9[ff]. It seems to me that it was reasonable for FSC to commence these proceedings, against BRG and the Second and Third Defendants, so as to seek to pursue BRG's claims. The fact that this issue has become moot as against BRG and the Defendants, by reason of the liquidator's settlement of BRG's claims, is sufficient reason to displace the presumption as to costs under UCPR r 42.20.
BRG submits that, before FSC's application was dismissed by consent, it was doomed to fail and that BRG had no choice but to oppose FSC's application on the basis that the costs protection offered to BRG and the liquidator was inadequate. The difficulty with that proposition however, is that those matters have not and now will not be determined by the Court on the merits, because the liquidator's settlement of BRG's claims against the Defendants means that there will now be no hearing on the merits of FSC's leave application. BRG also submits that the liquidator formed the view that it was in BRG's best interests to accept the Defendant's settlement offer. That proposition is unsupported by evidence led by BRG as to the liquidator's reasoning process and depends upon a premise as to the inadequacy of FSC's position, the correctness of which will now not be determined. Accordingly, BRG has not established its claim for costs against FSC.
The Second and Third Defendants' submissions did not seek an order that any other party pay their costs of the proceedings, and sought an order that they not pay the costs of any other party to the proceedings. No other party sought an order for costs against the Second and Third Defendants and it is not necessary to address their submissions as to why such an order should not be made.
In summary, FSC has not established its claim for costs against BRG; BRG has not established its claim for costs against FSC; and no orders as to costs are sought by or against the Second and Third Defendants. There will be no order as to the costs of the proceedings.
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Decision last updated: 10 May 2023