Babsari P/L v Wong & Ors [2000] QSC 380

[1] WHITE J: This is an application by the eighth defendant, Westpac Banking Corporation ("Westpac") that Raymond Yee Ping Tsui and his wife, Janet Yin Hing Tsui, who are the directors of the plaintiff, Babsari Pty Ltd ("Babsari") pay Westpac's costs of and incidental to action no 874 of 1995 (consolidated with writ no 340 of 1995) ordered to be paid by Babsari to be assessed on an indemnity basis.

[2] Chesterman J delivered judgment in the action on 27 October 1999 and on 2 November 1999 ordered that Westpac's costs of and incidental to the issues between it and Babsari be assessed on a standard basis and be paid by Babsari. Babsari is unable to meet its costs obligations.

[3] The circumstances behind the proceedings brought by Babsari are complex, but for this application may be stated relatively succinctly. A full recital of the facts and various allegations between the parties is to be found in his Honour's reasons for judgment ("MNW-1" to the affidavit of Mark Norman Wellard filed 5 September 2000).

* The seventh defendant, ("Asean") borrowed funds from Westpac subject to certain conditions.

* In about August 1987 in consideration of Westpac forbearing to sue in respect of advances or accommodation already granted or afforded to Asean, Babsari gave Westpac mortgages over a number of properties which it owned to secure the debt of Asean.

* In about August 1987 the first and second defendants, Douglas Wong and his sister, Janet Wong, gave Westpac personal guarantees to secure the debts of Asean.

* In about October 1987 the third and fourth defendants, Mr and Mrs Chow, gave Westpac a mortgage over a number of properties which they owned to secure the debts of Asean.

* In about August 1987 the fifth and sixth defendants, Mr and Mrs Tsang, by giving the certificate of title to a property owned by them to Douglas Wong who deposited it as security with Westpac for Asean's indebtedness impliedly, granted Westpac an equitable mortgage over that property.

[5] Babsari alleged that as a result, the first to sixth defendants became liable as co-debtors in respect of any liability arising in Babsari to repay to Westpac any amount advanced to Asean. Asean failed to repay its debt to Westpac. Westpac made demand on Babsari to make payment of the amounts outstanding by Asean. Babsari discharged Asean's indebtedness in full.

[6] Babsari claimed that by virtue of its payment of Asean's debt it was entitled to contribution from the first to sixth defendants as co-debtors of their respective share of the total amount of money paid to Westpac by Babsari. It sought an order that each of those defendants pay to it an equal portion of the debt which had been discharged and an order to have assigned to it each of the securities held by Westpac in respect of the debt of Asean.

[7] In their action which was consolidated with Babsari's action, Mr and Mrs Chow claimed against Westpac that the mortgages which they had given were invalid because they had been given as a result of misleading or deceptive conduct on the part of Westpac or that the bank had taken the benefit of the mortgages in breach of a fiduciary duty which they owed to Mr and Mrs Chow.

[8] In deciding this application I will refer to certain of the facts as found by his Honour. Asean was promoted to acquire the rights to the design, manufacture and sale of an item of furniture and to develop this business it obtained loans and facilities from Westpac. The individual defendants and Mr and Mrs Tsui are all members of an extended family. Douglas Wong and Janet Wong were the directors of Asean and in May 1987 they appointed Mr Tsui an additional director and allotted two shares each to two companies associated with themselves and two to Babsari which thereafter held a 20 per cent interest in Asean. After this occurred, his Honour found that Mr Tsui played an active but not dominant part in Asean's affairs.

[9] In August 1987 Babsari acquired a further 20 per cent interest in Asean when Janet Wong resigned as director and her company transferred its shares to Babsari. In return, his Honour concluded, Janet Wong was desirous of being released from her personal guarantee to Westpac in respect of Asean's indebtedness. A rearrangement of security was proposed to the bank in which Mr Tsui actively participated. Douglas Wong proposed obtaining mortgages over real property owned by Mr and Mrs Tsang and Mr and Mrs Chow as replacement security. If that occurred Westpac agreed to release Janet Wong from her guarantee.

[10] As his Honour found, Mr and Mrs Chow had a different understanding of the reason why Westpac was to be given mortgages over their property. Douglas Wong offered to sell some of his businesses to Richard Wong, a cousin. Richard Wong sought financial assistance from his parents-in-law, Mr and Mrs Chow. They gave him the certificates of title to certain real property which they owned to obtain a loan from Westpac and he, in turn, passed the securities to Douglas Wong. He arranged with Westpac for the necessary documentation to be prepared as substitute security in order for Janet Wong's security to be released. When Mr and Mrs Chow executed the mortgage documents they showed that the mortgage was to secure the indebtedness of Asean as was explained to them, as his Honour found, by the officers of the bank. Mr and Mrs Chow believed that this gave effect to the business deal between their son-in-law and Douglas Wong.

[11] His Honour concluded that notwithstanding what appeared in the mortgage document, Westpac and Mr and Mrs Chow never reached agreement because the bank intended to accept the benefit of their mortgage only as a means of releasing Janet Wong from her guarantee and only if Mr and Mrs Tsang also provided a mortgage. Mr and Mrs Chow intended to support their guarantee of Asean's obligations by a mortgage over their property only in order to obtain a loan for Richard Wong from the bank. Neither, his Honour found, intended the mortgage to be effective until each of these events occurred.

[12] From 1991 it was Westpac's contention that Mr and Mrs Chow were not bound by their mortgage. The substitute security arrangements never came into force because Mr and Mrs Tsang never executed a mortgage although Westpac held a certificate of title over property which they owned. In the result, his Honour concluded that Mr and Mrs Chow never became co-sureties.

[13] Mr and Mrs Chow claimed against Westpac that they were entitled to be released from their mortgages because of false and misleading conduct by Westpac officers. Their claims under the Trade Practices Act were held to be both statute-barred and without any foundation. His Honour found further that no fiduciary relationship arose between Mr and Mrs Chow and Westpac.

[14] His Honour dismissed Babsari's claim against Mr and Mrs Chow and their claim against Westpac.

[15] By the time the action came to trial the first defendant's bankrupt estate had made a settlement with Babsari; Janet Wong had settled with Babsari; Babsari had reached a settlement with Mr and Mrs Tsang which gave nothing to Babsari; Asean was defunct. All that had remained for the trial was Babsari's claim against Mr and Mrs Chow and their claim against Westpac.

[16] Babsari, as found by his Honour, is a company which acted as trustee of a trust which existed to benefit the family of Mr Raymond Tsui. His Honour found that although both Mr and Mrs Tsui were directors, Mr Tsui controlled the company without reference to his wife. During the trial Mr Tsui gave evidence that he and Mrs Tsui were giving instructions to the solicitors for Babsari about the conduct of the litigation and that they were paying the legal bills for Babsari.

[17] By letter dated 17 November 1999 Mr Tsui writing on behalf of Babsari said that the company was in no position to meet the obligations imposed upon it by the costs order and mentioned that it was "in the process of winding up operations". In April 2000 Westpac's solicitors ascertained that Mr Tsui had applied on behalf of Babsari on 20 January 2000 for the voluntary deregistration of the company. The Form 6010 reflecting s 601AA(2) of the Corporations Law which Mr Tsui lodged with the Australian Securities and Investment Commission contains declarations that the company had no outstanding liabilities and was not party to any legal proceedings.

[18] Mr and Mrs Tsui declined Westpac's request to accept personal liability for Babsari's obligations to pay costs.

[19] Westpac points to conduct by the directors of Babsari which would cause the court to exercise its discretion to make the orders sought against them. It relies principally on the fact that Babsari brought and continued the action for contribution against Mr and Mrs Chow in circumstances where Mr Tsui was an active party in the arrangement for substitute security for Janet Wong's personal guarantee and that Mr and Mrs Tsang's security which was part of that arrangement as he knew did not eventuate. Babsari, as instructed by Mr Tsui, sued both Janet Wong and Mr and Mrs Chow knowing that there could not be binding securities from both of them. Mr and Mrs Tsui had a personal interest in the outcome in as much as Janet Wong's exit from Asean resulted in an acquisition by Babsari of a further 20 per cent interest in that company.

[20] Had Mr and Mrs Chow not been sued by Babsari for contribution they would not have brought their case against Westpac to have the mortgages set aside. His Honour did not hold Babsari responsible for Mr and Mrs Chow mounting an action which they knew was untenable against Westpac. However, as the bank's solicitors pointed out well in advance of the trial to Babsari's solicitors, the bank's preferred course would have been to interplead and transfer the securities in accordance with the order of the court. This required an agreement by all the alleged co-debtors. But while Babsari continued to pursue Mr and Mrs Chow they maintained their claim against the bank.

[21] The other conduct which is said to enliven the discretion occurred after the trial when Mr Tsui attempted to deregister Babsari in breach of the requirements of the Corporations Law so as to avoid, it might be inferred, the usual liquidation procedures.

[22] That there is jurisdiction to make a costs order against non-parties to legal proceedings is clear. The general approach to an application such as the present is found in the joint reasons for judgment of Mason CJ and Deane J in Knight v FP Special Assets Limited (1992) 174 CLR 178 at 192-3, with whom Gaudron J agreed.

"As our discussion of the earlier authorities indicates, there are, however, a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party. ...

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."

The present facts satisfy those requirements. Babsari was unable to fund the litigation and could not have met an order for costs should it have been unsuccessful. Mr Tsui has actively conducted the litigation on behalf of the company, not just as a director but as one who has a personal interest in the successful conclusion of the litigation both for himself, Mrs Tsui and his family.

[23] This is not to advocate making a director liable for costs where a company has unsuccessfully bought or defended proceedings funded by the director. To do so without more would erode the concept of the separate liability of the company. Knight makes clear that the prima facie rule is that an order for costs is only made against a party to the litigation. Something more must be present before a director will be made liable for costs if the company is unsuccessful.

[24] The English Court of Appeal in Metalloy Supplies Ltd v MA (UK) Ltd [1996] EWCA Civ 671; [1997] 1 WLR 1613 concluded, in the case of a liquidator, that the jurisdiction to order costs against a non-party must be exercised with great caution, in exceptional circumstances and that impropriety of some kind will be a necessary ingredient, per Waller LJ at 1618. The court emphasised public policy considerations operating against an order against a non-party in the case of a liquidator. Batt J in CE Heath Underwriting Insurance (Australia) Pty Ltd v Daraway Constructions Pty Ltd (BC9503967) a decision in the Supreme Court of Victoria delivered 1 September 1995, said of an application to make a director personally liable for costs where he had sworn a clearly incorrect affidavit that had led to the adjournment of the trial, that there must be

"... some element of dishonesty, recklessness, or at least personal carelessness before I can properly order costs against a director, even a controlling director of the defendant" (p 5).

Where company directors persisted in raising deliberately false issues as to the genuineness of their signatures and the execution of documents by the company, Moynihan J concluded in Re Tort Finance and Insurance Services Pty Ltd [1994] 1 Qd R 558 that an order for costs should be made against the directors themselves.

[25] Both Dawson J and McHugh J considered that ordinarily the appropriate remedy against a company which may be unable to meet a costs order would be to obtain an order for security for costs, 204 and 217. No application for security for costs was made against Babsari although it was raised after Mr Tsui discontinued as a plaintiff in the consolidated action in mid 1998, (see letter 11 August 1998 from Westpac's solicitors to Babsari's solicitors, being part of "PDL1" to the affidavit of Philip Denis Leach filed 16 October 2000). The bank expressed a concern about costs once Mr Tsui had ceased being a party. Babsari's solicitors declined to give any details about Babsari's capacity to meet an order for costs because of the significant lapse of time from the commencement of the action.

[26] Mr Flint for Babsari, submitted that failure to bring a timely application for security for costs against Babsari should operate to defeat Westpac's application. Conversely, in State of Queensland v Mantle (BC9906099), decision of the Full Federal Court of 15 September 1999, an order for security for costs had been made but there was a shortfall and an application was made that that shortfall be paid by non-parties to the litigation. The trial judge declined to make such an order since security had already been ordered. The court upheld the decision, but in the course of doing so concluded that the evidence before the court indicated that none of the non-parties fell within the category of case described by Mason CJ and Deane J in Knight as apt for such an order.

[27] Whether an application for security for costs was, or ought to have been, made against a company conducting litigation will be one of the factors to take into account. Similarly, whether the non-party against whom an order is sought ought to have been warned prior to trial will depend on all the circumstances. In this case, that no security for costs application was brought by Westpac against Babsari is not a compelling factor for refusing to order the relief sought. There is every chance that Westpac would have been unsuccessful because Babsari sought nothing save the securities from the bank in the exercise of its right to subrogation. It was not until the evidence unfolded and his Honour made the findings that he did that Babsari's role through Mr Tsui became clearer. As to the second matter, a director in Mr Tsui's position, seized of all the facts did not, in the interests of justice, need the warning referred to in Metalloy.

[28] I conclude that Mr Tsui should pay the costs ordered by Chesterman J to be paid by Babsari to Westpac. Although not determinative, his conduct in seeking to deregister Babsari immediately following the adverse costs order lends some support to the exercise of the discretion, because this was plainly a dishonest attempt to avoid the consequences of the judgment.

[29] Mr Derrington for Westpac submits that although the application is not as strong against Mrs Tsui, the modern approach to the responsibility of directors should not allow her to escape liability. Where something more is required, as here, than merely directing the litigation on behalf of the company a court should be slow to make an order against a director who, on the evidence, was effectively under the domination of her co-director husband. I would not extend the order to Mrs Tsui.

[30] Finally, Westpac seeks its costs on an indemnity basis. The approach which a court should take to such an application was summarised by Sherpherdson J in Naomi Marble & Granite Pty Ltd v FAI Insurance Company Limited [1998] QSC 18; [1999] 1 Qd R 518. His Honour referred at 522 to the principles which were enunciated by Cooper and Merkel JJ in Re Wilcox; ex parte Venture Industries Pty Ltd (1996) 141 ALR 727 at 729

"In order to exercise the discretion judicially the following principles have been accepted by the court as applicable:

(a) The court ought not to depart from the rule that costs be awarded on a party and party basis unless the circumstances of the case warrant the court in departing from the usual course;

(b) The circumstances which may warrant departure from the usual course arise as and when the justice of the case so requires or where there may be some special or unusual feature in the case to justify the court in departing from the usual course;

(c) While the circumstances in cases in which indemnity costs have been ordered offer a guide, the question must always be whether the particular facts and circumstance of the case in question warranted the making of an order for costs other than on a party and party basis."

See also Re Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1993) 81 ALR 337 and Colgate Palmolive Co v Cussons Pty Ltd [1993] FCA 536; (1993) 118 ALR 248. Although indemnity costs were sought against Babsari by Westpac, Chesterman J rejected that application because he concluded that Babsari could not be held responsible for the institution of Mr and Mrs Chow's action against the bank.

[31] No further evidence or submissions are before me and I would decline to order costs other than on a standard basis.

[32] The order is that Raymond Yee Ping Tsui pay the costs of Westpac Banking Corporation of and incidental to action no 874 of 1995 (consolidated with Writ no 340 of 1995) ordered to be paid by Babsari Pty Ltd by Chesterman J on 2 November 1999 to be assessed on a standard basis.

[33] Babsari should also pay the costs of and incidental to this application.