Solicitors:
O'Neill Partners (Plaintiff)
Holman Webb (First Defendants)
Piper Alderman (Second and Third Defendants)
File Number(s): 2023/448311
[2]
Background
By my judgment delivered on 1 July 2024 ([2024] NSWSC 808) ("Principal Judgment"), I held that a deed of company arrangement dated 23 October 2023 ("DOCA") entered into by the Second Defendant, Academy Construction & Development Pty Ltd (subject to Deed of Company Arrangement) ("ACD") should be terminated and ACD should be wound up and the liquidators nominated by the Plaintiff, the Owners - Strata Plan 90889 ("Owners Corporation") should be appointed as liquidators of ACD.
In the course of the Principal Judgment, I reviewed the affidavit evidence led by the Owners Corporation and by the First Defendants, Messrs Spring and Moore in their capacity as joint and several deed administrators of ACD ("Administrators"). The Second and Third Defendants in the proceedings, ACD (which at that point had passed back to the control of its director, Mr John Beaini) and Mr Beaini ("ACD Parties") led no evidence at the hearing. I also set out a detailed chronology of events. I observed (at [46]-[49], [50]-[51]) that it was not necessary to determine the Owners Corporation's claim that the passage of the resolution authorising the entry into the DOCA should be set aside or their claim that there were defects in the information provided to the creditors at the second meeting of creditors.
I found (at [52]ff) that the DOCA was oppressive, unfairly prejudicial to, or unfairly discriminatory against, the Owners Corporation and should be set aside under s 445D of the Corporations Act 2001 (Cth) ("Act"). I observed (at [64], [67]) that:
"… the Administrators and the ACD Parties made no attempt to establish that a pari passu distribution as between other creditors and the Owners Corporation, after the Owners Corporation's claim was properly assessed, would result in a distribution of $200,000 or less to the Owners Corporation. The Administrators and the ACD Parties also did not establish any rational distinction between the position of Class A creditors whose claims were allowed in full, and the position of the Owners Corporation, where any uncertainty in the amount recoverable by the Owners Corporation would necessarily have been addressed in the valuation of that claim in the proof of debt process. There is here no suggestion that there was any proper commercial imperatives in respect of any future trading by ACD to prefer all creditors other than the Owners Corporation, by paying their claims in full, to the Owners Corporation, although that approach no doubt encouraged other creditors to vote in favour of the Resolution. …
I do not read these decisions [Britax Childcare Pty Ltd (ACN 006 773 600) v Infa Products Pty Ltd (ACN 092 222 994) (admins apptd) (2016) 115 ACSR 322; [2016] FCA 848; Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32; Decon Australia Pty Ltd v TFM Epping Land Pty Ltd [2022] FCAFC 54) as establishing, conversely, that a deed proponent is free to determine, without any proper commercial basis, that one creditor should receive a minimal return so that other creditors may be paid in full, and that the other creditors are then free to approve that result at the second meeting of creditors. That approach is potentially oppressive, irrespective of whether it is directed to a majority or minority creditor."
I rejected (at [73]) the ACD Parties contention that the DOCA was justifiable because the amount claimed by the Owners Corporation was disputed and exceeded the total undisputed debts of other creditors, and observed that:
"the amount that should be allowed for the Owners Corporation's claim would be determined in the proof of debt process, so that its claim and claims of other unsecured creditors would then have the same character; and the fact that a claim is large does not, without more, justify capping it in an arbitrary amount, even if that will have the consequence that other creditors can be paid in full."
I also observed (at [75]) that:
"I am comfortably satisfied here that a basis for termination of the DOCA under s 445D(1)(f) of the Act is established, on the ground that it is oppressive and unfairly prejudicial to or unfairly discriminatory against the Owners Corporation, even apart from the fact that its inclusion of third party releases is not authorised by Pt 5.3A of the Act for the reasons noted below. It is not necessary to address all of the criticisms of the DOCA advanced by the Plaintiffs or the detail of Mr Spring's cross-examination in order to reach that conclusion. It is sufficient, for that basis, that, first, that no party was able to point to any objective basis for the DOCA to impose a cap of $200,000 on the recovery by the Owners Corporation, which appears to have been chosen for not better reason than that the ACD Parties wished to extinguish the Owner's Corporation's claim for that amount."
I also noted (at [76]) the lack of justification for the approach to the priority of creditors' claims adopted by the DOCA and found (at [78]ff) that the DOCA should be terminated under s 445D(1)(g) of the Act, and I observed (at [84]-[85]) that:
"Mr Notley [who appeared for the ACD Parties] refers to the Owners Corporation's submission that the DOCA is against the public interest because there is no explanation why the DOCA was structured with two classes of creditors and with the Owners Corporation as the sole member of one class. He submits and I accept that, as I noted above, a deed of company arrangement may, in principle, provide for differential dividends amongst creditors and that Pt 5.3A does not require a pari passu distribution, although it does not follow that any differentiation between creditors on any basis will be permitted. He also submits that the debts of unsecured creditors in Class "A" were not disputed, and the amount owing by ACD to the Owners Corporation was disputed and "vastly exceeded" the total of the undisputed debts to the unsecured creditors in Class "A". As I noted above, it seems to me that the former does not provide a proper basis for the differential treatment of the Owners Corporation, which could only recover the amount for which it was admitted to proof under the DOCA, in an amount that would necessarily reflect any uncertainties in its claim; and the latter does not support a differentiation, because the fact that a claim is large does not, without more, provide a rational basis to cap it to an arbitrary amount and pay smaller claims in full.
I am also comfortably satisfied that a basis for termination of the DOCA under s 445D(1)(g) of the Act is established, given the lack of rational basis for the differential treatment of the Owners Corporation under the DOCA, even apart from the fact that its inclusion of third party releases is not authorised by Pt 5.3A of the Act for the reasons noted below, and has the consequence that the DOCA is an abuse of Pt 5.3A of the Act of a similar character to that considered in Canstruct [Pty Ltd v Project Sea Dragon Pty Ltd (subject to a Deed of Company Arrangement) [2024] FCA 112]."
I concluded (at [86]ff) that the Court should exercise its discretion to terminate the DOCA. It was also common ground in the primary proceedings that the DOCA was invalid, by reason of the third party releases that it required the Owners Corporation to provide, and I held that those clauses could not be severed in the relevant circumstances.
At the conclusion of the Principal Judgment (at [106]-[107]), I observed that:
"For these reasons, the DOCA should be terminated and the Owners Corporation's nominees should be appointed as liquidators of ACD. My preliminary view is that costs should follow the event, as between the Owners Corporation and the ACD Parties, and the ACD Parties should pay the Owners Corporations' costs of the proceedings as agreed or as assessed. My preliminary view is that there should no order for costs in favour of, or against, the Administrators in respect of these proceedings. However, I will allow the parties an opportunity be heard as to costs.
I direct the parties to bring in short minutes of order to give effect to this judgment, including as to costs, within five business days and, if there is no agreement between them, their respective draft orders and submissions as to the differences between them, not exceeding 5 pages in Arial font in one and a half spacing."
[3]
Substantive orders
There is now limited dispute between the parties as to the substantive orders which should be made, but they have not agreed the position as to costs. There is a difference in the form of the second proposed order, where the Plaintiffs seek an order that ACD be wound up and the ACD Parties propose an order declaring that, by the operation of s 446AA of the Act and the order terminating the DOCA, ACD is taken to have passed a special resolution under s 491 of the Act to be wound up voluntarily. Mr Ball, who did not appear for the ACD Parties at the hearing but appears for them in respect of orders and costs, points out that the form of proposed order 2 is consistent with my observations in Re ACN 613 909 596 Pty Ltd (formerly Minle Wine Negociants of Australia Pty Ltd) (subject to deed of company arrangement) [2023] NSWCA 871 and with order 2 that I made in that case. I accept that an order in that form is properly made in this case. I also accept that, as proposed order 6 contemplates, the Administrators should be discharged from their undertaking provided to the Court on 15 December 2023, but only to the extent necessary to permit them to pay funds held by them pursuant to the DOCA to the liquidators. I do not propose to limit that order by reference to their wider claim to remuneration or expenses of the voluntary administration or deed administration, where that claim has not been in issue in the proceedings.
[4]
Costs
I should first address the applicable principles which are well-established. The Court has power to make an order for costs under s 98(1) of the Civil Procedure Act 2005 (NSW) ("CPA") and r 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"). Section 98 of the CPA confers a discretionary power to determine costs on the Court and requires that that discretion be exercised judicially: Ballam v Ferro (No 2) [2022] NSWSC 1358 at [54]. Rule 42.1 of the UCPR in turn provides that:
"Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs."
A successful party in proceedings has a "reasonable expectation" of being awarded costs against an unsuccessful party, unless there is good reason for that presumption to be displaced: Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11 at [22], [134]. In Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121], Hodgson JA (with whom Mason P agreed) observed that:
"… underlying both the general rule that costs follow the event, and the qualifications to that rule, is the idea that costs should be paid in a way that is fair, having regard to what the court considers to be the responsibility of each party for the incurring of the costs."
That observation was cited, with apparent approval, by the Court of Appeal in Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [98] and, in Cellarit Pty Ltd v Cawarrah Holdings Pty Ltd (No 2) [2018] NSWCA 266 ("Cellarit") at [7]-[9], McColl JA summarised the applicable principles as follows:
"Section 98 of the Civil Procedure Act 2005 (NSW) confers a wide discretion on the court with respect to costs. The general rule is that court costs follow the event unless the court makes some other order pursuant to the discretion conferred by Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 42.1.
As Beazley JA explained in Baker v Towle [(2008) 39 Fam LR 323; [2008] NSWCA 73 at [11] (Mathews AJA agreeing)], in most litigation, UCPR r 42.1 "operates in a straightforward way, 'the event' being readily identifiable as a judgment for the plaintiff or the defendant on the claim. In that sense, 'the event' to which the rule refers is the result of the proceedings, so that the party who succeeds on the claim before the court is awarded costs, unless the court, pursuant to the discretion conferred by r 42.1, makes 'some other order'.
Underlying both the general rule that costs follow the event, and qualifications to that rule, is the idea that costs should be paid in a way that is fair, having regard to what the court considers to be the responsibility of each party for the incurring of the costs."
I have here drawn on my summary of these principles in Re Munja Bakehouse Pty Ltd [2024] NSWSC 17 at [4]ff.
I turn first to the question whether an order for costs should be made against the First Defendants, the Administrators. Mr McDonald submits there are good reasons to order costs against the Administrators, without prejudice to rights they have to be indemnified against the deed fund. He notes the Administrators' recognition of their limited role in the proceedings but contends the Administrators, through their Counsel, took a greater role during the hearing and "effectively took the lead, such as proposing a severance of the offending clause and/or a variation of the DOCA". I do not accept that submission, where the Administrators were relevantly addressing the legal issues arising from the common ground that the DOCA was invalid, unless the third party releases contained in it could be severed from it. I also do not accept that the Administrators had gone beyond their proper role in making submissions as to the legal issues relating to whether the DOCA was oppressive, although I did not accept a submission they made as to the case law in the Principal Judgment (at [71]) to which Mr McDonald refers.
Mr McDonald also refers to my findings in respect of the Administrators' role in the drafting of the DOCA proposal and, at some length, to my observations as to the Administrators' role in the chronology of events and to difficulties with the analysis undertaken by the Administrators in comparing the potential outcomes of a liquidation and the DOCA. He also points to my observation in paragraph 64 of the Principal Judgment, which I have quoted above. However, it is trite that an order for costs is not made by reference to the merit or otherwise of the conduct in issue in the proceedings, but by reference to the conduct and outcome of the proceedings. Notwithstanding the findings which I reached in respect of the substance of the issues in dispute, it seems to me that the Administrators adopted an appropriately limited role in the conduct of the proceedings, and that there should be no order for costs against them.
The Administrators do not seek an order for costs in their favour but resist any order for costs against them. The Administrators submit:
"This Court decided to terminate the D[O]CA on the grounds that: (a) it was not authorised by the Act, because of the third party release clause; and (b) it was oppressive, unfairly prejudicial to or unfairly discriminatory against the Owners Corporation (or contrary to the public interest), by reason of the fact that there was not a rational basis for differential treatment of its claim under the D[O]CA: Reasons at [77], [84], [85], [91]. The Deed Administrators: did not join issue with the relevant allegations in that regard; took a neutral position on those issues; and did not seek to be heard other than to provide assistance to the Court: Reasons at [52], [79].
Moreover, the Court did not need to decide (and did not make any findings one way or the other with respect to) the allegations made by the Owners Corporations against the (Deed) Administrators personally, including their conduct of the administration (noting that some of these allegations were abandoned by the Owners Corporation during the hearing): Reasons at [12], [38], [49], [51]."
I accept the Administrators' submission that they largely took a neutral position on the issues on which the Owners Corporation succeeded.
The Administrators also submit that they had invited the Owners Corporation to withdraw their allegations about the Administrators' conduct, following which, they contend, they would have taken a neutral role in the proceedings and, in all likelihood, filed a submitting appearance. They submit that the Owners Corporation refused or did not respond to those invitations and, had they been accepted, the evidence and the hearing would have been much briefer and the Administrators would not have had to incur much (if anything) in the way of costs in the proceedings. That is obviously a submission made with the benefit of hindsight, as was my qualified observation to which they refer (at Principal Judgment [3]) that:
"At least with hindsight, that was unfortunate where the allegations as to the Administrators' conduct had limited relevance to the determination of the proceedings, and a significant amount of time was spent, in the cross-examination of Mr Spring, in pursuing them." [emphasis added]
The Administrators also tender correspondence between their solicitors and the solicitors for the Owners Corporation, by which they had sought the Owners Corporation's confirmation that it did not impugn their conduct or allege any deficiency in their investigation, or any misleading statements or omissions in the second report to creditors, on the basis that they would then not take an active role in the proceedings. Putting aside hindsight, it seems to me that it was reasonable for the Owners Corporation not to provide that confirmation, where its criticisms of the DOCA arose in the factual context of the Administrators' conduct. It is plain enough, from the chronology of events set out in the Principal Judgment, that serious questions potentially arose as to the Administrators' independence and the adequacy of their analysis of preference claims and the likely outcomes of a liquidation and the DOCA, although it was not necessary to determine all of the criticisms that could be and were made of their conduct of the administration to determine the issues in the proceedings.
The Administrators note that no party has made a submission that they should be deprived of their right of indemnity to funds held by them under the DOCA for payment of their expenses, including costs of the proceedings, and any approved remuneration, but make submissions as to that issue against the contingency that they are incorrect. They are correct that no such submissions were made, so far as any right to indemnity in respect of remuneration and costs referable to the proceedings was concerned. No wider issue as to their right to indemnity or remuneration is in issue in the proceedings and it is not necessary to address that question or their submissions.
I now turn to the question whether an order for costs should be made against the Second and Third Defendants, the ACD Parties, or only against ACD. The Owners Corporation submits that a costs order should be made in its favour against both the ACD Parties. Mr McDonald, who appears for the Owners Corporation, submits that there is no reason to depart from the general rule under UCPR r 42.1 that costs follow the event. I accept that the usual and straightforward application of the usual principle that costs follow the event would have consequence that the ACD Parties must pay the Plaintiffs' costs of the proceedings.
The ACD Parties submit, first, that the costs order made in favour of the Owners Corporation should be limited to an order against ACD and no order for costs should be made against Mr Beaini. They submit that no order for costs should be made against Mr Beaini because he was joined to the proceedings as a party to the DOCA where his rights and liabilities were directly affected by the relief sought and he was a necessary party to the proceedings. I should add that the approach as to costs for which ACD and Mr Beaini both contend was, on the face of it, contrary to the interests of ACD and its creditors, although Mr Beaini would be obliged to have regard to creditors' interests if ACD is now insolvent or near insolvent. The ACD Parties also submit that this is not a case where Mr Beaini elected to separately appear, be separately represented and make separate submissions from ACD, increasing the costs of the proceedings. I accept that submission, so far as it goes. However, Mr Beaini could have filed a submitting appearance and he did not, but took the same position as ACD in actively opposing the relief sought.
The ACD Parties also submit that:
"It would not be a just result to impose a costs order on [Mr Beaini] whose presence and participation in a case was (as acknowledged by the [Owners Corporation]) not related to the ultimate issue for decision, and whose joinder to the proceedings was considered by the parties to be a mandatory consequence of his having been the DOCA proponent."
I do not accept that submission, because the question of costs depends, not on why Mr Beaini was joined as party to the proceedings, but on the role which he played in them. As I noted above, Mr Beaini here joined with ACD (which was under his control) in making submissions in opposition to the termination of the DOCA, and no distinction was drawn at any point in the proceedings between the positions which ACD and Mr Beaini both unsuccessfully advanced. There is, in those circumstances, no basis on which to order costs only against ACD, which may well not have the capacity to pay them where it will be wound up, and not against Mr Beaini.
Alternatively, the ACD Parties alternatively seek an order that the costs ordered against both ACD and Mr Beaini should exclude the Owners Corporation's costs in connection with any claims, allegations or complaints made by the Owners Corporation concerning the conduct of the Administrators. Mr Ball submits and I accept that the Court in a proper case can undertake an apportionment of costs by reference to the issues in the proceedings. I should add that it will not ordinarily do so and it is not bound to do so. In Cellarit at [10]-[14], McColl JA observed that:
"Where there are multiple issues in a case the court generally does not attempt to differentiate between the issues on which a party was successful and those on which it failed. This recognises the proposition that justice may not be served if parties are dissuaded by the risk of costs from canvassing all issues which might be material to the decision in the case.
However there is a tension between that proposition and the proposition that, [i]f parties come to realise that they will not necessarily recover the whole of their costs, even though they have unsuccessfully raised a discrete issue, they are likely better to consider whether the raising of that issue is a justifiable course to take.
Further, even where there are multiple issues, unless a particular issue or group of issues is clearly dominant or separable it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between the particular issues on which it was successful and those on which it failed.
However, a court can mould a costs order to take account of the partial success of the party against whom orders have been made at trial insofar as that party identifies particular issues or groups of issues on which it succeeded at the trial. This requires consideration of whether there were "clearly discrete issues for determination" or, rather, whether "all issues are inseparable, or at least sufficiently linked, with respect to the overall disposition of a particular matter". A separable issue can relate to "any disputed question of fact or law" before a court on which a party fails, notwithstanding that they are otherwise successful in terms of the ultimate outcome of the matter.
Where there is a mixed outcome in proceedings, the question of apportionment of costs between issues on which the party who has overall been successful, and those on which that party has failed, is very much a matter of discretion, and mathematical precision is illusory." [footnotes omitted]
Mr Ball submits that the Owners Corporation's complaints about the Administrators' conduct were "clearly dominant or separable" and took up a significant part of the proceedings as to evidence or argument. I do not accept that those complaints were either dominant or separable, where they were part of the factual context in which the application to set aside the DOCA was put and succeeded; although, with the benefit of hindsight, it would also have succeeded without them. It was not necessary to decide several aspects of those complaints in the Primary Judgment because I held that the DOCA was oppressive, and was legally invalid, on other grounds. It seems to me that that provides no basis to find that the Owners Corporation should not recover the whole of its costs for its successful application to set aside the DOCA, where the Owners Corporation may well have also succeeded on other grounds had it been necessary to determine them. Mr Ball also, oddly, advances the submission that there is reason to apportion costs because the ACD Parties did not lead any facts or advance any evidence. It seems to me that, to the contrary, their attempt to maintain the DOCA, absent an affirmative factual response to the Owners' Corporation's evidence, is more rather than less reason to order costs against them.
The Administrators respond that the costs order in favour of the Owners Corporation should be made jointly against ACD and Mr Beaini, and point to the risk that costs may not otherwise be recoverable from ACD which is to be wound up. I accept that submission, for the reasons noted above in rejecting the ACD Parties' submissions. The Administrators rightly did not address the question whether only part of those costs should be ordered against the ACD Parties.
I am satisfied that there is no basis on which to make an order, adverse to ACD's and its creditors' interests, that only ACD and not Mr Beaini pay the costs of the proceedings, where there was no distinction between the role taken by ACD and Mr Beaini in the proceedings and no basis to order costs against one but not the other of them. I am also satisfied that there is no reason to apportion or limit the Owners Corporations' recoverable costs of the proceedings to exclude matters relating to the Administrators' conduct.
[5]
Orders
I make the following orders, and will address the ACD Parties' stay application immediately following the delivery of this judgment:
1 The Deed of Company Arrangement dated 23 October 2023 (DOCA) with respect to the Second Defendant, Academy Construction & Development Pty Ltd (subject to a deed of company arrangement), be terminated.
2 The Court declares that, by operation of section 446AA of the Corporations Act 2001 (Cth) and the making of Order 1, the Second Defendant is taken to have passed a special resolution under section 491 of the Corporations Act 2001 (Cth) that it be wound up voluntarily.
3 Anthony Elkerton and Paul Weston be appointed as the liquidators of the Second Defendant.
4 The Second and Third Defendants pay the Plaintiff's costs of this proceeding as agreed or assessed.
5 There be no order for costs in favour of, or against, the First Defendants.
6 The First Defendants are discharged from the undertaking provided to the Court on 15 December 2023 to the extent necessary to permit them to pay funds held by them pursuant to the DOCA to the liquidators.
[6]
The ACD Parties' stay application
The ACD Parties seek an order that the orders that I have made be stayed until the expiry of 28 days unless the ACD Parties within that time file any notice of appeal and, if an appeal is filed, they be stayed until after the determination of that appeal. The Plaintiffs did not address the stay application in their submissions as to orders and costs, possibly because they had not received sufficient notice that it would be made. The Administrators also did not address the stay application on the basis that it did not affect them. It seems to me that they were in error in that view, where the stay would have the consequence that they would continue in office for a potentially long period and questions would arise as to whether the Court should permit the deed fund to be eroded by their remuneration and disbursements in that period, and whether a stay should be granted unless the ACD Parties had indemnified them for those costs and disbursements and provided any appropriate security for that indemnity. The Administrators would likely have an interest in those questions. My Associate has drawn the parties' attention to those matters and, as I noted above, I will hear the parties as to the stay application following the delivery of this judgment.
[7]
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Decision last updated: 16 July 2024