Ballast Holdings Pty Ltd v Leonite Capital

Legal principles 25 Section 43 of the Federal Court Act confers a broad discretion on the Court to award costs in a proceeding. That includes a discretion to order a party's lawyer to bear costs personally pursuant to subs 43(3)(f) and for costs to be awarded against a party on an indemnity basis pursuant to subs 43(3)(g).

Indemnity costs 26 An indemnity costs order may be made where there is "some relevant delinquency on the part of the unsuccessful party": see Oshlack v Richmond River Council (1998) 193 CLR 72 at [42] (Gaudron and Gummow JJ). As their Honours explained at [44]: It may be true in a general sense that costs orders are not made to punish an unsuccessful party. However, in the particular circumstance of a case involving some relevant delinquency on the part of the unsuccessful party, an order is made not for party and party costs but for costs on a "solicitor and client" basis or on an indemnity basis. The result is more fully or adequately to compensate the successful party to the disadvantage of what otherwise would have been the position of the unsuccessful party in the absence of such delinquency on its part. (Footnotes omitted.) 27 In Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 232-234 Sheppard J set out the following principles: 2. The ordinary rule is that, where the Court orders the costs of one party to litigation to be paid by another party, the order is for payment of those costs on the party and party basis. … 3. … 4. In consequence of the settled practice which exists, the Court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the Court in departing from the usual course. That has been the view of all judges dealing with applications for payment of costs on the indemnity or some other basis whether here or in England. The tests have been variously put. The Court of Appeal in Andrews v Barnes (supra) at 141 said the Court had a general and discretionary power to award costs as between solicitor and client "as and when the justice of the case might so require". Woodward J in Fountain Selected Meats appears to have adopted what was said by Brandon LJ (as he was) in Preston v Preston (supra) at 637; namely, there should be some special or unusual feature in the case to justify the Court in departing from the ordinary practice. Most judges dealing with the problem have resolved the particular case before them by dealing with the circumstances of that case and finding in it the presence or absence of factors which would be capable, if they existed, of warranting a departure from the usual rule. But as French J said (at p 8) in Tetijo, "The categories in which the discretion may be exercised are not closed". Davies J expressed (at p 6) similar views in Ragata (supra). 5. Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud (both referred to by Woodward J in Fountain and also by Gummow J in Thors v Weekes (1989) 92 ALR 131 at 152; evidence of particular misconduct that causes loss of time to the Court and to other parties (French J in Tetijo); the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp (supra)); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata); an imprudent refusal of an offer to compromise (eg Messiter v Hutchinson (1987) 10 NSWLR 525; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal); Crisp v Keng (unreported, Court of Appeal, NSW, Kirby P, Priestley JA, Cripps JA, No 40744/1992, 27 September 1993) and an award of costs on an indemnity basis against a contemnor (eg Megarry V-C in EMI Records (supra)). Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis. 6. It remains to say that the existence of particular facts and circumstances capable of warranting the making of an order for payment of costs, for instance, on the indemnity basis, does not mean that judges are necessarily obliged to exercise their discretion to make such an order. The costs are always in the discretion of the trial judge. Provided that discretion is exercised having regard to the applicable principles and the particular circumstances of the instant case its exercise will not be found to have miscarried unless it appears that the order which has been made involves a manifest error or injustice. (Emphasis added.) 28 In CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Ltd (2003) 47 ACSR 100; [2003] NSWSC 728 at [19] Barrett J citing Santow J in, among others, Polaroid Australia Pty Ltd v Minicomp Pty Ltd (1997) 16 ACLC 529 stated: In the s 459 field, Santow J warned in a number of judgments that, with the hurdle to be cleared by companies seeking to have statutory demands set aside being so low, creditors persisting with the defence of such applications need to consider carefully, against the possibility of an order for indemnity costs, whether there are valid grounds for their taking up court time and putting the company to expense by doing so: … 29 At [22] his Honour continued: I accept that the possibility of an order for indemnity costs should not be allowed to deter a party by whom a statutory demand has been served from putting the company to appropriate proof of the genuine dispute it asserts. But that principle has a limit to it. As Galaxy Resources, Wildtown Holdings and Carinda Homes show, there are cases in which attempts to resist the setting aside of the demand are, even on the interpretation of the facts most favourable to the defendant, so devoid of prospects of success as to be perverse. The opportunity to put the company to proof of the asserted genuine dispute is something to which the defendant should not be regarded as entitled in such obvious cases. A defendant, on having an obvious and irremediable weakness in its position pointed out, ought to withdraw the statutory demand. If, in such circumstances, such a defendant does not do so, it may well be appropriate for the court to award costs to the plaintiff on the indemnity basis. (Emphasis added.) 30 In CBS Commercial Canberra Pty Ltd v AXIS Commercial (ACT) Pty Ltd; In the matter of CBS Commercial Canberra Pty Ltd (No 2) [2022] FCA 687 at [23] Halley J found that the decision by the defendant to persist in its defence to the plaintiff's application to set aside the defendant's statutory demand after it was put on notice of the basis on which it was unlikely to succeed gave rise to a relevant delinquency or alternatively a special or unusual feature sufficient to justify an award of indemnity costs.

Non-party costs 31 Section 459N of the Corporations Act provides that, where the Court sets aside a demand on an application under s 459G of the Corporations Act, it may order the person who served the demand to pay the company's costs in relation to the application. 32 In Product People (International) Pty Ltd v Box Seat Company Pty Ltd (in liq) (No 2) [2013] FCA 1437 Farrell J considered an application for costs by the plaintiff, The Product People (International) Pty Ltd, which was successful in setting aside a statutory demand served upon it by the defendant. Relevantly, the plaintiff sought orders that Mr Neville Jones, a major creditor of the defendant, pay the plaintiff's costs on an indemnity basis 33 At [53]-[54] Farrell J set out the principles governing the award of a non-party costs order: 53 The principles governing such awards were usefully summarised by Collier J in Citrus Queensland Pty Ltd v Sunstate Orchids Pty Ltd (No 10) [2009] FCA 498 at [20]-[21]: [20] Although as a general rule costs are not awarded against a stranger to litigation, as I have already indicated it is well-settled that the Court has a discretion pursuant to s 43 of the Federal Court Act to order costs against a non-party in appropriate circumstances (Knight (1992) 174 CLR 178, Caboolture Park (1993) 45 FCR 224, Gore v Justice Corp Pty Ltd (2002) 119 FCR 429, Kebaro Pty Ltd v Saunders [2003] FCAFC 5, Life Therapeutics Ltd v Bell IXL Investments Ltd (No 2) (2008) 170 FCR 595). The exercise of such discretion is approached with caution - indeed it has been described as "rare and exceptional" (Vestris v Cashman (1998) 72 SASR 449 at 467, Kebaro [2003] FCAFC 5 at [103]) - and depends on the circumstances of each case as it is a "fact-specific jurisdiction" (Kebaro [2003] FCAFC 5 at [69]). Principles guiding the approach of the Court to the exercise of the (sic) include the following: • There must be a real link between the non-party and the proceedings, which is material to the issue of costs (Bischof v Adams [1992] 2 VR 198 at 204-205, Kebaro [2003] FCAFC 5 at [70]). • The mere fact that a person may benefit from litigation will not, without more, suffice to justify an award of costs (Bischof v Adams [1992] 2 VR 198 at 204-205, Vestris v Cashman (1998) 72 SASR 449, Kebaro [2003] FCAFC 5 at [70], Probiotec Ltd v The University of Melbourne (2008) 166 FCR 30 at [48]). • An order for costs may be appropriate - provided the interests of justice so require - where the party to litigation is an insolvent person or a man of straw, the non-party has played an active part in the conduct of the litigation and the non-party has an interest in the subject of the litigation (Mason CJ and Deane J in Knight (1992) 174 CLR 178 at 192). • Regard will be had to whether the non-party had been warned, or the non-party could have been joined as a party or applied to join earlier in the proceedings and thereby obtained the protection of the rules of the court (Vestris v Cashman (1998) 72 SASR 449, Kebaro [2003] FCAFC 5 at [75], Yates v Boland [2000] FCA 1895 at [32]). • It can be appropriate to exercise the power against a person who may be characterised as no more than a real party to the litigation in critical and important respects, albeit not the only such party (Kebaro [2003] FCAFC 5 at [111], Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406 at 414, Gore (2002) 119 FCR 429 at 439). • An order for costs may be appropriate where a non-party causes a party to bring or defend proceedings for his or her own financial benefit, either to gain the fruits of the litigation or to preserve assets in which the person has an interest (Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757 at 765). • Where a non-party has maintained or financed an action, or caused an action, or has some management of the action, a costs order may be appropriate (Symphony Group Plc v Hodgson [1993] 3 WLR 830 at 840). This may be the case where, for example, the nominal plaintiff is mentally incompetent and the non-party has a substantial interest in the outcome (Flinn v Flinn [1999] 3 VR 712). [21] Conversely, the courts have declined to order costs against a non-party: • Simply because the non-parties were directors of the plaintiff company and had caused the plaintiff to commence and maintain proceedings in circumstances where they ought to have known that, if the proceedings were unsuccessful, it was unlikely that the plaintiff could meet a costs order: Carborundum [1992] 3 NZLR 757. • Where the non-party had not been separately represented at the hearing of the primary proceedings. • Simply because the non-party is a legal expense insurer (Murphy v Young & Co's Brewery plc [1997] 1 WLR 1591). 54 The order will be made when, in the circumstances of the particular case, it is just and equitable that a non-party pay the costs of a party to the litigation: Vestris v Cashman (1998) 72 SASR 449 at 469 per Lander J. His Honour also said at 468: … In exercising the discretion regard would be had to whether the non-party could have been joined as a party earlier in the proceedings and thereby obtained the protection of the rules of court; whether the non-party has had any warning that an application for costs against that party would be made; whether, in those circumstances, the non-party could have applied to be joined in the proceedings and thereby had the capacity to influence the proceedings or the non-party could have protected itself by making an offer in accordance with the rules; whether if a warning had been given the non-party could have terminated the proceedings by discontinuance, negotiation, payment or otherwise; whether the party who would otherwise be usually liable for costs can meet an order for costs and if relevant the reason why that party cannot meet an order for costs; whether it was apparent at any earlier stage in the proceedings, and if so when, that the party could not meet costs; whether the moving party should have sought an order for security for costs; the relationship, if any, between the non-party and the party who would usually be liable for costs; whether the non-party has caused the proceedings; whether the non-party has funded the proceedings; whether the non-party stood to benefit by the litigation and if so how; whether the non-party had a direct or indirect financial interest in the litigation; and whether there has been any improper conduct on the part of the non-party. None of the matters will necessarily be decisive. Indeed the presence of one or more of those matters does not inexorably lead to the conclusion that an order for costs should be made against a non-party. In Bischof v Adams the mere fact that a person may benefit from the litigation was not enough. …

Consideration 34 There are two questions to resolve: should an order be made that Leonite pay Ballast Holdings' and Nextgen Financial's costs on an indemnity basis; and should an order be made that Valorum, Leonite's solicitors, be jointly and severally liable to pay the costs ordered by the Court. I address each of those questions in turn.

Should Leonite pay the plaintiffs' costs assessed on the indemnity basis? 35 The ground on which the plaintiffs succeeded, namely that there was a genuine dispute about the existence of the debt the subject of demands on the basis that Russell Cameron lacked corporate authority to sign the Loan Transaction Documents, was raised with Leonite in the 8 December 2022 Letter. 36 On 16 December 2022, when the plaintiffs filed and served their evidence, Leonite was put on notice of the factual matters underpinning that dispute. It was based upon that evidence that I was satisfied that there was a genuine dispute about the existence of the debt given that the Loan Transaction documents were signed by Mr Cameron who at the time was not a director of Ballast Holdings or Nextgen Financial and, based on the evidence before me, had no authority to sign those documents: see Ballast v Leonite at [63]-[64]. Further, I found that there was no evidence before me which undermined the existence of a genuine dispute about Mr Cameron's authority: see Ballast v Leonite at [66]. 37 On 15 May 2023 the plaintiffs again reiterated the basis upon which they contended there was a genuine dispute about the debt the subject of the statutory demands. It was at that time that the plaintiffs foreshadowed their intention to file applications for security for their costs. As at that date they had incurred approximately $30,000 in costs. 38 The threshold to establish a genuine dispute is not "difficult or demanding" to meet: see for example Kirrak Pty Ltd v Compass Scaffolding & Plant Hire Pty Ltd [2007] NSWSC 1002 at [3]. The claim must have some merit and be genuine and there must be a serious question to be tried: see Ballast v Leonite at [55]. In other words, the hurdle is low. 39 In light of the relatively low threshold that the plaintiffs had to meet and the uncontroverted evidence presented to Leonite about Mr Cameron's lack of authority to sign the Loan Transaction documents, I am satisfied that in this instance it is appropriate that an order be made that Leonite pay each of Ballast Holdings' and Nextgen Financial's costs on an indemnity basis from 16 December 2022, being the date on which they served their evidence. 40 The decision by Leonite to persist in its defence of the plaintiffs' applications to set aside the statutory demands gave rise to a relevant delinquency or alternatively a special or unusual feature sufficient to justify an award of indemnity costs: see Oshlack at [44] (Gaudron and Gummow JJ); Colgate-Palmolive Company at 233-4 (Sheppard J). It seems to me there was an obvious weakness in Leonite's defence of those applications in that it could not contradict the evidence that Mr Cameron was not an office holder and otherwise had no authority to sign the relevant documents. This weakness was made plain to Leonite. 41 Leonite submits that, in the alternative to the order sought by the plaintiffs, an order should be made that it pay the plaintiffs' costs to the extent agreed between the parties leading to the dismissal by consent of the plaintiffs' interlocutory applications for security for costs. The evidence before me allows me to infer that an arrangement was reached between Leonite and the plaintiffs in relation to the question of security and, I infer, pursuant to that arrangement the applications for security for costs were withdrawn and funds were and are held in Valorum's trust account. However, there was no evidence of the amount held and whether and how it might satisfy the plaintiffs' entitlement to their costs on a party-party basis or otherwise or any further explanation given as to why I would make the alternative order sought by Leonite.

Should an order be made that Valorum be jointly and severally liable to pay costs? 42 The plaintiffs submit that Valorum should be jointly liable to pay their costs as ordered by the Court because it served the statutory demands on its letterhead, gave its address for service and assisted Leonite to prepare its voluminous evidence, much of which was withdrawn or inadmissible. The plaintiffs contend that it can be inferred from the correspondence exchanged by the parties that Valorum did not advise Leonite to withdraw the statutory demands, otherwise it ought to have ceased to act for its client. 43 The plaintiffs submit that Valorum was instrumental in issuing and serving the statutory demands, their non-withdrawal and the resistance to the provision of financial information and/or an undertaking as to costs, that Valorum unfairly threatened an adverse costs orders against their solicitors a week from final hearing and that it is just and equitable that it be jointly liable for costs to avoid a worthless award of costs against Leonite if it fails to pay. 44 Leonite seeks the order against Valorum on the basis of s 459N of the Corporations Act or, in the alternative, s 43(3)(f) of the Federal Court Act. 45 As set out above, s 459N of the Corporations Act empowers the Court, where it sets aside a statutory demand, to order the person who served the demand to pay the company's costs of the application to set it aside. The plaintiffs seem to interpret this section to mean that the person who, for want of a better expression, physically served the demand can be ordered to pay costs. I do not think that is what is intended by s 459N. Rather, the person who served the demand is intended to mean the party who issued, or instructed the issue of, the demand, in this case Leonite. To construe the section otherwise could lead to potentially absurd or unintended results. For example, service can be effected by third parties retained for that purpose or a party's solicitor, as was the case here. That is not to say that the Court does not have power to order a non-party to pay costs in relation to a proceeding brought under the Corporations Act. It does: see Product People at [47]-[50]. 46 That the statutory demands were served under cover of letters from Valorum does not, in my view, make Valorum the party that "served the demand" for the purposes of s 459N of the Corporations Act. That party was Leonite. But even if I am wrong about that, I would not make the order sought by the plaintiffs either pursuant to s 459N of the Corporations Act or s 43(3)(f) of the Federal Court Act. 47 The plaintiffs rely on the principles set out in Product People (see [33] above). In particular, they rely on the proposition that a circumstance in which an order may be made against a third party is where that party "has played an active part in the conduct of the litigation and the non-party has an interest in the subject of the litigation", including if they have been put on notice and it is just and equitable. 48 The exercise of the discretion to award costs against a non-party to a proceeding is to be approached with caution. Here the facts relied on by the plaintiffs do not lead me to conclude that it is appropriate to make an order that Valorum is liable for any costs payable by Leonite. There is no evidence that Valorum caused Leonite to defend or continue to defend the proceedings at any time or that it influenced Leonite in the way suggested in relation to requests for documents or undertakings in relation to payment of costs. 49 As Leonite submits, there is no reason to believe that Valorum acted other than reasonably and on instructions. In addition, Valorum had no interest in the proceeding in the relevant sense and did not stand to benefit from them (other than for its fees in acting for Leonite). That is in contrast, for example, to Mr Jones, the non-party in Product People, who funded the litigation and provided an indemnity to the party issuing the statutory demand. 50 Finally, there is no evidence to suggest that a costs order against Leonite will be fruitless and will not be met. There is no evidence that Leonite is impecunious. Funds are held in trust by its solicitors, I infer, in substitution for the plaintiffs pressing their applications for security for costs and, it seems, by reason of security held by Leonite over the assets of Genesis in Australia it has assets available in the jurisdiction from which a costs order may be met.

Conclusion 51 The defendant should pay the plaintiffs' costs assessed on the ordinary basis up to 16 December 2022 and thereafter on an indemnity basis. I am not satisfied that any order should be made as against Valorum for liability for the plaintiffs' costs. 52 The plaintiffs effectively sought two orders in their respective interlocutory process. They have been partially successful and succeeded in obtaining one such order. In those circumstances each party should pay their own costs of the interlocutory process to which they are party. 53 I will make orders accordingly. I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Markovic.