BL & GY International Co Ltd v Hypec Electronics Pty Limited & Ors

Supreme Court of NSW|2002-06-28|Before: Mathews AJ, Mr J, Mr P

CITATION : BL & GY International Co Ltd v Hypec Electronics Pty Limited & Ors [2002] NSWSC 575 CURRENT JURISDICTION: Common Law FILE NUMBER(S) : SC 12674/97 HEARING DATE(S) : 15/3/02, 3/6/02, 7/6/02, 20/6/02, 21/6/02 JUDGMENT DATE : 28 June 2002

BL & GY International Co Limited - Plaintiff PARTIES : Hypec Electronics Pty Limited - first Defendant Colin Mead - Second Defendant Lucy Guitar Mead - Third Defendant JUDGMENT OF : Mathews AJ

LOWER COURT Supreme Court JURISDICTION : LOWER COURT 12674/97 FILE NUMBER(S) : LOWER COURT Mathews AJ JUDICIAL OFFICER :

COUNSEL : Mr J McCarthy QC with Mr Kildea, Mr P Bruckner - Plaintiff and Grace Yang Mr D Fagan with Mr V V Bedrossian - First and Second Defendant Ma & Co Plaintiff and Third Defendant SOLICITORS : Etheringtons Solicitors - First and Second Defendants Mr H Byrne - Third Defendant CATCHWORDS : Costs - plaintiff unsuccessful in principal proceedings, defendant unsuccessful in cross-claim - little or no separate evidence directed to cross-claim - plaintiff ordered to pay defendant's costs of entire proceedings - plaintiff's case found to be based on fabricated evidence - indemnity costs ordered - application for non-party to pay defendant's costs - whether the proceedings were an abuse of the process of the Court - whether costs should be awarded against a non-party who purported to commence the proceedings as an authorised director of the plaintiff - discretionary considerations involved - costs order made against non-party. LEGISLATION CITED : Corporations Law Oshlack v Richmond River Council (1998) 193 CLR 72 at 89 Knight v F.P. Special Assets Limited (1982) 174 CLR 178 CASES CITED : Williams v Spautz (1992) 174 CLR 509 Vestris v Cashman (1998) 72 SASR 449 Yates Property v Boland (1997) 147 ALR 685 DECISION : See paragraph 76

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

12674/97 BL & GY INTERNATIONAL CO LIMITED v HYPEC ELECTRONICS PTY LIMITED & ORS

1 HER HONOUR: On 14 February 2002 I delivered my reserved judgment in this matter. The judgment effectively represented a victory for the first and second defendants, although a cross-claim lodged by the first defendant was dismissed. The case having been a complex one, I reserved the question of costs. That issue has now been argued, and extensive written and oral submissions have been furnished on behalf of all parties. 2 There are essentially three issues which require to be determined in relation to costs. Before discussing them, I should say something of the background of the matter. It is fully set out in my judgment of 14 February 2002 and any detailed appraisal of the costs issue will require recourse to that judgment. However I think it appropriate to briefly describe the background of the matter here.

Factual background 3 The plaintiff in these proceedings, BL & GY International Co Limited (BL & GY), is a Taiwanese company. It is effectively owned by members of the Yang family, most of whom now live in Australia. Lucy Mead (previously Lucy Yang) and her mother each hold 44 percent of the shareholding, with 4 percent being held by each of Lucy's sisters, Grace Yang and Josephine Chen, and a further 4 percent by their father. The company has only ever had one director, Lucy Mead, who is registered as the "person in charge" of the company. However evidence was given that after Lucy Mead moved to Australia in 1982, the management of the company was taken over by her sister Grace Yang. In 1995 Grace also moved to Australia, and the management of the company was assumed by their younger sister, Josephine Chen. These changes were not reflected in the company's documentation, which continues to show Lucy Mead as the manager of the company. 4 In December 1982 Lucy Yang married Colin Mead, who had considerable interest and expertise in computers. The following year, after the two of them had visited Lucy's family in Taiwan, Colin Mead started a business of importing and selling electronic products, particularly computer parts. About a year later Lucy Mead joined him in the business. After the incorporation of the first defendant, Hypec Electronics Pty Limited (Hypec), the business was conducted entirely through that company. Colin and Lucy Mead were its sole directors and shareholders. 5 Between 1985 and 1996 Hypec purchased a large number of computer products from BL & GY in Taiwan. All paperwork on behalf of Hypec was conducted by Lucy Mead. Colin was involved in the technical aspects of the business and left the documentation to her. 6 Hypec's business thrived for a considerable period. However by late 1996 it became apparent that the company was in financial difficulties. In November 1996 Colin and Lucy Mead separated. Hypec has not operated since. 7 In March 1997 Colin Mead commenced proceedings in the Family Court of Australia, seeking division of his and Lucy's matrimonial property. On 17 September 1997 BL & GY filed the statement of claim in these proceedings, seeking $4,844,466 together with interest and costs. The original statement of claim alleged that this amount was owing pursuant to loans made by BL & GY to Hypec between 30 June 1992 and 30 June 1996. Both Colin and Lucy Mead were also joined as second and third defendants on a number of alternative bases, which included negligence and a breach of s 232 of the Corporations Law. Colin Mead defended the proceedings. However no defence was entered by either Hypec or Lucy Mead. On 4 December 1997 judgment was entered against Hypec for an amount in excess of $7.6 million together with costs. On 6 January 1998 judgment on liability was entered against Lucy Mead with damages to be assessed. 8 BL & GY proceeded to try and enforce its judgment against Hypec. On 7 May 2001 an order was made for the winding of that company upon BL & GY's petition. David Watson was appointed liquidator. Shortly afterwards, Colin Mead applied to the Equity Division of the Court seeking leave to intervene in these proceedings and to take responsibility for the proceedings on behalf of Hypec. On 21 August 2001, after a contested hearing, Einstein J made the orders as sought. 9 On 7 September 2001 Colin Mead, on behalf of Hypec, applied to have the judgment entered against it set aside. On 25 September 2001 Sully J made orders as sought, which included an order that Hypec have leave to file a defence in the proceedings and to issue a cross-claim against BL & GY, Lucy Mead and Grace Yang. 10 In October 2001 BL & GY filed a further amended statement of claim in which it pleaded its case as one of goods sold and delivered, rather than money owing under a loan agreement. The amount sought was increased to $7,484,466. The reason for this increase is detailed later, in para [19] of this judgment. 11 The hearing of the matter commenced on 5 November 2001. It was originally estimated to last five to seven days. However the case eventually occupied fifteen hearing days and was not completed until 26 November 2001. My judgment was delivered on 14 February 2002. 12 The issues raised at the hearing were complex and difficult. In essence, it was Hypec's and Colin Mead's case that the claim initiated by BL & GY was a fraudulent one, based on fabricated documents. In order to explore this contention, it was necessary to undertake a detailed analysis of the evidence as to the dealings between the parties and the consistency of the documentation provided by BL & GY. 13 The principal documents relied upon by BL & GY were, first, its general ledger, which was generally referred to in the proceedings as "Ex K". This ledger opened in January 1991 with a debit balance of approximately A$2.2 million and ended in September 1996 with a closing balance of A$4,884,466, being the amount initially claimed in these proceedings. This ledger was based on invoices said to have been sent by BL & GY to Hypec, as well as payments said to have been made by Hypec between 1991 and 1996. Photocopies of all these invoices, together with earlier invoices going back to 1987, were tendered into evidence and became generally known as "Ex L" . 14 In preparing Hypec's defence to these proceedings, Colin Mead obtained Customs records as to goods imported by Hypec from BL & GY. These records were obtained by supplying the Customs authorities with the Customs codes of both the supplier (BL & GY) and the owner (Hypec). It was not possible to search importations according to the name of the supplier or owner. Accordingly, the completeness of the records obtained by Mr Mead was dependent upon his having been able to locate and pass on every code used by both BL & GY and Hypec during the relevant period. 15 Mr Mead then set about correlating the Customs data with BL & GY's invoices as contained in Ex L. On no occasion did the prices in the Customs records match those on the invoices. On a few occasions the invoice prices were lower, but in the great majority of cases the invoice prices exceeded the Customs values, in most cases by very significant amounts. In many cases the invoice price was more than double the Customs value. There were some invoices which could not be matched with any Customs entry, and in some cases there were Customs entries with no corresponding invoice from BL & GY. According to the Customs records, the value of all goods imported by Hypec from BL & GY between March 1987 and September 1996 totalled a little over $4.1 million. By contrast, the amounts claimed in the BL & GY invoices for the same period was in the order of $9.39 million. 16 It was Colin Mead's and Hypec's case that the invoices in Ex L overstated both the quantity and the value of goods sent by BL & GY to Hypec. They were not genuine records of the actual transactions between the two companies. It was submitted that the Customs records constituted the only reliable indicator of the true position. It was also claimed that numerous payments had been made by Hypec to BL & GY which were not recorded in Ex K. Relying on the Hypec cheque butts and cash books, Colin Mead concluded that a total of over $7.6 million had been paid by Hypec to BL & GY between 1986 and 1996. Hypec's cross-claim against BL & GY sought repayment of the difference between that amount and the Customs value of the imported goods. 17 The principal witnesses in BL & GY's case were Lucy Mead, Grace Yang and their sister Josephine Chen. Before describing the nature of their evidence, I should say something about the position of Lucy Mead in the proceedings, as it is highly relevant to the costs issue. Although she was nominally a defendant in the proceedings, Lucy Mead was clearly identified with the plaintiff's interests. She remained registered as the person in charge of the plaintiff company and, at least on paper, was a 44 percent shareholder in that company. Her sisters and parents held the remaining 56 percent. She had allowed judgment to be signed against her, and she conceded that both she and Hypec were indebted to BL & GY in substantial amounts. She was a principal witness in the plaintiff's case. 18 Lucy Mead and her two sisters sought to explain the discrepancy between the amounts claimed in the invoices in Ex L and the prices set out in the Customs data by saying that, in the documentation from which the Customs records were taken, BL & GY invariably understated the value of the products it was sending to Hypec in order to minimise Customs duty payable by Hypec in Australia. They said that this was done at the request of Colin Mead, (a matter which he denied). Later, when the goods had been received into Australia, BL & GY routinely sent a new "commercial invoice" which set out the actual price of the goods. It was these commercial invoices which were reproduced in Ex L and listed in Ex K. It was no surprise, therefore, they said, that there was a significant discrepancy between the amounts recorded in the Customs entries and the amounts claimed in BL & GY's invoices. 19 As to the amounts which Hypec was said to have paid BL & GY, the plaintiff's case was firmly based on the proposition that no payments had been made other than those recorded in Ex K. Indeed it was the plaintiff's case that six credits, totalling $2.63, million which were recorded in Ex K during 1994, should be reversed. It was said that the credits had been recorded in order to reflect Lucy Mead's agreement to transfer a particular property to BL & GY in part payment of Hypec's debt to that company. As the property was never in fact transferred, it was submitted that the credits should not have been made and should be reversed. It was on this basis that, by the time of hearing, BL & GY's claim had been increased from $4,844,466 to $7,484,466. 20 One of the difficulties faced by the plaintiff in the case was that Hypec's records, particularly the cheque butts and cash books, showed a large number of payments to BL & GY, some of them for very large amounts, which were not recorded in Ex K. Lucy Mead, in her evidence in chief, said that it was she who had made these entries, and that virtually all of them were false. The amounts which were recorded as payments to BL & GY had in fact been utilised for other purposes, principally the purchase and improvement of properties in the joint names of Colin and Lucy Mead, or otherwise to support their extremely lavish lifestyle. 21 Other documents confirmed that at least some of the payments which were recorded in Hypec's books as having been paid to BL & GY had in fact been utilised for other purposes. Accordingly, no reliance could be placed on this aspect of Hypec's records. This was fatal to Hypec's cross-claim, as I shall explain shortly. 22 There were numerous grounds upon which Colin Mead and Hypec claimed that both Ex K and Ex L were patently false documents and that BL & GY's case against Hypec was a fraudulent one. I do not propose to go through all of them here. They are thoroughly detailed in my principal judgment. They included the course that these proceedings took, particularly the manner in which the nature of the plaintiff's case changed between September 1997 and November 2001. In addition, it was suggested that Grace Yang's and Lucy Mead's evidence relating to the credits of $2.63 million recorded in Ex K in 1994 was inherently so unlikely as to reflect adversely upon the credibility of both witnesses and also upon the reliability of Ex K. Very significantly, the last seven invoices in Ex L and Ex K post-dated the last shipment of goods from BL & GY to Hypec. Both Grace Yang and Josephine Chen sought to explain this phenomenon. Their evidence in this regard was so lacking in plausibility and credibility as to undermine their credit generally and to suggest collusion between them. Similarly, it gave rise to grave reservations about the veracity and reliability of Exs K and L. 23 A further highly significant matter which undermined the integrity of Ex K emerged from a comparison between that document and the Hypec financial records. The Hypec records were largely written up by Lucy Mead, although a number of entries had been made by Grace Yang. The Hypec cash books recorded all transactions with BL & GY as loan transactions. There was no indication whatsoever of any trading relationship between the companies. Most significantly, in each taxation year between 1993 and 1996 inclusive, Hypec's balance sheets, prepared from books written up by Lucy Mead, showed the balance owing under BL & GY's loan account on 30 June as being precisely the same amount as BL & GY's ledger, Ex K, claimed to be owing by Hypec as at 31 December of the same year. By way of illustration, Hypec's balance sheet at 30 June 1993 showed BL & GY's loan account to be $5,917,471. this was precisely the amount that Ex K showed to be owing by Hypec on 31 December 1993, notwithstanding that Ex K listed eight invoices, claiming a total of $760,000, which were dated between July and December of that year and which were therefore purportedly taken into account in reaching that figure. 24 This pattern recurred each year up to 1996. Moreover, when Lucy Mead was asked about this matter in cross-examination, she sought to explain it by reference to seven letters, each of them on BL & GY letterhead and signed by Josephine Chen, and each of them bearing date 30 June, the first being 30 June 1990 and the last 30 June 1996. For various reasons which I need not explore here, it was abundantly clear that these letters were not genuine. All of them appeared to have been written at much the same time and were patently designed to shore up a difficulty which was perceived in the plaintiff's case. As it was Lucy Mead who sought to rely on these records, their clearly spurious nature reflected very adversely upon her credibility. 25 The amount of payments made by Hypec to BL & GY was a central issue in the case. It was relevant both to BL & GY's claim and also to Hypec's cross-claim. According to Ex K, only $234,818 was paid by Hypec to BL & GY between 1 January 1991 and 31 December 1996. (This is putting aside the $2.63 million which appeared as credits in the 1994 records). Hypec's records constituted an inherently unreliable source of information as to payments made to BL & GY because, as Lucy Mead acknowledged, most of the amounts which were described as payment to BL & GY had in fact been utilised for other purposes. As to BL & GY's records, Hypec's solicitors attempted, over a considerable period of time, to obtain access to BL & GY's banking records. With one exception they were never produced. No adequate explanation was provided for the plaintiff's failure to produce these documents and I drew the inference that they would not have assisted the plaintiff's case. But there was one year's bank statements which it was in BL & GY's interest to produce. These were the 1994 statements, which BL & GY relied upon to show that the $2.63 million shown as credits in Ex K was not in fact received by the plaintiff. An analysis of these records, together with Hypec's records, showed that in that year at least thirteen Hypec cheques, totalling approximately $248,000, made their way into BL & GY's bank account in Taiwan. None of these were recorded in Ex K. Yet the plaintiff's case had always been that Ex K recorded every payment that was received by BL & GY from Hypec between 1991 and 1996. 26 Finally there was a considerable body of evidence from which I concluded that the prices claimed in the invoices in Ex L were inflated. I found the plaintiff's witnesses' explanation for the discrepancy between the amounts claimed in these invoices and the amounts set out in the Customs records to be unsatisfactory and implausible. The absence of the original BL & GY invoices, apparently caused by a flood at Lucy Mead's office earlier in 2001, was highly suspicious. Accordingly I concluded in my judgment that the prices charged in the commercial invoices were very unlikely to represent the amounts which Hypec had in fact agreed to pay to BL & GY. 27 This last conclusion, on its own, was sufficient to support a verdict for the defendants in the principal proceedings. 28 I turned then to the cross-claim. This depended upon reliable assessments being able to be made, first as to the amounts paid by Hypec to BL & GY during the relevant period, and second as to the value of the goods purchased by Hypec. Neither of these conditions could be met. As to the first matter, namely payments by Hypec to BL & GY, my finding was that no reliance whatsoever could be placed upon the Hypec records as written up by Lucy Mead, in the light of the evidence that many of these so-called payments had in fact been utilised for other purposes. The person in charge of Hypec's affairs in the liquidator's office, Mr Hodgson, expressed the view that none of the entries which showed payments to BL & GY made could be accepted as reliable without confirmation. Nor were the BL & GY bank statements available except for the year 1994 29 This alone would have been sufficient to dispose of the cross-claim. But there was a further basis upon which it could not have succeeded. The cross-claim depended upon a reliable assessment being able to be made as to the value of the goods imported by Hypec from BL & GY. In this regard the Customs records were the principal source of information. But for them to be complete, I had to be satisfied that Colin Mead had been able to locate all of Hypec's and BL & GY's Custom codes during the relevant period. I could not be affirmatively satisfied of this matter, and therefore could not exclude the possibility that other importations might have taken place which were not before the Court. 30 On both these grounds, the cross-claim could not succeed. Issues raised as to costs. 31 I turn now to discuss the costs issues which have been raised in this most unusual case. I should preface this discussion by pointing out that Hypec's costs are, because of the way the litigation has been conducted, entirely the responsibility of Colin Mead. The liquidator initially sought to intervene in the costs proceedings but withdrew from them upon all parties agreeing that no costs order would be sought either for or against Hypec. It was Colin Mead personally who conducted the defence on behalf of Hypec and he is the person who will have to bear any costs payable by the defendant and will gain the benefit of any costs orders in its favour. 32 The three issues in dispute are as follows:

the costs of the cross-claim?
should Colin Mead receive costs on an indemnity basis? 3. should Lucy Mead and/or Grace Yang be ordered to pay BL & GY's costs?

Costs of the cross-claim 33 The defendant having failed in its cross-claim, the normal order would be that the plaintiff pay the costs of the claim and the defendant pay the costs of the cross-claim. However it was submitted on behalf of Mr Mead that the appropriate order in this case would be that he receive the whole of the costs in respect of the entire proceedings. It was pointed out in support of this submission that only a very small portion of the parties' overall costs of the proceedings could be attributed to the cross-claim. Very little of the pre-trial costs could have been incurred in relation to it, as the cross-claim was filed only about five weeks before the hearing. As to the costs at the hearing, the evidence which was relevant to the cross-claim was precisely co-extensive, it was submitted, with that which was relevant to the principal claim. 34 Mr McCarthy QC, who appeared for BL & GY and Grace Yang on the costs issue, submitted that there was no reason to vary the normal order. Mr McCarthy relied upon a report from the liquidator dated 17 September 2001 in which he analysed the material then available to him and concluded that the cross-claim was unlikely to succeed. This opinion was made known to Mr Mead. In these circumstances, Mr McCarthy submitted, the cross-claim should not have been lodged and no latitude should be allowed to Mr Mead in relation to the costs attributable to it. 35 I do not wish in any way to derogate from the thoroughness of the liquidator's report. However, there was a great deal of material which was adduced in evidence at the hearing which was apparently unavailable to the liquidator. Moreover, throughout this period, and up to a date even after the commencement of the hearing, the defendant was still trying to obtain access to BL & GY's bank records. Had they been produced, an accurate assessment of the payments made by Hypec to BL & GY might have been able to be made, as it was for the year 1994. This would have solved at least part of the problems faced by the proponents of the cross-claim. 36 An analysis of the evidence in this case supports the proposition that little if any further material was adduced on the cross-claim than was already relevant under the principal claim. Some time was spent on submissions relating to the cross-claim, but I am unable to identify any evidence which was adduced only on that issue. This is illustrated by the fact that my judgment, which consisted of 190 paragraphs, had only four paragraphs which exclusively related to the cross-claim. Moreover I accept the submissions made on behalf of Mr Mead, that the cross-claim was in substance a defensive measure. It was designed to accommodate to the possibility, which remained a possibility until the hearing had already commenced, that a balancing between the two companies might show an excess of payments over purchases. 37 In my view it would unnecessarily increase the complexity of the costing process if the cross-claim were to be treated separately from the principal claim. I propose to order that Mr Mead receive the costs of the entire proceedings.

Indemnity costs 38 It was submitted on behalf of Mr Mead that he should be ordered costs on an indemnity basis. The principal ground for making this submission was that "BL & GY's claim has been mounted and prosecuted upon deliberately and knowing false evidence." 39 Mr McCarthy submitted that this was not an appropriate case for indemnity costs. He referred to material which showed that the liquidator considered it likely that Mr Mead was involved with dishonest transactions in the administration of Hypec. This presumably refers to the misapplication of Hypec funds by Lucy Mead, for the benefit of both herself and her husband. The extent of Colin Mead's knowledge of these misapplications was not a relevant matter at the hearing, except in relation to his credibility. It is not a matter upon which I am in a position to draw any firm conclusions. However, I regard it as highly unlikely that he could have been unaware of the fact that his lavish lifestyle was being financed by company funds. 40 Having said that, I have difficulty in regarding this as a relevant matter on the issue of indemnity costs. On my finding, BL & GY raised a false claim against Hypec and, by extension against Mr Mead, which was based on fraudulent documentation. Hypec, whose registered office was then under the control of Lucy Mead, allowed judgment to be signed against it. Without the intervention of Colin Mead, Colin and Lucy Mead's assets would almost certainly have been "clawed back" through Hypec for the benefit of BL & GY. (see later, paragraph 56) 41 It is undisputed that the Court has inherent jurisdiction to order costs on an indemnity basis. The categories of circumstances in which this will occur are not closed. But it will always require unusual features to take a case out of the category where the ordinary rule applies, namely that costs be paid on a party and party basis. As Gaudron and Gummow JJ said in Oshlack v Richmond River Council (1998) 193 CLR 72 at 89, indemnity costs can be awarded in a case "involving some relevant delinquency on the part of the unsuccessful party." The purpose is not to punish the unsuccessful party but more fully or adequately to compensate the successful party to the disadvantage of the unsuccessful party. 42 A recitation of the background of this litigation provides some indication of its highly unusual features. I have not encountered a case like it in all my time in practice. The plaintiff's case was based on false documentation. Much of the oral evidence called by the plaintiff was similarly false and collusive. Mr Mead should not have been put to the expense of defending himself and Hypec in these proceedings. 43 In my view more than adequate ground has been shown for taking the unusual step of ordering that Mr Mead's costs be paid on an indemnity basis.

Should Lucy Mead and/or Grace Yang be ordered to pay BL & GY's costs? 44 It is submitted on behalf of Mr Mead that the appropriate costs order in this case is that, in addition to BL & GY, Lucy Mead and Grace Yang be ordered to pay his costs. This was the most controversial of the costs orders sought, and was strenuously challenged both by Mr McCarthy on behalf of Grace Yang and Mr Byrne on behalf of Lucy Mead. 45 I should say at the outset that, although Grace Yang and Lucy Mead were parties to some aspects of these proceedings, in terms of the costs order now sought by Mr Mead they must be treated as non-parties. This issue is therefore regulated by the body of law which relates to payment of costs by non-parties. 46 In the written submissions initially provided on behalf of Mr Mead, reliance was placed upon the categories of cases referred to by Mason CJ and Deane J in Knight v F.P. Special Assets Limited (1992) 174 CLR 178 at 192-93. However, as Mr Bedrossian later conceded, the categories referred to in Knight have been superseded by the enactment, in 1997, of Pt 52A r 4 of the Supreme Court Rules. As relevant here, that rule provides as follows: P.52A r.4 (1) The powers and discretions of the Court under section 76 of the Act (which relates to costs generally) shall be exercised subject to and in accordance with this Part. (2) Subject to subrule (5), the Court shall not, in the exercise of its powers and discretions under section 76 of the Act, make any order for costs against a person who is not a party. (3)… (4)… (5) Subrule (2) shall not limit the power of the Court to make any order: (a) under rule 43 or Part 42 rule 7 (f); (b) for payment by a relator in proceedings of the whole or any part of the costs of a party to the proceedings; (c) for payment by a person who: (i) is bound by an order made, or judgment given, by the Court in proceedings or is bound by an undertaking given to the Court in proceedings; and (ii) fails to comply with the order or the judgment or breaches the undertaking, of the whole or any part of the costs of a party to the proceedings occasioned by the failure or the breach; (d) for payment by a person who has committed contempt of court or an abuse of process of the Court of the whole or any part of the costs of a party to proceedings occasioned by the contempt or abuse of process; (e) in exercise of its supervisory jurisdiction over its own officers; (f) against a person who purports without authority to conduct proceedings in the name of another person; or (g) against a person who commences, carries on, enters an appearance in, or defends proceedings as the authorised director of a corporation, or purports to do so. (6) Save as mentioned in subrules (1) to (5), this Part has effect subject to the Act and to the rules and subject to any other Act. 47 It is common ground that the effect of Pt 52A r 4 is to restrict the power of the Court in making a costs order against a person who is not a party. It is also common ground that the only two paragraphs of sub rule (5) which are relevant to these proceedings are paragraphs (d) and (g). Paragraph (d) would, if the conditions were otherwise fulfilled, enable a costs order to be made against both Grace Yang and Lucy Mead. Paragraph (g) would enable an order to be made only against Grace Yang. 48 I shall discuss first the issues relating to paragraph (d). 49 It is the defendant's contention that paragraph (d) of Pt 52A r 5 applies in this case in that the commencement and continuation of these proceedings was an abuse of the process of the Court. 50 Numerous authorities were cited as to what constitutes an abuse of process of the Court. However in my view it is unnecessary to go beyond Williams v Spautz (1992) 174 CLR 509. A primary issue in that case was whether an abuse of process of the Court necessarily involved an improper act as well as an improper purpose. This is not a critical matter in the present case, for in my view the commencement and continuation of the present proceedings, based as it was on false evidence, clearly involved an improper act. However the majority of the Court in Spautz (Mason CJ, Dawson, Toohey and McHugh JJ) found that the existence of an improper act was not an essential ingredient in an abuse of process. They commented, however, that an improper act may, in appropriate circumstances, afford evidence of improper purpose and therefore of abuse of process. 51 According to the majority in Spautz, the essence of an abuse of process is that the Court's processes be used for an improper purpose. In this regard, their Honours made the following observations (at page 529): "It has been suggested that the criterion for abuse of process is whether the improper purpose is the sole purpose of the moving party. However, in more recent times it has been said, in our view correctly, that the predominant purpose is the criterion. That was the test applied by Lord Denning in Goldsmith v Sperrings Ltd and by the English Court of Appeal in Metall & Rohstoff v Donaldson Inc. In giving the judgment of the Court in the latter case, Slade LJ observed: "[A] person alleging such an abuse must show that the predominant purpose of the other party in using the legal process has been one other than that for which it was designed." It is, of course, well established that the onus of satisfying the court that there is an abuse of process lies upon the party alleging it. The onus is "a heavy one", to use the words of Scarman L J in Goldsmith v Sperrings Ltd and the power to grant a permanent stay is one to be exercised only in the most exceptional circumstances." 52 Accordingly, the focus in this case is upon the plaintiff's purpose in commencing the proceedings against Hypec and its directors. When I say "the plaintiff" I am primarily referring to Lucy Mead and Grace Yang. In spite of Lucy Mead's protestations to the contrary, I am satisfied that she was not only well aware that the proceedings were being commenced but was highly instrumental in their commencement. As to Grace Yang, she swore the affidavit in support of the original statement of claim and was apparently the person who gave all relevant instructions to BL & GY's legal advisers. 53 In support of Mr Mead's contention that the commencement and pursuance of these proceedings constituted an abuse of process of the Court, reliance was placed upon the following passage of my judgment in the primary proceedings. "It will be abundantly clear from the discussion thus far, that I have formed an extremely adverse view of the case sought to be presented by BL & GY. In my opinion Lucy Mead and her two sisters, particularly Grace Yang, have shown themselves to be entirely lacking in credibility and plausibility. Lucy Mead has admitted falsifying Hypec's records so as to conceal the misapplication of company funds. There is much to support the conclusion that she and her sisters have similarly falsified BL & GY's records so as to support a false claim against Hypec. A motive for doing this is easy to find, as Mr Fagan has pointed out. Hypec had no funds to meet BL & GY's judgment against it. Had the judgment not been set aside, recourse would almost certainly have been sought against Colin and Lucy Mead as directors. If successful, the properties in their joint names, which are now the subject of a property dispute in the Family Court, would presumably have been sold in order to meet BL & GY's judgment.

54 If I were to be satisfied that the claimant's dominant purpose in commencing the present proceedings was to frustrate the Family Court proceedings by diverting property held by Colin and Lucy Mead to BL & GY, this would clearly constitute an improper purpose so as to make the commencement of the proceedings an abuse of the Court's process. Mr McCarthy submits that there is inadequate evidence to affirmatively satisfy me that this was the purpose for which the proceedings were commenced. It was equally likely, he submitted, that BL & GY believed that Hypec owed it money and that it commenced these proceedings for the purpose of recovering money which it genuinely believed to be owing to it. The fact that BL & GY's case was based on false evidence and claimed an inflated amount is irrelevant if the purpose for which the proceedings were commenced was not an improper one. 55 I accept Mr McCarthy's submission in this respect. In order to find that, these proceedings constituted an abuse of the court's process I must be affirmatively satisfied that the dominant purpose in commencing them was to frustrate the Family Court proceedings 56 The matters relied upon by Mr Mead as establishing this improper purpose are, briefly, as follows:

• The sequence of events: Colin Mead commenced the Family Court proceedings in March 1997. In September 1997 the present proceedings were commenced, claiming money owed under loan transactions between BL & GY and Hypec.

• The fact that these proceedings were based on false and collusive evidence involving Lucy Mead and her two sisters.

• The fact that Lucy Mead failed to defend the proceedings on behalf of Hypec or herself and allowed judgment to be entered against both of them.

• The fact that Lucy Mead took an active role in supporting the plaintiff's case, including giving evidence for the plaintiff in terms which were shown to be false.

• Mr Mead also relies on evidence given by BL & GY's solicitor, Mr Mitchell, in interlocutory proceedings in this case before McClellan J on 4 October 2001. Mr Mitchell was being cross-examined by Mr Stitt QC, who appeared on that occasion for Hypec and Mr Mead. As relevant here, the following evidence was given: "STITT: Q. Did you understand the nature of the allegations which were made in the claim that was brought by BL & GY against Hypec and the Meads? A. I did. Q. And did you understand the nature of the allegations being made both against Lucy Mead and Colin Mead? A. I did. Q. Did you appreciate that Lucy Mead, not defending those proceedings, would put Colin Mead under pressure in relation to defending those proceedings? A. I don't understand what you mean by "under pressure". He defended the proceedings. My instructions were that was not anticipated. HIS HONOUR: Q. Sorry, I don't understand that your instructions were what? A. My instructions were that it was believed that there would be no defence to the proceedings and that the company would be liquidated and the assets clawed back, that was the purpose of joining the directors in at the time in the eventuality that did not occur. Q. So the assets would be clawed back to the benefit of the plaintiff? A. The plaintiff. Q. Colin Mead having no interest in the plaintiff? A. Colin Mead had no interest in the plaintiff. STITT: Q. The plaintiff is situated in Taiwan? A Correct." 57 In addition, reference should be made to answers given by Lucy Mead at an interview with the liquidator of Hypec on 7 August 2001. The transcript of this interview was tendered by Mr McCarthy on the costs issue. At page 6 of the transcript Lucy Mead said that her 44 percent shareholding in BL & GY was "only on paper." She had surrendered her shares to her parents and sisters, she said, although this had not been shown in the company's records. This is relevant to the question of improper purpose because, on one view of the matter, a success by BL & GY in these proceedings would only have served to divert part of the jointly held property of Colin and Lucy Mead away from the purview of the Family Court proceedings. Colin Mead could still have sought a share of Lucy's 44 percent shareholding in BL & GY. Lucy Mead's assertion that she had divested herself of her shares in that company could therefore be interpreted as a further attempt to ensure that any property which BL & GY "clawed back" as a result of these proceedings would be inaccessible to the Family Court. 58 The real question is whether the cumulation of these circumstances is sufficient to affirmatively satisfy me that the plaintiff's purpose in commencing these proceedings was to divert property away from the purview of the Family Court. The onus in this regard is, as stressed in Spautz, a heavy one. 59 I find this issue an extremely difficult one. The combination of the circumstances listed above is, to express it mildly, extremely suspicious. Both Lucy Mead and Grace Yang have shown themselves to be entirely lacking in credibility. The commencement of these proceedings was an improper act, based as it was on false evidence. As the majority said in Spautz, this can be a relevant consideration in determining whether there was an improper purpose. 60 There is one matter which weighs against the proposition that these proceedings were commenced to divert funds from the Family Court. This was not raised during submissions on the costs issue, but nevertheless it is a relevant matter. It is simply this. The evidence at the hearing tended to suggest that the falsification of BL & GY's records had been taking place over a considerable period of time. This can only have been done with the assistance of Lucy Mead, given the correlation between Hypec's figures at 30 June each year and the BL & GY balance as at 31 December. It is unnecessary here to explore Lucy Mead's or her sisters' motives for this. However there were a number of factors which made it appear that the falsification of documents might have taken place over a long period, rather than after the Family Court proceedings were commenced, by which time the two companies had long since ceased trading with each other. 61 The combination of the circumstances listed above is, as I have said, extremely suspicious. However given the heavy onus which applies in cases of this nature it is not, in my view, sufficient to affirmatively satisfy me that these proceedings were commenced with the improper purpose of diverting funds from the purview of the Family Court. 62 Accordingly no power exists under rule 52(A)(5)(d) to award costs against Lucy Mead or Grace Yang. 63 I turn now to paragraph (g) of sub rub 52A(5). This enables a costs order to be made against a non-party who, as relevant here, commences proceedings "as the authorised director of a corporation, or purports to do so." In fact Grace Yang is not and never has been a director of BL & GY. It has only ever had one director, namely Lucy Mead. However it was Grace Yang who swore the affidavit verifying the statement of claim which initiated these proceedings. She did so in the following terms: "1. I am a director of the plaintiff and am authorised to swear this affidavit on behalf of the plaintiff. 2. I believe that the allegations of fact in the statement of claim set out above are true." 64 As Mr McCarthy concedes, the swearing of this affidavit by Grace Yang places her within the purview of sub rule 5 (g) in that she purported to commence the proceedings as the authorised director of BL & GY. However, he urges that the Court should, in the exercise of its discretion, decline to make a costs order against her. Mr McCarthy also submitted that, if a costs order were to be made against Grace Yang, it should not extend beyond 31 October 2001. On that date an amended statement of claim was filed in the proceedings. Attached was an affidavit of Grace Yang in which she deposed to being authorised to verify the claim on behalf of the company but did not hold herself out as a director. 65 I shall deal with the second matter first. The "proceedings" in this matter are the proceedings that were commenced on the 17 September 1997. It was in those proceedings that the matter proceeded to trial and later to judgment. The mere fact that an amended pleading was filed during the course of the proceedings in which Grace Yang no longer held herself out to be a director of the plaintiff company in my view makes no difference to this issue. The whole of the proceedings were commenced by her, in her purported capacity as authorised director of the plaintiff. Accordingly, any costs to be awarded against Grace Yang can, on my finding, encompass the whole of the proceedings to date. 66 A number of discretionary matters were raised by Mr McCarthy which bear careful consideration. The first relates to Mr Mead's failure to seek appropriate security for costs against BL & GY. 67 A total of $130,000 was lodged by BL & GY as security for costs in these proceedings during the pre-hearing stage. (This amount has, since my judgment, been paid out to Mr Mead). Mr Mead sought an increase in the amount of security for costs before Master Harrison on 23 May 2000. This was rejected and an appeal to Greg James J was dismissed in July 2000. No further application was made by Mr Mead for increased security for costs prior to or during the course of the hearing. This was strongly relied upon by Mr McCarthy as a discretionary matter which should disentitle Mr Mead from now seeking a costs order against Grace Yang. In this regard he relied on Vestris v Cashman (1998) 72 SASR 449. At p 457 Olsson J (with whom Doyle CJ and Lander J agreed) listed a number of discretionary considerations bearing on the question of ordering costs against non-parties. As relevant here, he said: "A failure on the part of the successful litigant to make a timely application for security for costs is a relevant consideration, where it appears unlikely that a corporate litigant will be unable to pay any costs awarded against it. The availability of an order for security for costs at an earlier stage of the litigation will, in any situation, be a strong argument for refusing to exercise a discretion to order costs against a non-party: see Knight v FP Special Assets Ltd per Mason CJ and Deane J." "To express the concept in another fashion, common fairness dictates that a defendant seeking to place a non-party at risk of an order for costs must, either by bringing a timely application for security or, alternatively, at least by letter advising the defendant's intention, place the non-party on notice of that risk, so that the non-party will not, in effect, be lulled into a false sense of security and ambushed, when it is too late for it to reflect as contemplated in Yates Property Corporation Pty Ltd v Bolan." 68 Mr McCarthy also referred to the judgment of Branson J in Yates Property v Boland (1997) 147 ALR 685 at 695 where her Honour said: "The matter to which I refer is the failure of the respondents, or any of them, to apply for security for costs in the proceeding. In my view, such failure is a matter which, along with other matters, may appropriately be taken into account on an application of this kind. Where a company which is apparently without means to pay an order for costs in favour of a respondent initiates litigation, the appropriate course will ordinarily be for such respondent to seek an order for security for costs: see Knight's case per Dawson J at CLR 204. Those who stand behind the company may then make a decision, ordinarily at an early stage, as to whether to make the financial commitment necessary to allow the litigation to proceed." 69 The other discretionary matters relied upon by Mr McCarthy were:

• Grace Yang's limited interest in BL & GY. On paper, at least, she holds only 4 percent of the shares in that company.

• The fact that Mr Mead does not come to these proceedings with clean hands. 70 On the other hand, Mr Bedrossian has urged a number of discretionary considerations which he submits favour the making of a costs order against Grace Yang. It was she, according to the evidence, who gave all relevant instructions to BL & GY's legal advisers, at least up to and including October 2001. This was confirmed by Mr Mitchell in his evidence before McClellan J. He told the Court that he took instructions in respect of these proceedings solely from Grace Yang. Moreover it is apparent that Grace Yang has been substantially if not entirely financing the conduct of these proceedings. Affidavits were filed earlier this year as to Ms Yang's assets. These showed that she had raised a considerable amount of money in order to pay BL & GY's legal costs. One must therefore assume that she had a very close interest in the outcome of the proceedings. 71 It is very likely on the evidence that BL & GY is insolvent. The principal asset shown on its balance sheets between 1991 and 1996 was the alleged debt owing from Hypec. The company ceased trading in 1996 and is therefore most unlikely to have improved its position in the meantime. The fact that Grace Yang has expended large amounts of money in payment of BL & GY's legal costs would tend to support the conclusion that the company is unable to pay its own expenses. 72 In my view the factors supporting the making of a costs order against Grace Yang significantly outweigh those against it. I am unable to place great weight on Colin Mead's failure to seek further amounts by way of security for costs. In Vestris and Yates Property the plaintiff was an insolvent corporation. The principles expressed in those cases, whilst clearly apt in that situation, have far less significance in cases such as this. Given that Grace Yang was already funding BL & GY's legal costs, it is difficult to conceive how a further request for security for costs would have changed the course of the proceedings. Certainly she is only a 4 percent shareholder of BL & GY, but the fact that it was she who authorised the commencement of these proceedings and later paid BL & GY's legal advisers indicates that she had a very close involvement with the case and its outcome. 73 Colin Mead may well not be blameless so far as the misapplication of Hypec's funds is concerned. However that cannot in my view be regarded as a major consideration on this issue. The commencement and continuation of these proceedings, whilst not an abuse of the Court's process, constituted improper conduct in that it was, to Grace Yang's knowledge, based on false and fabricated evidence. If, as appears likely, BL & GY is unable to meet a costs order, it would be most unfair that Colin Mead should have to pay the costs of himself and Hypec in defending these claims. As Lander J said in Vestris at page 467 "Whilst the circumstances to make an order for costs against a non-party will be both rare and exceptional such an order can be made without the moving party having to demonstrate any improper conduct of any kind on the part of the non-party. An order for costs against a non-party is not dependent upon any improper conduct on the part of any party. Of course in some cases improper conduct on the part of the non-party will be a relevant factor in the exercise of the discretion." 74 Grace Yang's actions in relation to these proceedings, including the giving of false and collusive evidence, in my view constitute improper conduct which is relevant to this issue. 75 The circumstances of the present case are both rare and exceptional. In my view the interests of justice would best be served by ordering that both BL & GY and Grace Yang pay Colin Mead's costs. 76 The orders I therefore make are that BL & GY and Grace Yang are to pay the costs of Colin Mead on an indemnity basis being the costs incurred for himself and for his conduct of the proceedings in the name of Hypec Electronics Pty Limited in respect of the entire proceedings. Those costs include the following reserved costs:

Costs reserved on 9 December 1998 by G James J Costs reserved on 25 May 2000 by Master Harrison Costs reserved on 10 July 2001 by Bergin J Costs reserved on 25 September 2001 by Sully J.

Last Modified: 07/01/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

At a glance

Court

Decision date

Before

Source

Judgment (22 paragraphs)

Parties

Cases Cited (6)