Boylan v Collingwood-Smith [2010] NSWSC 651 | Case summary

2008/280885 - BOYLAN v COLLINGWOOD-SMITH JUDGMENT 1 HIS HONOUR: By orders that I made by consent yesterday, the proceeding, including the cross-claim, was disposed of, save as to costs, which were reserved. These reasons relate to costs. 2 By her amended summons the plaintiff claims, in para 1, an order that the first defendant, who is her former husband, and the second defendant, a company of which they are both directors (the Company), make available for inspection by the plaintiff and her appointed representatives, books and financial records of the Company. She seeks in para 2 an order that the documents be delivered to the offices of her solicitor. 3 Next, in para 3 of the amended summons, the plaintiff seeks an order that the first defendant provide a written account of all dealings with the Company in relation to all payments made by the Company, whether by way of loan or otherwise, to or at the direction of the first defendant and/or any company of which he was a director or shareholder at the relevant time. 4 By para 4 of the amended summons the plaintiff seeks an order that there be a referral pursuant to Rule 20.14 of the Uniform Civil Procedure Rules to an appropriately qualified person for the purpose of enquiring into the outstanding loans due to the Company and preparing a financial report and, in particular, a set of proper accounts in respect of the Company. 5 It is convenient to consider orders 1 and 2 as going together and relating to production of documents for inspection, and orders 3 and 4 as going together and relating to a taking of accounts, or at least a preparation of a report by a referee as to accounts. 6 The orders sought in paras 5 and 6 of the amended summons need not be discussed in detail. By para 6 the plaintiff sought a deferral of the operation of order 17 made by the Family Court of Australia on 14 February 2007 (see below) until after certain events. 7 The cross-claimants seek an order that the Company be wound up on the just and equitable ground. Subsection 467(4) of the Corporations Act 2001 (Cth) (the Act) is referred to. As well an order is sought that the Court appoint a liquidator of the Company, being a person as agreed or, in the alternative, as appointed by the Court. 8 In relation to the first two orders sought by the plaintiff, it should be noted at once that the Act gives her certain rights. In his written submissions Mr Cotman SC, who appeared for the plaintiff, refers to s 198F (director's right to inspect books), s 247A (Court's power to order that access to books be afforded to a member of a company) and s 290 (director entitled to access to financial records of a company). 9 The plaintiff's right under the Act is not disputed, but the first defendant was to argue that he, at least, had no further books or records to disclose and that if any existed, they were with the Company's former accountants, Owen T Daniel & Co, to whom the plaintiff should look. Mr Cotman said that this response was not good enough, since the accountants would hold any documents as agents for the Company or perhaps even for the first defendant. 10 Nothing that I have to say in these reasons for judgment is intended to detract from this proposition: the question of whether the plaintiff would have succeeded on the first two paragraphs of the amended summons is a matter that has not been resolved on the merits and in relation to those orders the appropriate order is that the parties bear their own costs. 11 I turn now to give a brief history of the facts. The Company was incorporated on 25 October 1979 and the first defendant became a director of it at that time. The plaintiff became a director of the Company on 24 October 1989. Both the plaintiff and the first defendant are shareholders of the Company. 12 The plaintiff and the first defendant married on 29 September 1990. In 2005 the marriage was in difficulty. On 14 February 2007 in proceeding SYC 788/07 the Family Court of Australia made certain orders by consent, including order 17 which was as follows: "That the husband and the wife do all acts, give all necessary instructions and execute all documents required to cause Harrow Productions to be liquidated and they agree to act upon the advice of the accountants of the company as to the time at which, and the manner in which the liquidation take place: 17.1. That the husband and wife will pay equally any costs incurred in the liquidation of Harrow Productions, including any tax which may be payable as a result of the liquidation." 13 The Family Court of Australia has extended the operation of this order from time to time in view of the pendency of this proceeding. 14 The accountants of the Company as at February 2007 were Owen T Daniel & Co. The plaintiff was concerned about certain items in the accounts that had been prepared by that firm. The plaintiff's concern related to shareholder loan accounts totalling $1,880,153.00 as at 30 June 2007 as shown in the accounts. The plaintiff says that she sought supporting documentation but without success. She was also concerned to note that members of the firm, according to a newspaper report, faced certain criminal charges. 15 In time, the first defendant with, I think, the consent of the plaintiff, instructed Gould Ralph Pty Limited (Gould Ralph) to conduct an independent review of the Company's accounts. That firm provided a lengthy report with annexures. Gould Ralph reconstructed the loan accounts in order to distribute the amounts payable as between the plaintiff and the first defendant. The plaintiff was not satisfied with the reconstruction and she commenced this proceeding on 26 September 2008. 16 Another important background fact is that the Australian Taxation Office was conducting an audit of the Company. Both the plaintiff and the first defendant were well aware of this: the audit extended to the questioning of them. In her affidavit sworn on 19 May 2009 the plaintiff referred at some length to the audit. Paragraphs 21-25 of the affidavit are as follows: "21. Annexed hereto and marked 'LAB 5' is a copy of a letter dated 28 November 2008 from the Australian Taxation Office to the first defendant ('ATO Audit Letter'). At the end of the first page of the ATO Audit Letter the second defendant is referred to. Approximately one third down on the second page of the ATO Audit Letter it is stated to the effect that the audit relates to a period of at least 16 years. 22. I am informed and verily believe that until the audit is concluded a liquidation of the second defendant is unlikely to be able to be finalised. 23. The audit as it relates to the second defendant concerns at least transactions purportedly entered into by the second defendant with entities in Vanuatu, including but not limited to an entity the name of which is, or is similar to, Lime Street General and Commercial Insurance Company and/or an entity the name of which is, or is similar to, Edgecumbe Finance. 24. In the above circumstances there is little point in appointing a liquidator to the second defendant until after the accounts of the second defendant have been finalised to the satisfaction of the plaintiff and the first defendant and until after conclusion of the audit by the Commissioner of Taxation. 25. An outcome of the audit may be amended assessments issued by the Commissioner of Taxation to the second defendant giving rise to further taxes payable by it." 17 When the hearing commenced on Wednesday 9 June Mr Cotman in opening took me to various features of the Gould Ralph report and its annexures with a view to showing anomalies. It has not been disputed that there may be a case for concluding that the reconstruction is not entirely satisfactory. This is not necessarily a criticism of Gould Ralph, because it seems that what has bedevilled the case is the lack of available records of a satisfactory nature, whoever may be to blame for that problem. 18 Soon after the hearing commenced on 9 June 2010 apparently senior counsel for the defendants asked Mr Cotman whether he was going to direct the Court's attention to a certain letter dated 17 May 2010 from the Australian Taxation Office (ATO). This enquiry caused the plaintiff some alarm, because, although there was no affidavit evidence to this effect, apparently the plaintiff was quite unaware of the letter. The letter is a lengthy one and is addressed to the first defendant in his capacity as a director of the Company. In summary, it stated that amended assessments were to be issued shortly to the Company covering the income years 1994 to 2007 in estimated total amounts of $3,895,804.53. In addition, the letter estimated interest charges of $1,723,666.10. The two amounts total $5,619,470.63. 19 It is clear that until the letter came to light the plaintiff had been proceeding on the basis that the Company was solvent, although, as I indicated, she was well aware of the audit being conducted and of the possibility that this might result in an assessment to tax. Paragraphs 5 and 6(a) of the amended summons referred to this possibility but not, according to Mr Cotman, to assessments of the kind and magnitude now threatened. 20 Upon production of the ATO letter, senior counsel for the plaintiff sought a brief adjournment, which was granted, and after taking instructions agreed overnight to the orders sought in the amended cross summons - a winding up of the Company and the appointment of a liquidator. 21 I recently discussed the authorities in relation to questions of costs where there has not been a hearing on the merits in Coffs Ex-Services Memorial & Sporting Club Ltd v Coffs Harbour Catholic Recreation & Sporting Club Ltd [2010] NSWSC 605 at [13]. One of the authorities there mentioned was One.Tel Ltd v Deputy Commissioner of Taxation (2000) 171 ALR 227. In that case Burchett J said (at [6]) that a distinction was to be drawn between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it cannot be said that one side has simply won, no issue remains between the parties except that of costs. His Honour said that in the former type of case there will commonly be lacking any basis for an exercise of the court's discretion otherwise than by an award of costs to the successful party. His Honour noted that it is the second type of case that more often creates a problem, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear costs. His Honour cited Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 (McHugh J). 22 Senior counsel for the first defendant says that the present case is quite simple: the plaintiff ultimately capitulated and the first defendant got the relief that was being sought in the amended cross-claim. I do not think the position is so simple. In One.Tel, Burchett J was not contemplating in his Honour's first category a capitulation that is prompted by a supervening event. The present case has elements of both the first and second categories. 23 The Court is given a wide discretion as to costs by s 98(1) of the Civil Procedure Act 2005, which provides that subject to the rules of court and to that and any other Act, costs are in the discretion of the Court and the Court has full power to determine by whom, to whom and to what extent costs are to be paid. The reason why I think that the simple submission made for the defendants does not necessarily prevail, concerns the ATO's letter dated 17 May which was not disclosed to the plaintiff until the hearing. 24 It is said on behalf of the first defendant that he had assumed that an identical letter was sent to his co-director, the plaintiff. It appears from the cover of the Court file that the Usual Order for Hearing was made on 1 April 2010. This would have required that there be included in the Court Book, which was to be filed not less than ten working days before the hearing date, relevantly, all documents to be relied upon at trial. It seems that this would have required the first defendant to include the letter. In any event, one would think that the first defendant, through his legal representatives, should have raised the letter for discussion with the legal representatives of the plaintiff. 25 It is put for the plaintiff that if she had been aware of the ATO's letter earlier, she would have agreed to a winding up promptly, as in fact she did on the hearing. It may be said, although the matter was not explored, that the first defendant did not intend to rely upon the letter at trial, but I think he probably would have done so, even if only as relevant to the exercise of discretion. It is difficult to accept, in a situation where both parties have proceeded on the footing that the only asset of the Company was the loan accounts totalling approximately $1,880,153.00, and that there were only one or two very small debts, that a possible debt to the Commissioner of $5,619,470.63 would not have assumed great importance on the hearing. 26 The plaintiff says that the appropriate order as to costs is that the parties bear their own respective costs down to 17 May 2010 and that after that the first defendant should pay the plaintiff's costs. I am not sure that even on this approach the appropriate date would be 17 May. Perhaps it would have been a little later or even the end of May, when the ten working days would have required the Court Book to be filed. 27 A difficulty with the plaintiff's submission is that the plaintiff always knew that the ATO might issue amended assessments to the Company. As noted earlier, paras 5 and 6(a) of the amended summons referred to the possibility. What she did not know was the basis and magnitude of the assessments that were foreshadowed by the ATO by its letter dated 17 May 2010. In these circumstances it is not clear to me that she can blame the first defendant entirely for her having pursued the proceeding after that date. 28 On the first defendant's side it is said that in any event the plaintiff's case was doomed to fail. The authorities to which I referred earlier show that it is appropriate to order a party to pay the other side's costs, even without an adjudication on the merits, if the party in question acted unreasonably in maintaining or defending the proceeding or if it is quite clear that that party would have failed in the proceeding. 29 It seemed to me that there were indeed difficulties confronting the plaintiff. 30 At the beginning of the hearing I raised with senior counsel for the plaintiff a difficulty that I had in relation to the taking of accounts. I put it to him that although this is a partnership type company, the fact remains that it is not a partnership and the taking of accounts is usually ordered where there is a dissolution of a partnership or mutual dealings between the parties to the taking of the accounts. Senior counsel frankly conceded that he was unaware of any case in which the remedy of the taking of accounts was ordered in the situation that prevails here. He insisted, however, that the equitable jurisdiction was broad enough to permit the remedy, and addressed arguments to the convenience offered by this course. My impression remained that the case was appropriate for a winding up in which the liquidator would be charged with the responsibility of working out what the correct amounts of the loan accounts were. However, I do not decide finally that the Court could not, as a matter of jurisdiction or power, have given the plaintiff in substance the relief that she sought. The question has not had to be resolved as on a final hearing. It is possible that on a final hearing the matter would have had to be resolved as an exercise of discretion. 31 In his written submissions on costs, senior counsel for the plaintiff refers to Meagher, Gummow and Lehane, Equity: Doctrines and Remedies (fourth edition) para [25-020]. There is nothing in that paragraph that takes the matter any further, it seems to me. That paragraph refers to a number of situations in which a taking of accounts has been ordered, but none of them is the present one. 32 In the alternative to seeking a taking of accounts, the plaintiff sought a reference out under Part 20 rule 14 of the Uniform Civil Procedure Rules 2005. That rule provides, relevantly: "At any stage of a proceeding the court may make an order for reference to a referee appointed by the court for inquiry and report by the referee on the whole of the proceeding or on any question arising in the proceeding." 33 The difficulty that I have with the suggestion that this rule assists the plaintiff is that it is difficult to see to what final relief the reference out would go. 34 Notwithstanding some doubt, I am not satisfied that the plaintiff brought or maintained the proceeding "unreasonably" or that the proceeding was necessarily doomed to fail. As I mentioned, at least there does appear to be reason for questioning the reconstruction by Gould Ralph, although my preliminary view is that this is a matter that was appropriate for exploration by a liquidator. Likewise, although the first defendant should have disclosed the ATO letter, and if he had done so the plaintiff probably (although not certainly) would have promptly consented to a winding up, it is not clear that this must lead to an order for costs in the plaintiff's favour. 35 One possible approach would be to order that the plaintiff pay costs down to 17 May 2010 and order that the first defendant pay costs after that date, except in each case as to orders 1 and 2 in the amended summons as to which each party would bear her or his own costs. I will not make either order for the reasons given above. 36 Many of the things that were said on costs from the bar table were not supported by affidavit evidence. I make no criticism of anyone in this respect, since one would certainly not wish to see an argument over costs develop into a mini trial. 37 In the result, I think that the case is one in which the usual approach should be taken, that is to say, that there should be no order as to costs, to the intent that the parties bear their own respective costs of the proceeding, including the cross-claim. 38 The order of the Court is that there is no order as to costs to the intent that the parties bear their own respective costs of the proceeding including the cross-claim.

Boylan v Collingwood-Smith

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Judgment (11 paragraphs)

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