Brien & 1 Ors v Australasian Memory & 1 Ors

REVISED - 18 April, 2000 IN THE SUPREME COURT OF NEW SOUTH WALES IN EQUITY

No. 2933/97 In the matter of Australasian Memory Pty Limited ACN 003 636 324 and the Corporations Law Richard Campbell Brien First Plaintiff Steven Nicols Second Plaintiff Australasian Memory Pty Limited ACN 003 636 324 First Defendant Barry Charles Amor Second Defendant

No. 2945/97 Barry Charles Amor Plaintiff Australasian Memory Pty Ltd. Defendant

1 What, if any, cost orders should now be made in relation to the Plaintiffs' application? It was an application so far successful before myself as the trial judge and then before the Court of Appeal. It is presently the subject of a reserved judgment by the High Court, leave to appeal having been allowed on limited grounds. 2 I describe the application in general terms. It was for remedial orders under s447A and/or 1322 of the Corporations Law because the Plaintiffs, who were then administrators, had irregularly convened the second meeting of the creditors of the First Defendant Australasian Memory Pty Limited (in liq) ("the Company"). It was irregularly convened because that second meeting of creditors had been convened eight days earlier than that prescribed by s439A of the Corporations Law. That application necessarily embraced orders of a remedial character which had the effect of validating the subsequent appointment of the Plaintiffs as liquidator of the Company when the Company purportedly passed from administration to liquidation; see in particular order 2 and order 4(e) made on 19 September 1997. 3 The making of those orders was strenuously contested by the Second Defendant on a variety of grounds. This was in circumstances where an associated company of the Second Defendant had after the meeting been subsequently made the subject of a contested statutory demand in relation to a debt claimed against it by the Company through the Plaintiffs now purporting to act as liquidators. The Second Defendant was originally a director of the Company. He had not at the time opposed the convening of the meeting of creditors eight days early. He had indeed voted proxies for employees in support of the resolutions passed at the meeting. Indeed no director or creditor took issue with the prematurity of the convening date. This was in circumstances where there was urgency in doing so, in order to try to effectuate a sale of the Company as a going concern, though that failed. 4 The grounds upon which the Second Defendant contested the orders made were wide-ranging. They included a constitutional challenge to s447A, and to the extent available s1322, the merits of making such orders insofar as there were a discretion to do so, and finally arguments were put that these orders were outside the power to make remedial orders inter alia by reason of their retrospective operation. 5 It is only the latter question which is before the High Court. The High Court granted special leave on the question of the construction of s447A and s1322 of the Corporations Law but on no other ground. The Appellants have sought in subsequent submissions to have the High Court make a determination also as to the costs of the proceedings before me, a course which the Respondents oppose. 6 I am satisfied that I should deal now with the question of costs having contemplated the possibility of deferring that till after the High Court delivers its judgment. Ordinarily the trial court determines costs even though an appeal be contemplated and it is open of course for the appellate process to correct any cost orders made. Indeed if the Appellants are successful there may be that consequence in relation to the cost orders already made by the Court of Appeal. However, I have deferred the operation of the cost orders later made. 7 To my mind, the issues come down to this. Should the Plaintiffs, though entirely successful to date, bear the costs themselves? Or alternatively should the Company and thus the creditors bear such costs to the extent there are assets in the Company available to satisfy them when this is likely to leave a shortfall in their recovery? The basis for denying the Plaintiffs their costs, or part thereof, would be by reason of the Plaintiffs' application being properly characterised as an application for a dispensation. Ordinarily the party seeking the dispensation bears the cost, though successful. Or should the Plaintiffs be awarded costs against the Second Defendant, so costs follow the event and given that the earlier calling of the meeting was in the interests of creditors? Or is some compromise between these two extremes the proper answer? 8 There is authority for the proposition that the party who seeks a dispensation usually pays the other party's costs as the price of that dispensation. Thus Golski v Kirk (1987) 14 FCR 143 where Beaumont J says at 157: "The respondent seeks leave to cross appeal against the order for costs made by Miles CJ. The learned judge ordered that the respondent pay the costs of the application but, since the proceedings were interlocutory, leave to cross appeal is required. Costs are, of course, discretionary, and it will only be in rare cases that leave to appeal from a decision to award costs will be granted. There is nothing extraordinary about the order for costs made by Miles CJ. On the contrary, it is usual for a party seeking an indulgence to pay the costs of the application, especially where, as here, the application throws up a difficult legal question. Since I propose to allow the appeal with costs, the question is now academic. I would refuse leave to cross appeal."

9 Similarly Wilcox J dealt with an application for an extension of time pursuant to the Administrative Decisions (Judicial Review) Act in the same way, in Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344 at 353. Wilcox J said at 353: "Mr Bennett submitted that, whatever the result, his client should have an order for payment by the applicants of his costs of this application. In opposition, Mr Bannon mentioned two factors, neither of which I regard as persuasive. The first matter was that the various Ministers had been prepared to receive representations asking for reconsideration of the decision and that in that situation commercial people, such as the applicants, might well be hesitant to bring the matter to court. It seems to me that that submission overlooks the fact that there was a consistent course of refusal by the various Ministers and that the new discussions, as each point, occurred at the behest of the applicants and their various advisors. I do not think that a respondent is to be prejudiced in relation to costs because he is prepared politely to receive submissions seeking reconsideration. The second point made by Mr Bannon was that it would have been open to the respondent to consent to an order for extension and thus avoid the necessity for hearing. There may be cases where the appropriateness of an order extending time is so evident that it is unreasonable for a respondent to resist the application. That is not this case. In Wedesweiller Sheppard J made the costs of the successful application for extension of time costs in the applications for review. There were special features about that case which may have dictated that result. In the normal course an applicant for extension of time under s.11 should pay the costs incurred by the respondent in relation to the application. This is the general provision of the Federal Court Rules 1979 in relation to an application for an extension of time under the rules: see O.62, r.23 and L. Grollo Darwin Management Pty Ltd v Victor Plaster Products Pty Ltd (1978) 33 FLR 170 at 178-179 relating to the corresponding provision of the High Court Rules . I see no reason to distinguish between a case of an application for extension of time limited by the rules and a case, such as the present, in which the applicant seeks an extension of the time limited by an Act. There is a long line of authority to support the general rule that a successful applicant should pay the costs of the respondent of an application to set aside a default judgment: see Ritchie, Supreme Court Procedure NSW , par 34.5.4 and cases cited therein. Those authorities are based upon the fact that the default of the applicant has occasioned the necessity for the making of the application and that a respondent, other than in exceptional circumstances, should not be prejudiced in costs because of the applicant's default. The same principle applies to this case. Had the present applicants complied with the time requirements of s11 this application would not have been necessary. The applicant should pay the respondent's costs of this application."

10 Had the Plaintiffs as administrators adverted at the time to the potential contravention of s439A of the Corporations Law, prior to holding the prematurely convened second meeting, an application under s439A(6) could have been made. Such an application would have been entirely uncontroversial, short and straightforward. Even if the Second Defendant were to have opposed it, contrary to likelihood as the Second Defendant had yet to face the statutory demand against his associated company, the likely outcome would still have been an order abridging the convening period, which would not have needed to have been retrospective. In that circumstance, the only available ground of opposition would have been the merits of the application and that clearly favoured its grant. The likely cost order, even had there been that limited opposition, would have been against the Company. But the costs of such an half-hour application in the Duty List would have been a tiny fraction of those later incurred. It therefore would be artificial to somehow take a small portion of the costs later incurred and have that ordered against the Company, when quite clearly events took a fundamentally different course. 11 In my judgment, the Plaintiffs should have all of their costs against the Second Defendant. These should be paid to the exclusion of the First Defendant. It is undoubtedly the case that the actions taken by the Plaintiffs when Administrators and subsequently as Liquidators, were for the benefit of creditors. They were taken in circumstances of extreme urgency to try to maintain the value of the Company as a going concern. The following extracts from my judgment show this, taken from the report in (1997) 25 ACSR 1. (a) "The administrators' efforts were directed to the critical task of maximising the return to creditors by endeavouring to maintain the company as a going concern for as long as possible with the support of creditors, in particular those supplying stock, in order if possible to secure an advantageous sale of the business as a going concern." (p23) (b) "The prematurely called meeting of creditors - premature by only eight days - was accelerated in order for the meeting to provide an opportunity to try and persuade those creditors who had declined to supply stock to re-commence supply, in order to maintain the value of the Company as a going concern." (p23) (c) "At the adjourned meeting of creditors on 24 March 1997, it was thus resolved that the Company be wound up, by an overwhelming majority of the creditors attending; fifty-five creditors voted for winding up with one against and six abstentions - with the Second Defendant in the present proceedings as proxy for forty-five employees, voting for the winding up." (p23) (d) "Since [24 March 1997], the Plaintiffs have been acting as liquidators with it seems no appreciation of the likelihood of any challenge until the proceedings in May of this year in the Federal Court resulting in the decision of Justice Whitlam on 6 June 1997." (p24) (e) "I am satisfied on the material before me that the Plaintiffs acted throughout with the object of maximising the chances of the Company and as much as possible of its business continuing in existence and in a manner calculated to do so. Thus the accelerated meeting date was precisely to urge on supply creditors that they continue to supply the Company. Furthermore, I am satisfied that when it was clear that it was not possible for the Company or its business to continue in existence, the Plaintiffs took prompt action to provide for a fair and efficient winding up, being one that results in a better return for the Company's creditors and members than would have resulted from an immediate winding up of the Company. That conduct, including the conduct of calling the second meeting of creditors prematurely, was thus properly directed to fulfilment of the object of Pt 5.3A earlier set out." (p27)

12 In situations where administrators are working under tight time pressures in what is highly technical legislation, it would be undesirable for courts to be unduly pedantic or punitive. This is more particularly where, as here, the Administrators, on becoming liquidators (if such they did) incur costs ultimately the result of a non-creditor's contestation of a statutory demand, taken out by the Administrators in furtherance of the creditors' recovery of assets and thus their interests. No creditor has complained at the action taken by the Plaintiffs. That is not surprising. That action, as was found, was designed to fulfil the purposes of Pt 5.3A as set out in s435A of the Corporations Law. With the wisdom of hindsight, it would have been better had the Administrators appreciated that an application should have been made prior to the second meeting date under s439A(6) and made it then. But with a creditors' meeting to be brought forward eight days, that would have left very little time for the s439A(6) application to be made beforehand. The slip-up though unfortunate was understandable. Accordingly, I am satisfied that this of itself should not disbar the Plaintiffs from their costs of an entirely successful resistance thus far to the numerous challenges brought by the Second Defendant to the Plaintiffs' status as liquidators. 13 It is too simplistic to invoke as a principle, as if it were some universal talisman, that the party who seeks dispensation must inevitably pay its costs. That will still depend on the circumstances, though it be the "usual" outcome as the cases recognise. Indeed the present situation can be differentiated form the usual one, where some creditor resists the dispensation. Had here some of the creditors resisted the dispensation, that would have placed a very different cast on the situation before me. For it is to creditors that the Administrators primarily owe their duty to convene creditors' meetings, not to a potential debtor to the Company who at the time had no quarrel with the prematurity of the meeting. I say primarily, because there is also a broader public interest in maintaining the statutory timetable. The Second Defendant is not however in a position to invoke that public interest, for there is nothing in his circumstances which would do so. Nor was that timetable intended to be a rigid one, as evinced by the statutory power to modify it. 14 Therefore in Hohfeldian terms, the administrator's duty to hold meetings of creditors according to the statutory stipulations is matched by a correlative right on the part of creditors to have that statutory regime complied with; it is not however an absolute right, as the Court may still allow dispensation for proper cause. Creditors may not speak with one voice on whether dispensation should be allowed, but have varying interests. But in any event there is no such correlative right, qualified or otherwise on the part of the Second Defendant to insist on compliance; that is to say, beyond that implicit in his having locus standae to oppose any dispensation being given at all. No duty is owed by the administrator to a debtor, or former director, in the circumstances of the Second Defendant, such as could properly be described as the subject of a dispensation vis a vis the Second Defendant. His interests are fundamentally opposed to creditors, insofar as he seeks to resist recovery of a debt. It must not be overlooked that while this duty to hold the statutory meetings is to be exercised for the benefit of creditors and in the wider public interest in accordance with the time table laid down by s439A, the legislature made it capable of adjustment not only by s439A(6) but also by the dispensing powers in s447A of the Corporations Law and s1322, provided the conditions for that adjustment or dispensation have been made out. 15 Nor is it irrelevant to note the scope of the wide-ranging resistance mounted by the Second Defendant. It went well beyond the merits of the application to include a constitutional challenge and a challenge based on interpretation of the relevant provisions. That was a forensic choice properly open to the Second Defendant. But he cannot complain if, having lost so far, he has to bear the costs. The proceedings bore all the hallmarks of conventional and vigorously contested litigation. This was not a case of dispensation for the Administrators resisted by those to whom the duty to convene the meetings was primarily owed, namely the creditors. In those circumstances the proper order is for costs to follow the event. Creditors should not suffer by any of those costs being awarded against the Company, where the costs are so substantial and there is already a deficiency of assets.

ORDERS 16 1. The Second Defendant to pay to the Plaintiffs their costs of these proceedings.

2. The Second Defendant is ordered to pay (to the exclusion of the First Defendant) all legal costs payable to the legal representatives of the Defendants arising out of the conduct of these proceedings. 3. Noting that this is not opposed by the Plaintiffs, I stay the foregoing cost orders pending the handing down by the High Court of its decision in appeal S84 of 1999.

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