Buzzle Operations Pty Limited (in liq) v Apple Computer Australia Pty Ltd

CATCHWORDS : COSTS - determination of costs of proceedings - application for indemnity costs under Uniform Civil Procedure Rules, r 42.8 of disputing facts in notice to admit facts - whether court should make contrary order under r 42.8 - whether disputing party liable for costs if in a position to make informed assessment about whether facts should remain in dispute after 14 days - COSTS - release of security for costs - costs not yet assessed but will exceed security - release ordered

LEGISLATION CITED : Civil Procedure Act 2005 (NSW)

Townsend v Collova [2005] WASC 4 CASES CITED : Bostik Australia Pty Ltd v Liddiard (No 2) [2009] NSWCA 304 Lahoud v Lahoud [2006] NSWSC 126

Plaintiffs: Buzzle Operations Pty Ltd (In Liq) PARTIES : 2nd Plaintiff: Andrew Hugh Jenner Wily 1st Defendant: Apple Computer Australia Pty Ltd 2nd Defendant: James Likidis

COUNSEL : Plaintiffs: L V Gyles SC with J Shepard Defendants: C R C Newlinds SC with R C A Higgins

SOLICITORS : Plaintiffs: Piper Alderman Defendants: Clayton Utz

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2004/181828 Buzzle Operations Pty Limited (in liq) & 1 Or v Apple Computer Australia Pty Ltd & Ors (No. 2) JUDGMENT 1 HIS HONOUR: The plaintiffs seek an order that the defendants pay the plaintiffs' costs of disputing facts as set out in paragraphs 4, 5 and 6 of a notice to admit facts dated 5 July 2006 on the indemnity basis. 2 On 5 July 2006 the plaintiffs served a notice to admit facts. The notice required the defendants to admit the following facts including, " 1. Buzzle was insolvent as at 14 September 2000 and remained insolvent at all times up to and including March 2001. 2. Buzzle was insolvent as at 30 September 2000 and remained insolvent at all times up to and including March 2001. 3. Buzzle was insolvent as at 31 October 2000 and remained insolvent at all times up to and including March 2001. 4. Buzzle was insolvent as at 30 November 2000 and remained insolvent at all times up to and including March 2001. 5. Buzzle was insolvent as at 31 December 2000 and remained insolvent at all times up to and including March 2001. 6. Buzzle was insolvent at all times during February and March 2001. "

3 As a separate matter, the plaintiffs seek an order that the defendants pay the plaintiffs' costs of the issue of whether Buzzle Operations Pty Limited ("Buzzle") was insolvent at and from 6 November 2000 on the basis that this was an issue on which the plaintiffs succeeded. 4 The Uniform Civil Procedure Rules provide that if a party in receipt of a notice to admit facts does not serve on the requesting party a notice disputing any fact specified in the notice within 14 days, that fact is taken to be admitted for the purposes of the proceedings (Uniform Civil Procedure Rules, r 17.3(2)). Such an admission can only be withdrawn with leave. The defendants did not serve a notice disputing facts but this was because of an agreement reached between the solicitors for the parties. 5 On 7 July 2006 Clayton Utz, the solicitors for the defendants, wrote to Piper Alderman, the plaintiffs' solicitors, requesting that the plaintiffs reconsider their notice and withdraw it. They said: " If your clients do not withdraw their Notice to Admit Facts, we will be forced to go to the trouble of drafting a Notice to Dispute Facts without the benefit of our client's Defence to the Further Amended Statement of Claim ... "

6 It was then agreed between the solicitors for the parties that the defendants would not be taken to have admitted the facts in the notice because they did not serve a notice disputing facts. 7 The question of Buzzle's solvency remained in issue except to a very limited extent and then only from the commencement of the hearing. In opening submissions senior counsel for the defendants said that the defendants did not dispute that Buzzle was insolvent from 19 February 2001. Otherwise there was no admission. 8 Rule 42.8 provides: " 42.8 Dispute of fact subsequently proved or admitted

(1) In this rule: disputing party means the party who serves a notice disputing a fact under rule 17.3 (2). fact in dispute means the fact that is the subject of a notice served under rule 17.3 (2). requesting party means the party who is served with a notice disputing a fact under rule 17.3 (2).

(2) Unless the court orders otherwise, the disputing party must, after the conclusion of proceedings in which a fact in dispute is subsequently proved or is subsequently admitted by the disputing party, pay the requesting party's costs, assessed on an indemnity basis, being costs incurred by the requesting party: (a) in proving the fact, or (b) if the fact has not been proved - in preparation for the purpose of proving the fact. (3) An entitlement to costs under this rule is not affected by any order as to costs unless that order makes particular reference in that regard. "

9 Counsel for the defendants submitted that because no notice disputing a fact was served under r 17.3, the costs consequence in r 42.8(2) did not arise. I do not accept that submission. In my view when the solicitors for the parties agreed that the defendants were not to be taken to have admitted insolvency by not serving a notice disputing the facts, they are to be taken as having agreed that the parties would be in the same position as they would have been in had such a notice disputing facts been served. The need not to serve a notice arose because of the costs which that course would entail. The solicitors properly agreed to a course which would reduce costs, but I do not think that the defendants can be heard to say that they are not to be treated as if they had given notice. 10 In my view the question of the costs consequences flowing from the serving of the notice to admit facts is to be approached as if a notice disputing facts had been served and r 42.8(2) applied. 11 I have been taken to little authority on how the court should approach a decision as to whether to make a contrary order under r 42.8(2). As a matter of principle the discretion to make a contrary order is to be exercised having regard to s 56 of the Civil Procedure Act 2005 (NSW) and, in particular, in this case, what order is required to facilitate the just resolution of the real issues in the proceedings. In my view it would be a proper exercise of discretion under r 42.8 to make a contrary order if the facts sought to be admitted were significant to the outcome of the proceedings and if the party asked to make the admission was not, at the time the notice was served, in a position to assess whether the fact was or was not true. 12 I was referred to a decision of Le Miere J in Townsend v Collova [2005] WASC 4 where his Honour, dealing with an equivalent rule in Western Australia (albeit in somewhat different terms), said: " [19] The plaintiffs contend that the defendants did not admit the facts set out in paras 1 to 6 of the notice to admit facts and that the plaintiffs proved those facts at trial. The defendants admit those matters but submit that it is not reasonable to expect the defendants to admit those facts where they concerned information exclusively within the knowledge of the plaintiffs and the first defendant. In any event, the defendants submit, the costs incurred in proving these facts were minimal.

[20] Under O 66 r 3(2), if a party proves facts of which he sought admission by a notice and the disputing party did not admit the facts, the disputing party must pay the costs of proof of those facts unless a contrary order is made. The question raised in the present application, then, is whether the plaintiffs should be deprived of those costs. In general, the incidence of party and party costs in litigation does not depend on whether a matter was within a party's knowledge, it depends upon success. Order 30 r 2 and O 66 r 3(2) are intended to encourage parties, including those who expect to be ultimately successful, to consider realistically whether they will put the other party to the cost of proving each and every fact. In the absence of some special factor, the disputing party runs the risk that, if the party giving the notice to admit succeeds, a costs burden must be accepted. The use of costs orders as an incentive to narrow the issues, to shorten trials and to save costs is a part of litigation in this Court. In my opinion the primary question that a party in receipt of a notice to admit a fact must address is whether the notice-giver will prove that fact. In the circumstances of this case I see no reason to deprive the plaintiffs of their costs in relation to the facts set out in paras 1 to 6 of the plaintiffs' notice to admit facts. "

13 Counsel for the plaintiffs laid stress on his Honour's statement in paragraph 20 that, in general, the incidence of party and party costs in litigation does not depend on whether a matter is within a party's knowledge. In the context in which that was said, namely the context of the submission recorded in paragraph 19, his Honour might well be taken to be saying that it is not enough to justify a contrary order under the rule that the fact which a party is asked to admit is one which is not within his knowledge.

14 Where the issue is as to how a discretion is to be exercised, I do not think that much is to be gained by parsing and analysing judgments on different facts dealing with the exercise of a discretion. At least in this case I consider that it would be a sufficient basis to make a contrary order under the rule if the defendants were not in a position at the time the notice was served to assess whether or not Buzzle was insolvent at the dates specified in the notice. 15 Counsel for the defendants submitted that the whole question under the rule was to be tested with regard to the state of mind and the means of knowledge of the party receiving the notice during the short period the party receiving the notice had to consider it. Counsel submitted that if the party were acting reasonably in disputing the fact within the 14 days allowed for service of the notice disputing the fact, then that would satisfy the making of a contrary order and it would not be relevant to the exercise of discretion under the rule that at some later time the party had sufficient information from which it ought reasonably to have decided to admit the fact. I do not agree. A contrary order under the rule can be qualified. It can be made on terms. 16 If the defendants were not in a position to assess the truth of the facts sought to be admitted in the 14 days after the notice was served and they acted reasonably in disputing the facts, then it would be appropriate to make a contrary order. It does not follow that the order cannot be so framed that the party receiving the notice might be required to pay costs of proving the fact, either on the ordinary or the indemnity basis, from the time the party ought to have made the admission. 17 The plaintiffs contend that in July 2006 the defendants were in a position to assess whether Buzzle was in fact insolvent during the periods specified in the notice and, in particular, in the periods referred to in paragraphs 4, 5, and 6 of the notice. 18 The plaintiffs point to the following matters. First, I have found that by the end of December 2000 Apple had reasonable grounds to suspect that Buzzle was insolvent and did so suspect. 19 Secondly, the KPMG report of 19 February 2001 was known to the defendants and it stated that it was abundantly clear that Buzzle was then insolvent. 20 Thirdly, Apple had appointed receivers to Buzzle and Apple could have assessed from the information the receivers had gained whether Buzzle was insolvent at the times stated in the notice. 21 Fourthly, the substantial indebtedness of Buzzle was its indebtedness to Apple. 22 I do not think that these matters, even taken in combination, were sufficient to enable the defendants in July 2006, acting reasonably, to make an assessment of Buzzle's insolvency at the dates stated in the notice. A finding of suspicion of insolvency is, of course, not the same as a finding of the fact of insolvency. One can suspect facts that are not true. The KPMG report provided a good reason for Apple to have admitted Buzzle's insolvency from 19 February 2001. This Apple ultimately did. But that was not a sufficient basis to make any of the admissions sought in the notice. There was no evidence that the receivers had conducted the kind of analysis that would be required to make an assessment of the fact of Buzzle's insolvency at the relevant periods. There was no reason to think that the receivers would have spent money in making such an analysis which would not appear to have been relevant to the receivers' task. 23 Finally, although Apple knew that its own debts had not been paid in full, that would not be a sufficient basis for admitting the fact of insolvency at least from 30 November or 31 December 2000. It may well have been a sufficient basis upon which Apple could assess that Buzzle was insolvent at all times in February and March 2001, but the argument on this application did not proceed on the basis that I should make an order in relation to one of the paragraphs dealing with Buzzle's insolvency as distinct from considering all of the admissions sought in globo. In any event, an admission only of paragraph 6 would hardly have advanced matters or have saved costs. 24 It does not follow that the defendants remained in the position that they were unable to make an assessment of Buzzle's insolvency such that it was reasonable for the issues to have remained live issues up to and during the hearing. 25 On or about 8 December 2006 the plaintiffs served a report of Mr Cook, to which I referred at paragraph 148 and following in my reasons delivered on 30 March 2010 in these proceedings. I accepted Mr Cook's conclusions on solvency and I noted that there was no contrary expert evidence and that the defendants' submissions on the question of Buzzle's solvency were perfunctory. It was submitted for the defendants that Mr Cook's report did not provide a clear enough basis upon which they could make a decision whether to admit the fact of insolvency because Mr Cook made assumptions as to Buzzle's debts and the ageing of those debts which he did not seek to prove. 26 Counsel for the defendants submitted that the issues as to what debts Buzzle had incurred were not clarified until expert evidence was served, including expert evidence from the defendants and a joint report of experts on the level of debts was prepared. That evidence, it said, showed that the assumptions upon which Mr Cook had proceeded were not correct. I was not taken to the detail of the variances, or how such variances affected in a serious way Mr Cook's analysis. I do not think that they did affect that analysis. 27 In my view, from a reasonable time after the service of Mr Cook's report the defendants were in a position to make an informed assessment as to whether or not the facts in the notice to admit facts should remain in dispute. 28 Prima facie, therefore, I consider that the plaintiffs are entitled to an order that the defendants pay the plaintiffs' costs on an indemnity basis incurred from a reasonable time after service of Mr Cook's report where those costs relate solely to proof of Buzzle's insolvency. 29 Counsel for the defendants raised various discretionary matters which were said to warrant a refusal of the application. The defendants have not sought an order for indemnity costs, either generally or in relation to particular matters. Counsel referred to the service of numerous amendments to the pleadings, some of which were not proceeded with. Some of these, it was said, resulted in substantial costs being incurred, such as the issue concerning stamp duty. 30 I was told that a proposed amendment to pleadings had been served contending that the defendants were liable for being knowingly involved in a breach by the appointed directors of their directors' duties, but that claim was not pressed. Counsel also referred to the late service of very extensive documents by which the plaintiffs proved the debts that Buzzle had incurred. 31 I do not think all of these matters point in the same direction. Thus the late service of evidence from the plaintiffs' solicitor, and the service of the bundles of documents in relation to the incurring of debts, arose because, as I understand it, the defendants took the position that a joint report of experts on those matters could be used only as evidence on the issue of solvency. 32 There is a real question as to whether there was ever a real issue, in the sense that that expression is used in s 56 of the Civil Procedure Act, about that matter. I do not have the materials upon which I could assess the relevance to the present application of the way other parts of this long and complex litigation have been conducted. I do not think it would be right to select particular complaints in isolation. 33 I turn then to the other basis upon which the plaintiffs' application was put, namely that the plaintiffs had succeeded on the issue of solvency. But for the service of the notice to admit facts, I do not think that the plaintiffs' success on the issue of solvency would be a sufficient basis for the making of a special costs order in relation to that issue. I doubt that it can be considered as a separate and discrete issue. The Court generally does not attempt to differentiate between issues on which a party has been successful and those on which it has not (Bostik Australia Pty Ltd v Liddiard (No 2) [2009] NSWCA 304 at [38]). However, r 42.8 shows that where a notice to admit facts has been served and those facts are disputed, that is a sufficient basis for making a special costs order in relation to proof of those facts. 34 In the present case the fact I found was that Buzzle was insolvent from 6 November 2000. I observed that no different question arose as to whether the date was taken to be 3 or 6 November (at [143]) of my reasons. 6 November 2000 was the earliest date at which the plaintiffs needed to establish insolvency for any of the claims they advanced. 35 The notice to admit facts sought in paragraph 3 an admission that Buzzle was insolvent as at 31 October 2000. The plaintiffs do not seek an order for indemnity costs in relation to proof of solvency from 3 or 6 November 2000, doubtless because the finding was not that Buzzle was insolvent as at 31 October 2000. 36 The question of Buzzle's solvency was a single issue and it would be artificial to make different orders as to the costs of proof of solvency from, say, 30 November, as distinct from proof of insolvency from the time I found that Buzzle was insolvent. But because r 42.8 does not permit of an order of indemnity costs of proving Buzzle's insolvency from 6 November 2000, and because the matter is in any event in my general costs discretion under s 98 of the Civil Procedure Act, albeit informed by the considerations under r 42.8 had they been strictly applicable, I think the appropriate order is to make a separate order for the costs of proving Buzzle's insolvency without distinction as to date. I also think it appropriate that that order be made on the ordinary rather than the indemnity basis. 37 The plaintiffs will have incurred costs relating to proof of insolvency which also related to other issues and, in particular, the times at which debts were incurred. The plaintiffs had initially sought special costs orders in relation to proof of matters of quantum, but that application has not been proceeded with. That is to say I take it that the plaintiffs accept that the general costs order to be made, namely that the plaintiffs pay the defendants' costs of the proceedings, will apply also in relation to issues of quantum. 38 Given that the late affidavit of the plaintiffs' solicitor and the tender of documents arose because of the matter which was put in dispute concerning proof of the debts incurred by Buzzle for the purposes of the insolvent trading allegation, I do not think that the plaintiffs should be entitled under the costs order I will make in relation to proof of Buzzle's insolvency to recover their costs of an exercise of that kind which related to another issue, even though it might be said also to be relevant to the proof of insolvency. 39 There is a question as to what is a reasonable time after the service of Mr Cook's report from which the order should operate. I think a month is a reasonable period. 40 For these reasons I order that the defendants pay the plaintiffs' costs on the ordinary basis incurred from 8 January 2007 which relate solely to proof of Buzzle's insolvency. Subject to that order, I order that the plaintiffs pay the defendants' costs of the proceedings.

[Counsel addressed on release of security for costs.] 41 In my view it is not realistic to think that the amount which will become payable by the plaintiffs to the defendants pursuant to the cost orders I have made will be less than the amount of $1.1 million plus accrued interest presently held by the Court as security for the defendants' costs. It is in the interests of all parties that the moneys held as security be paid to the defendants so that they can be applied in reduction of the plaintiffs' liability for costs, given that that liability will shortly include a liability for interest on costs paid, pursuant to an order to be made under s 101(4) of the Civil Procedure Act. 42 The defendants accept that if any moneys received from the security held in the Court has to be repaid, then the moneys to be repaid will be repaid with interest at the rate prescribed in schedule 5 to the Uniform Civil Procedure Rules. 43 Rule 36.4 provides in substance that unless some other order is made, an order for costs which are to be assessed takes effect when the costs assessor's certificate is filed. The plaintiffs submit that that rule precludes the Court's making an order for release of the moneys held as security for costs before the costs order takes effect. If it were necessary to do so, I would order that for the purpose of payment out of the moneys held as security for costs, the costs orders which I have made today are to take effect forthwith, but I do not think it necessary to make such an order. 44 In my view the amounts held as security can be dealt with pursuant to orders of the Court and retain their character of security for costs that will become payable under orders that take effect in the future. Moneys when paid out can be dealt with as part of the general assets of the defendants, but they will not on that account lose their character as security for the costs which will be payable when the costs orders take effect. The defendants can have recourse to that security before the costs orders take effect, but they are still security for costs. 45 The defendants accept that the moneys the defendants will receive can be accounted for by being applied in whatever way the plaintiffs direct in reduction of the moneys to be payable by the defendants for costs and interest on costs. 46 There is no dispute that the defendants are entitled to orders pursuant to s 101(4) of the Civil Procedure Act for payment of interest on the costs and disbursements which have been paid over a long period. The orders to be made will reflect the form of orders in Lahoud v Lahoud [2006] NSWSC 126 with necessary adjustments. The form of order I propose under that subsection is as follows: 1. Order that the plaintiffs pay to the defendants interest at the rates set out in schedule 5 of the Uniform Civil Procedure Rules on the proportion (as calculated below) of each amount of costs and disbursements actually paid by the defendants from the date of payment of each amount until such time as the plaintiffs have paid to the defendants the amounts due under any order for costs made in these proceedings or until a further order is made relating to interest on costs in these proceedings. In this order the proportion of costs paid by the defendants on which interest is to run will be the proportion which the amount of costs and disbursements agreed to be payable, or allowed on assessment, or ordered pursuant to s 98(4)(c) of the Civil Procedure Act , after set-off of the amount payable by the defendants to the plaintiffs for costs, bears to the total amount of costs and disbursements the defendants have paid, or are liable to pay, to their legal representatives, in connection with the proceedings.

Reserve further consideration of whether interest on costs should continue to run.

[Counsel made no submissions as to the form of the above orders.] 47 I also make the following orders:

I give liberty to the parties to apply on reasonable notice.

I make an order in accordance with paragraphs 1 and 2 of the defendants' interlocutory process filed on 12 April 2010.

I order that those orders be stayed up to and including 11 May 2010.

I order that the plaintiffs pay the defendants' costs of and relating to the applications in paragraphs 1, 2 and 5 of the defendants' interlocutory process of 12 April 2010.

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