- Cabport Pty Ltd v Marinchek

Judgment (8 paragraphs)

[1]

Solicitors: Bridges Lawyers (Plaintiff) Swaab Attorneys (Second and Third Defendants) Somerset Ryckmans (Fourth Defendant) File Number(s): 2018/9353

[2]

Judgment

By my judgment delivered on 20 March 2018 ([2018] NSWSC 351) ("Judgment") I found that the Plaintiff, Mr Kong Yao Chin, had not been validly appointed as voluntary administrator of Bean & Sprout Pty Ltd (admin apptd) ("Company") and indicated that I would not make an order under s 447A of the Corporations Act 2001 (Cth) to validate that purported appointment. I also indicated that, had it been necessary to do so, I would have made a further declaration sought by the Second and Third Defendants (to whom I will refer, without disrespect, by their Anglicised first names, "Joyce" and "Charles") under s 447A of the Corporations Act that Mr Chin's purported appointment as voluntary administrator of the Company was invalid and of no effect, had that declaration not already been made on Mr Chin's application. I held, in paragraphs 63 and 68 of the Judgment, that the Fourth Defendant, Mr Weigung Huang (to whom I will refer, also without disrespect, by his Anglicised first name, "Allan") lacked authority to appoint a voluntary administrator under s 436A of the Corporations Act, lacked a reasonable belief in the Company's insolvency or likely insolvency and did not have a proper purpose in making the appointment of Mr Chin as voluntary administrator of the Company.

Orders as to costs

The principles applicable to the making of an order for costs are well established and not controversial in this application, although it may raise one novel issue as to their application. The Court has discretion to determine by whom, to whom and to what extent costs are to be paid, and costs will ordinarily follow the event unless it appears to the Court that some other order should be made as to the whole or any part of the costs, in accordance with r 42.1 of the Uniform Civil Procedure Rules 2005 (NSW). A successful party has a "reasonable expectation" of being awarded costs against an unsuccessful party, unless there is good reason for that presumption to be displaced: Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at [44], [134]. In Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121], Hodgson JA (with whom Mason P agreed) observed that: "… underlying both the general rule that costs follow the event, and the qualifications to that rule, is the idea that costs should be paid in a way that is fair, having regard to what the court considers to be the responsibility of each party for the incurring of the costs." That observation was cited, with apparent approval, by the Court of Appeal in Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [98].
Mr Chin submitted that he was "successful" in his application under s 447C of the Corporations Act, which sought a declaration either that he was or was not validly appointed as voluntary administrator of the Company, such that the ordinary rule that costs follow the event ought to be enlivened. That proposition needs to be qualified by a recognition that Mr Chin had sought alternative orders that his appointment was either invalid or valid and was likely to succeed as to one or other of these binary alternatives. It seems to me that the proper characterisation of events is that, first, Mr Chin's application for a declaration as to the validity of his appointment was opposed by Joyce and Charles, he was not successful in obtaining that order and they were successful in their opposition to it. They, rightly in the circumstances, do not seek an order for costs against Mr Chin but there is no reason why they should be required to pay Mr Chin's costs of their successful opposition to that order. Mr Chin's alternative application for a declaration as to the invalidity of his appointment was actively opposed by Allan and Mr Chin was successful in obtaining that declaration over that opposition. As I noted in the Judgment, it seems to me that that would ordinarily have the result that Allan should be required to pay the costs of that application, although I will address the various submissions that Allan put in opposition to that outcome below. It also seems to me that Mr Chin is entitled to his costs of the application on the basis that it was plainly properly brought by him, and the proper approach would be for the unsuccessful party rather than the successful parties to pay those costs. Mr Chin also submits that he had not engaged in any conduct which would justify depriving him of his costs, and I can see no basis for a contention to the contrary.
Mr Chin's primary submission is that the Company should pay his costs of the application. The Company (which, as I noted above, had previously not taken an active role in the proceedings), Joyce and Charles submit that Mr Chin's costs of the proceedings should be borne by Allan and that there is no proper basis for an alternative order that Mr Chin's costs be borne by Joyce or Charles or by the Company. Mr Chin rightly accepts that this proposed order is an "unusual one" because the Company played a neutral role (or, more precisely, no active role) in the proceedings, although Allan, who claimed to be a director, and Joyce and Charles, who were found to be directors, played active roles in the proceedings in their personal capacities. The fact that the Company did not take an active role in respect of either of Mr Chin's alternative contentions was not surprising when there was then an open question as to whether it was under the control of its administrators or its directors and uncertainty as to whether Allan on the one hand or Allan, Joyce and Charles on the other were its directors. In those circumstances, there would ordinarily be no basis for an order for costs in favour of Mr Chin against a party which took no substantive role in respect of his application. Mr Chin's submission that a costs order should be made on that basis appeared to depend on the premise that he was successful in the proceedings, which I would only accept as against Allan and not against the Company (which did not take a position opposed to Mr Chin's) or Joyce and Charles (who sustained the position for which they contended).
Mr Chin properly recognises that he is not entitled to an indemnity out of the assets of the Company to recover his costs and expenses of the proceedings, where he was not validly appointed as voluntary administrator. I note, however, that there was reference in the proceedings to the fact that he had obtained an indemnity from Allan prior to his appointment. Mr Chin also submits that the proceedings were of "incontrovertible benefit" to the Company, a proposition which on occasion has been held to support an order for payment of remuneration of an invalidly appointed administrator. It seems to me that it would be a strained use of language, to say the least, to suggest that the Company benefited, still less incontrovertibly benefited, from being drawn into proceedings to establish that a voluntary administrator was invalidly appointed to it.
Mr Chin also submits that, if Allan was ordered to pay his costs instead of the Company, he would be exposed to a credit risk in seeking to recover his costs from Allan, who is a natural person, rather than the Company. However, Mr Chin does not identify any authority that supports the making of a costs order of the kind that he seeks on that basis. Mr Chin also notes the possibility that the making of such a costs order against the Company could be combined with an order requiring Allan to pay the Company an amount by way of reimbursement of costs, but that proposition does not establish a basis for making such an order against the Company in the first place. While I can appreciate that Mr Chin may, for practical reasons, prefer to have a claim for costs against the Company rather than a claim for costs against Allan, his submissions do not identify any legal basis for making a costs order against the Company, which took no active role in the proceedings, and I am not satisfied that such an order should be made.
Alternatively, Mr Chin seeks an order that Allan should be required to pay his costs of the proceedings on an indemnity or ordinary basis. I am satisfied that such an order for costs should be made in Mr Chin's favour and against Allan, where Allan opposed the alternative order sought by Mr Chin as to the invalidity of his appointment as a voluntary administrator. I address the question whether that order should be made on an indemnity basis below.
The Company (which, as I noted above, had not previously taken an active role), Joyce and Charles also sought an order that Allan pay the Company's, Joyce's and Charles' costs of the proceedings, and that order (so far as it concerned Joyce and Charles) was consistent with the possible order as to costs to which I referred in the substantive judgment. I do not consider that order can be extended to the Company's costs of the proceedings where, as I noted above, the Company took no active role in the proceedings. Joyce and Charles also sought an order that the costs incurred by them be on an indemnity basis or, in the alternative, on an ordinary basis until 5 February 2018 and then on an indemnity basis from that date. I will address the question whether that order should be made on an indemnity basis below.
Allan submits that Mr Chin's costs should be borne by the Company and that he should have to pay no more than 25% of the costs of Joyce and Charles from 5 February 2018, on a party/party basis. Allan resists an order for costs against him, or seeks to limit the scope of that order, on the basis that, first, that he was granted leave to appear under r 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW) on 10 and 11 January 2018 and was not joined as Fourth Defendant until 5 February 2018, when he was joined on his application. He submits that ten of the thirteen affidavits filed by Mr Chin, Joyce and Charles had already been served by that date. It seems to me that that submission does not assist Allan. First, by being joined as Fourth Defendant to the proceedings, and electing to oppose the application, Allan exposed himself to a potential order for costs, if he was unsuccessful in the proceedings. The evidence on which Mr Chin, Joyce and Charles relied in chief, and their reply evidence, was necessary to meet the case that Allan put against them, when he elected to be joined as a defendant and became the only active proponent for the validity of the appointment of Mr Chin as voluntary administrator and the only active opponent to a finding of invalidity of that appointment. It does not seem to me that he is in a better position, in that respect, because he chose to be joined late, where much of the evidence on which Mr Chin and the Defendants relied was ultimately necessary to meet the case which he advanced.
In any event, Allan rightly recognises, in submissions, that the Court may make an order for costs against a person who is heard in proceedings under r 2.13(2) of the Supreme Court (Corporations) Rules. An order for costs could be made against Allan, where he had been heard under r 2.13 of the Supreme Court (Corporations) Rules on 10 and 11 January 2018, and his involvement in the proceedings had, as it plainly did, substantially increased the costs to which the other parties were exposed: compare Re DSHE Holdings Ltd (recs and mgrs apptd) (in liq) [2018] NSWSC 275, in which persons heard under that rule were required to bear a substantial portion of the other party's costs of an application. There is more reason to make such an order against a person who is joined as party to the proceedings rather than heard in them, under that rule.
Allan also submits that his involvement in the proceedings before or after 5 February 2018 did not enlarge the scope of the proceedings and that he was a necessary contradictor as the Court could not make an informed determination on Mr Chin's application as to the validity of his appointment, without Allan's evidence regarding the steps taken by Allan and another person in connection with the alteration to the Company's officeholders. I do not accept either of those submissions. It seems to me that Allan's active opposition to the orders sought, from at least 5 February 2018, substantially increased the costs and length of the proceedings from the position which would have existed had the matter been determined, for example, by reference to the documentary evidence, and without the need to address the evidence led by Allan and the submissions made by him (which were ultimately not accepted) that sought to establish that he was the only director of the Company at the time that he appointed a voluntary administrator to it. Allan's role, in that respect, was not as a necessary contradictor, leading evidence in a neutral attempt to assist the Court's inquiry, but as an opponent to one of the alternative cases put by Mr Chin, an opponent to the successful case advanced by Joyce and Charles, and a proponent of an unsuccessful case that he advanced. It seems to me that that position is properly reflected in an order for costs against him.
Allan also submits that, while he was joined as a party to the proceedings from 5 February 2018, he was not joined on his own application under r 2.13(4) of the Supreme Court (Corporations) Rules and that his position after that date remained essentially that of a "contradicting intervener". That submission is footnoted with the cryptic statement, unsupported by evidence, that: "Allan's consent to the Court's orders joining him as a party was given after [Joyce and Charles] had raised the spectre of an application by them to join Allan as a party to the proceedings and was compelled as [Joyce and Charles] had previously joined themselves as party to the proceedings." It does not seem to me that it is necessary to determine whether Allan had initiated voluntarily, or initiated in response to the Joyce's and Charles' position, or simply consented to, his joinder to the proceedings. Once he was joined, he conducted himself as a party to the proceedings, adopting an adversarial role, and the position as to costs should reflect the nature of his involvement in the proceedings.
Allan also submits that the Court should, in its discretion, limit the adverse costs ordered against him. It is sufficient to note that, having regard to the matters to which I have referred above, and the fact that I do not accept that Allan participated in the proceedings simply so as to draw a conflicting position to the Court's attention, I do not consider there is any basis to exercise the Court's discretion in that way.

Whether costs should be ordered against Allan on an indemnity basis

Mr Chin and Joyce and Charles seek an order that costs be ordered against Allan be paid on an indemnity basis. The basis on which the Court can make such an order is also well-established. Section 98(1)(c) of the Civil Procedure Act 2005 (NSW) permits the Court to order costs on an ordinary or an indemnity basis. Rule 42.2 of the Uniform Civil Procedure Rules provides that, unless the Court orders otherwise or the rules otherwise provide, costs payable are to be assessed on an ordinary basis. Rule 42.5 deals with an order for costs on an indemnity basis.
Costs are awarded on an ordinary basis unless there are exceptional circumstances: Leichhardt Municipal Council v Green [2004] NSWCA 341. An order for indemnity costs is not made to punish an unsuccessful plaintiff for persisting with a case that fails, but to compensate a successful defendant fully for costs incurred, when the Court takes the view that it was unreasonable for the plaintiff to have subjected that party to the expenditure of costs: Hamod v State of New South Wales [2002] FCAFC 97; (2002) 188 ALR 659 at [20]. Whether an indemnity costs order should be made depends, at least in part, on whether there was a relevant delinquency on the part of the unsuccessful party: Oshlack v Richmond River Council above at 89; Westpac Banking Corporation v Ollis [2007] NSWSC 1008 at [6]. In Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 7) [2008] NSWSC 199; (2008) 65 ACSR 324, McDougall J observed (at [24]) that there must usually be some special or unusual feature to justify departure from the ordinary rule as to costs, and that delinquency is not necessary for an order for indemnity costs, but is relevant to whether it should be made. The relevant principles were also considered by the Court of Appeal in Cabport Pty Ltd v Marinchek (No 2) [2013] NSWCA 131 at [6], where the Court observed that an order for indemnity costs may be made where conduct in proceedings is plainly unreasonable or involves an element of delinquency.
Mr Chin submits that the Court's power to make an order for indemnity costs extends beyond cases of unreasonableness, delinquency or persistence in a hopeless case, to the position "when the justice of the case might so require" or where there is some "special or unusual feature in the case to justify the Court in departing from the ordinary practice": Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 at [24]. Mr Chin submits that several factors are sufficiently special or unusual to justify an order for costs on an indemnity basis, namely that the proceedings were brought in the discharge of Mr Chin's duties under the Corporations Act; Mr Chin is not entitled to be indemnified out of the Company's assets to recover his costs and expenses of the proceedings; and Allan's conduct, by way of the invalid appointment of Mr Chin as voluntary administrator, has put him in that position. I accept, as I noted in the Judgment, that Mr Chin acted responsibly in bringing the proceedings and that the issues involved a degree of complexity. I also accept that an order for costs against Allan on the ordinary basis will leave Mr Chin exposed to a possible shortfall between the costs that he has paid his solicitors and Counsel, on a solicitor and client basis, and the costs which are recovered on an assessment or by agreement with Allan, but that seems to me to be an ordinary risk of litigation. To the extent that that risk confronts a voluntary administrator, the validity of whose appointment may be challenged, it could be mitigated by the voluntary administrator's seeking an indemnity as to costs from the person appointing the administrator. As I noted above, there was reference in this case to Mr Chin having already obtained at least a capped indemnity from Allan. I am not persuaded that those matters would, without more, support an order for indemnity costs in favour of Mr Chin against Allan. I address other matters that support such an order below.
The Company, Joyce and Charles submit that their costs should be borne by Allan on an indemnity basis, and refer to the well established principles as to the circumstances in which an order for indemnity costs should be made, including in respect of "plainly unreasonable" conduct of proceedings, to which I have referred above. They also refer to the circumstances in which orders for costs have been made on an indemnity basis, inter alia, where proceedings were commenced in wilful disregard of known facts or clearly established law, and also submit that the categories in which such costs are ordered are not closed and, by reference to Colgate-Palmolive Co v Cussons Pty Ltd above, that the question is whether the particular facts and circumstances of the case warrant the making of an order for payment of costs other than on a party/party basis.
The Company, Joyce and Charles refer, at some length, to the findings that I made in the Judgment that established the invalidity of Mr Chin's appointment as voluntary administrator of the Company, and submitted that Allan's conduct was plainly unreasonable and amounted to a delinquency for the purposes of making an order for indemnity costs against him. It is not necessary, in this costs judgment, to repeat at length the findings which had already been made in the Judgment, on which the Company, Joyce and Charles relied. The Company, Joyce and Charles also submit that Allan had been informed of their (or, more accurately, Joyce's and Charles') position from at least 8 January 2018 and they submit that, if Allan had acted reasonably, with regard to the information provided to him by Joyce's and Charles' solicitors on 8 January 2018, the proceedings that were commenced on 10 January 2018 may have been avoided. The Company, Joyce and Charles also refer to aspects of Allan's conduct of the proceedings, including his change of position as to whether he would be joined as party to the proceedings and would take an active role in them, and his delays in complying with orders made by the Court as to the filing of any relevant application, and his unsuccessful application seeking leave, on the morning of the hearing, to bring an application that the Company be wound up on the just and equitable ground under s 461(1)(k) of the Corporations Act. I do not find it necessary to rely on those matters in order to reach a finding that indemnity costs should be ordered against Allan.
In opposition to an order for indemnity costs, Allan refers to Joyce's and Charles' suggested "culpability" in the underlying events and circumstances, relating to changes in the officers of the relevant Chinese companies. That evidence does not assist Allan since, irrespective of the position in respect of the changes to the officers of those companies, I held in the Judgment that Allan had no reasonable basis for a belief that the Company was insolvent or likely to become insolvent at the relevant time, and the appointment of the voluntary administrator was made for an improper purpose, and the matters on which that finding was based were all known to Allan at that time. Allan also submits that the question of the validity of the actions taken in the related Chinese companies were obscured from Allan and "involved difficult questions of Chinese law regarding expert evidence", and that it was reasonable for Allan to put Joyce and Charles to proof on those matters. The difficulty with that submission, however, is that putting Joyce and Charles to proof of those matters, and succeeding on those matters, would not have assisted Allan where he had no reasonable basis for a belief that the Company was not in fact insolvent or likely to become insolvent as a matter of fact at the relevant time, and the appointment was also vitiated by an improper purpose. Where that was the case, Allan's contention that the appointment of the administrator was valid was bound to fail because, even if the changes of officers in the Chinese companies were invalid, or he was the sole director of the Company at the relevant time, the appointment of a voluntary administrator still did not satisfy the statutory requirements for such an appointment, and an appointment of a voluntary administrator made for an improper purpose would be set aside. It seems to me that these matters extend beyond a mere "weakness" of a case or an aspect of a case that might be insufficient to warrant an exercise of a discretion to award indemnity costs.
It seems to me that, quite apart from the issues as to the identity of the directors of the Company noted in the Judgment, which involved matters of Chinese law and disputed questions of fact, the position as to the Company's solvency and Allan's purposes in appointing the voluntary administrator was such that there was no reasonable prospect that the Court could have upheld the appointment of Me Chin as voluntary administrator in the circumstances. Although there was some contest as to the relevant facts, all of the relevant facts as to the Company's solvency and as to Allan's purpose in appointing the administrator, on which the finding of the invalidity of Mr Chin's appointment was founded, would have been known to Allan at all relevant times. That seems to me to be a sufficient basis to support an order for indemnity costs against Allan, both in respect of the costs payable to Joyce and Charles and the costs payable to Mr Chin.

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Judgment (8 paragraphs)

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