- Cabport Pty Ltd v Marinchek

Supreme Court of NSW|2020-08-20|Before: Black J

Solicitors: John B Hajje & Associates (Plaintiff) Bell Lawyers (Second Defendant) File Number(s): 2020/191713

Background

By Originating Process filed on 29 June 2020, the Plaintiff, Mr Meads, applies for an order that the First Defendant, Techfire NSW Pty Ltd ("Techfire") be wound up under s 232 or s 461 of the Corporations Act 2001 (Cth) and for an order that a provisional liquidator be appointed to Techfire while that application was determined. Mr Meads is a 50% shareholder in Techfire. The other shareholder in Techfire, Mr Blom, was not joined as a defendant to the application until 3 July 2020, and I made an order appointing a provisional liquidator to Techfire on that date. Mr Meads then foreshadowed an application that Mr Blom pay the costs of the application for appointment of a provisional liquidator, and I reserved the costs of that application. On 3 August 2020, I made a further order, by consent, that a liquidator be appointed to Techfire. The parties have since agreed that the question of costs be determined on the papers.
Mr Meads relies on the affidavit dated 14 August 2020 of his solicitor, Ms Hajje, in support of the application for a costs order against Mr Blom. Ms Hajje refers to information provided to her by the provisional liquidator that its time costs and disbursements have exceeded Techfire's cash at bank, including amounts recovered as pre-appointment debts and pre-appointment cash-at-bank.

The applicable principles

Section 98 of the Civil Procedure Act 2005 (NSW) confers a discretionary power to determine costs on the Court and the case law requires that that discretion be exercised judicially. Section 98(1)(c) permits the Court to order costs on an ordinary or an indemnity basis. Rule 42.2 of the Uniform Civil Procedure Rules 2005 (NSW) 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. The jurisdiction to order costs is compensatory and not punitive and 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 [1998] HCA 11; (1998) 193 CLR 72 at 89. 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.
In Re Hillsea Pty Ltd [2019] NSWSC 1309 at [13], I summarised the principles applicable to an indemnity costs order as follows: "Costs are awarded on an ordinary basis unless there are exceptional circumstances …. 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 … 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 …" [citations omitted] That passage was in turn cited with approval by Hallen J in Smith v Shilkin (No 3) [2020] NSWSC 787 at [69].
Ms Williams, who appears for Mr Meads, also refers to an example of an order for costs paid on an indemnity basis against the director of an insolvent company in Vanguard 2017 Pty Ltd, Re Modena Properties Pty Ltd v Modena Properties Pty Ltd (No 2) [2018] FCA 1461. Mr Johnson, who appears for Mr Blom, distinguishes that judgment on the basis that it involved other factors, including conduct of the third party that had increased the costs of the proceedings.

The parties' submissions

By her written submissions dated 14 August 2020, Ms Williams indicates that Mr Meads seeks an order that Mr Blom pay his costs of the application for the appointment of a provisional liquidator and the remainder of his costs of the application to wind up Techfire, each on an indemnity basis. Ms Williams also refers to the history of the proceedings and the circumstances which led to the application. She submits that it is "fair and equitable" that the Court exercise a discretion in favour of an order that Mr Blom pay Mr Meads' costs of the appointment of the provisional liquidator on an indemnity basis as the application was necessitated by certain conduct of Mr Blom and there is a clear causal connection between that conduct and Mr Meads incurring the costs of that application. Ms Williams also refers to the provisional liquidator's report to the Court which indicate his view that, subject to any substantive response and supporting evidence from Mr Blom, the majority of unknown payments and withdrawals from Techfire may support a claim against Mr Blom or his immediate family members in respect of unreasonable director-related transactions. Ms Williams points to the provisional liquidator's observation that Techfire is insolvent and has limited funds and that it appears that Mr Blom has significant personal assets.
Ms Williams submits that costs should be ordered against Mr Blom on an indemnity basis because of a lack of engagement on his part with an earlier proposal for the appointment of a liquidator to Techfire, Techfire's insolvency before the application was commenced, the fact that Mr Blom had proposed to appoint a third party to deal with Techfire's assets, and because the appointment of a provisional liquidator was the only way in which Techfire's assets could be protected. Alternatively, Ms Williams submits that an order should be made that the Plaintiff's costs be assessed on an indemnity basis and reimbursed under s 466(2) by Techfire.
In response, Mr Johnson, who appears for Mr Blom, submits that the proceeding was commenced on 29 June 2020 and initially sought the winding up of Techfire and the appointment of a provisional liquidator on grounds other than insolvency; that Mr Blom was at all times a necessary party, as a shareholder of Techfire; that he was joined as Second Defendant by orders made on 3 July 2020 and a provisional liquidator was appointed on that date by consent as between Mr Meads and Mr Blom, although in circumstances that the Court needed to be and was affirmatively satisfied that the appointment of a provisional liquidator was appropriate before making that order. Mr Johnson also submits, and I accept, that a winding up order was not founded upon any final determination of the matters on which Mr Meads relied in the Originating Process.
Mr Johnson notes that an order for costs would be made in favour of Mr Meads against Techfire, by reason of s 466 of the Act. Mr Johnson accepts that, as a general rule, costs follow the event unless it appears to the Court that some other order ought to be made as to the whole or any other party of the costs. Mr Johnson submits that, where there has been no hearing on the merits of the matters sought to be agitated in the Originating Process, namely a dispute between the shareholders of Techfire, Mr Meads had not succeeded in the action on particular issues that would support an order for costs in his favour. Mr Johnson also submits that, where an order for costs is made against Techfire, some other order should be made to the effect that Mr Blom ought not to be liable for an order for costs. Mr Johnson submits, rightly, that it is not uncommon that a company that is the defendant in winding up proceedings does not have available funds and that is not sufficient to establish an order for costs against its shareholders.

Determination

I have already ordered that the Plaintiff's costs of the proceedings be paid out of the assets of the Company, and s 466(2) of the Act will apply in that respect. No further order is required in that respect. I am satisfied that an order for costs should also be made against Mr Blom on the usual basis that costs follow the event, but only from the date on which he was joined as Second Defendant in the proceedings, 3 July 2020, until the date a liquidator was appointed, on 3 August 2020. Such an order should properly be made on the basis that Mr Blom put Mr Meads to the costs of commencing the proceedings by not previously consenting to the appointment of a provisional liquidator or liquidator, either on the just and equitable ground or on the basis of Techfire's insolvency. Where Mr Blom put Mr Meads to the costs of commencing the proceedings, he cannot avoid liability for costs entirely by then not resisting the orders that were sought at the hearing. I do not consider that I should make a costs order against Mr Blom for steps in the proceedings that took place prior to his joinder.
I also do not consider that I should make an order for costs against him on the indemnity basis, where there was nothing unreasonable in Mr Blom's conduct of the proceedings where, as I noted above, he consented to the appointment of a provisional liquidator and to the winding up order after he was joined in the proceedings.
There has been a mixed result in this application, and there should therefore be no costs order as to the costs of this application.
Accordingly, I make the following orders: 1. The Second Defendant, Mr Blom, pay the Plaintiff's costs of the proceedings, on an ordinary basis, as agreed or as assessed from his joinder in the proceedings on 3 July 2020 to the date of appointment of a liquidator on 3 August 2020. 2. There be no order as to the costs of this costs application.

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. Decision last updated: 21 September 2020

Corporations Act 2001(NSW)

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