Canstruct Pty Ltd v Project Sea Dragon Pty Ltd

Background 5 There is no need to set out the background of the extensive dispute between the parties in any great detail. The plaintiff, Canstruct Pty Ltd (Canstruct), was successful in obtaining orders for the setting aside of the DOCA entered into by Project Sea Dragon and for its termination. It also succeeded in obtaining orders that Project Sea Dragon be wound up in insolvency. In other words, it had substantial success in the action; a success which was maintained on appeal. 6 There were three defendants to the proceeding: Project Sea Dragon, which was then subject to the DOCA; the deed administrators of that DOCA, being the second defendants; and the company, Seafarms. The latter held all the shares in Project Sea Dragon and had relevantly identical directors.

Consideration 7 Canstruct seeks an order that Project Sea Dragon and Seafarms pay its costs of the proceeding. It does not seek costs against the second respondent. The arguments advanced by Project Sea Dragon and Seafarms against this course are considered in turn.

Was Seafarms an appropriate party to the proceeding? 8 Despite Seafarms' contentions, there is no real question as to whether it ought to have been a party to the proceeding. The Court was asked to make orders that directly affected its rights or liabilities and, in those circumstances, it was a necessary party: John Alexander's Clubs Pty Ltd v White City Tennis Club (2010) 241 CLR 1, 46 [131] - [133]. It was appropriate that it was joined to the proceeding so that it would be bound by the orders made. 9 In particular, Seafarms' interest in the litigation arose because: (a) it was a contracting party to the DOCA, was the proponent of the DOCA, and provided $3.5 million as the proponent's contribution for the establishing of the deed fund. It may have suffered financial loss if Canstruct's action was successful; (b) the termination of the DOCA and the placing of Project Sea Dragon into liquidation would directly affect the rights of Seafarms for the following reasons: (i) Project Sea Dragon and its assets would cease to be under Seafarms' control; (ii) Project Sea Dragon would remain subject to the liability of certain creditors; (iii) Seafarms would possibly become exposed to the liability to a liquidator of Project Sea Dragon for damages under ss 588V and 588W of the Corporations Act 2001 (Cth) (Corporations Act) in amounts equal to the total of the debts incurred by Project Sea Dragon whilst trading during insolvency; and (iv) the termination of the DOCA would confer rights on Seafarms to the remaining amount of the deed fund, but would expose it to a contest with the liquidators as to the legal entitlement. 10 For the reasons above, the orders sought by Canstruct directly affected Seafarms' rights and liabilities. That rendered it a necessary party. 11 In addition, Canstruct's case made serious allegations against Seafarms and its directors in relation to its motives in proposing the DOCA and voting in favour of it. In particular, it was alleged that Seafarms and Project Sea Dragon attempted to orchestrate the voluntary administration and DOCA process to avoid funds being used by Seafarms to pay Canstruct the substantial amount then owing to it. It was further alleged that Seafarms had other improper purposes in proposing the DOCA, namely to avoid a liquidator's investigation into its conduct in relation to the insolvent trading of Project Sea Dragon and potential recovery action. It was also alleged that Seafarms had sought to misuse Pt 5.3A of the Corporations Act in a way that fell below standards of commercial morality. In effect, it was alleged that some $400,000 was sought to be used as a bribe to creditors to vote in favour of the DOCA. It was further alleged that Seafarms had cast its vote in favour of the DOCA for the purpose of obtaining certain collateral advantages from the process. 12 Those significant and serious allegations against Seafarms warranted its joinder as a party in order to allow the Court to rule upon those issues in a way that bound it. It would be repugnant to the ordinary operation of the Court's systems for those issues to be ventilated without giving Seafarms a fair opportunity to resist them. 13 It ought to be remarked that Seafarms could have avoided the risks of an adverse costs order by filing a submitting notice and taking no part in the litigation. However, it did not choose that course. It fully participated as an active party and, jointly with Project Sea Dragon, instructed solicitors and engaged counsel who advanced common arguments on their behalf. Indeed, it can be assumed that Seafarms funded the defence of Canstruct's claim - the evidence before the Court at the hearing was that Project Sea Dragon had no money or available cash of its own, and all of its bills were paid in the absolute discretion of Seafarms. 14 In this context it is also relevant that by their joint concise statement in response, Project Sea Dragon and Seafarms sought that the application be dismissed and that Canstruct pay their costs of the proceeding. Necessarily, both were wholly invested in the action and sought an order for costs in their favour. 15 Given the foregoing, there is, with respect, no substance to the proposition that Seafarms was not a proper party to the proceeding and nor is there any substance to the suggestion that it played no real part in the proceeding.

Does s 556(1)(b) of the Corporations Act affect the nature of the order to be made? 16 It is noted that making an order that Project Sea Dragon pay Canstruct's costs would accord Canstruct priority over other creditors of Project Sea Dragon by reason of s 556(1)(b) of the Corporations Act. That section provides: 556 Priority payments (1) Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims: … (b) if the Court ordered the winding up--next, the costs in respect of the application for the order (including the applicant's taxed costs payable under section 466); … 17 Contrary to the submissions of Project Sea Dragon and Seafarms, the making of an order for costs in favour of Canstruct against Project Sea Dragon would not confer any substantial advantage on the former company. However, even if it did, that is the purpose of s 556(1)(b). In this case substantial costs were incurred in obtaining the winding up order; those costs were necessitated by the circumstances which involved the failed attempt by Project Sea Dragon and Seafarms to prevent it. There is no reason why the statutory priorities should not be accorded their intended effect. 18 In any event, Canstruct is more than likely to seek to recover its costs from Seafarms before it seeks to recover them from Project Sea Dragon. Seafarms is in a financial position to pay Canstruct's costs, whereas Project Sea Dragon is already insolvent and will be unlikely to be able to satisfy the costs order. Further, Canstruct is a substantial creditor of Project Sea Dragon with the consequence being that, to the extent that it recovers its legal costs from the assets in the hands of the liquidators, there will be less to distribute to it and the other creditors than would otherwise be the case. It would be uncommercial for Canstruct to seek to recover its costs from Project Sea Dragon in the first instance.

Is there a need to limit the recovery of costs as against the insolvent company? 19 Project Sea Dragon and Seafarms also submitted that any order for costs should be made solely against Project Sea Dragon, such that the costs be payable in its winding up, as had occurred in some similar cases. That submission should also be rejected. 20 In this respect, no assistance can be derived from the decision in Australian Securities and Investments Commission v Midland Hwy Pty Ltd (2015) 110 ACSR 203, wherein the Court ordered that the costs of the application be costs in the winding up of the respondent company. There was nothing in that case which suggested that any other order should be made. Indeed, there was no other party against whom a costs order was sought. Similarly, the circumstances in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510 have no equivalence to the present. In particular, there was no parent company funding the litigation and seeking to orchestrate and then uphold the DOCA, and no other party against whom the order might be made. 21 The reality is that very little benefit can be derived from costs orders made in other matters, save in relation to general principle. The determination of the question of costs depends upon the particular circumstances of each case. Here, both Project Sea Dragon and Seafarms actively engaged in the litigation and were joint protagonists in the arrangements which sought to utilise the voluntary administration and DOCA process to achieve collateral purposes. There is no warrant for not making any order against either.

Appropriate costs order 22 In this case, the appropriate order pursuant to s 43 of the Federal Court of Australia Act 1976 (Cth) is that the costs follow the event. Canstruct was wholly successful against Project Sea Dragon and Seafarms and it ought be entitled to an order for costs against them. There are no circumstances which support any departure from this general rule.

Reserved costs 23 One issue arose as to the existence of reserved costs orders which were made on 14 April 2024 and 4 August 2024. There is no need to make any further order, in either respects; pursuant to r 40.03 of the Federal Court Rules 2011 (Cth), those costs will, without further order, be recoverable by Canstruct.

The deed administrators' costs 24 Separately, the deed administrators sought an order that their costs be paid out of the deed fund created under the now terminated DOCA. They did so on the basis that up until the date of termination, being 22 February 2024, they were entitled to be paid their legal costs out of that fund pursuant to cl 10.1(b) of the DOCA. Further, cl 10.2(e) provided that they were entitled to an indemnity in relation to their costs. They submitted that it was arguable that their entitlement to indemnity out of the deed fund remained despite the termination of the DOCA. They added that, notwithstanding its termination, they had an equitable right to an indemnity out of, and a lien over, the deed fund, to recover their remuneration and expenses: Cresvale Far East (in liq) v Cresvale Securities Ltd (No 2) (2001) 39 ACSR 622, 635 - 636 [70]; Wellnora Pty Ltd v Fiorentino (2008) 66 ACSR 229, 235 [24]. 25 The deed administrators indicated to the other parties that they intended to seek orders that their costs be paid out of the deed fund and there was no opposition by any party to that order. 26 Given that, until its termination, the deed administrators were entitled to recover their legal expenses from the deed fund, there is no reason why that entitlement should not be relied upon to make the orders which they now seek. That is particularly so given the absence of any opposition by any other interested party. 27 In the circumstances, there should also be an order that the deed administrators' costs of and incidental to the proceeding be paid out of the deed fund. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington.