Capital Options (Aust) Pty Ltd v Hazratwala, in the matter of Weststate Consortium Pty Ltd

the application 10 Both the defendants and Mr Falconieri seek orders for costs on an indemnity basis and that Capital Options and Mr Bax, the sole director and shareholder of Capital Options and a non-party, be jointly and severally liable for those costs. 11 The defendants also seek an order that the costs payable be fixed in a lump sum.

Should there be an order for indemnity costs? 12 The usual position is that costs follow the event, those costs being taxed on a party and party basis. However, by s 43 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and "by virtue of its constitution as a superior court of record and a court of law and equity", the Court is empowered to make an order for indemnity costs: Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 228 (Colgate-Palmolive). 13 The power to order costs is discretionary. The power is not to be exercised arbitrarily but is to be exercised judicially, having regard to relevant principles and the justice of the case in all the circumstances: Minister for Immigration, Citizenship, Migrant Services and Multicultural Affairs v Mukiza [2022] FCAFC 105 at [4]. 14 The defendants and Mr Falconieri submit that an order for indemnity costs is appropriate given my findings in the Judgment that: (1) Capital Options failed to disclose relevant matters when it sought and obtained leave for Mr Bax to appear before the Registrar on an ex parte application seeking the summonses; and (2) the predominant purpose of the summonses was for the benefit of Capital Options, rather than to confer a benefit on Weststate Consortium Pty Ltd (Consortium) or its creditors. 15 The result of those findings was that Capital Options had engaged in an abuse of process. 16 Although the circumstances in which a Court will exercise its power to award indemnity costs are limited, such an order may be appropriate where there has been an abuse of the Court's process: Baillieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359 at 362 per Powell J. Ulterior purpose which amounts to an abuse of process may also attract an order for payment of indemnity costs: Packer v Meagher [1984] 3 NSWLR 486 at 500. 17 Further, by letters dated 27 January 2023 and 31 January 2023, the solicitors for Capital Options strenuously disavowed any basis for the discharge of the summonses and reserved their rights to tender that correspondence to support an order that the defendants pay Capital Options' costs of opposing the application on an indemnity basis: Affidavit of Clive Jeremy Hamilton Scott sworn 24 April 2023 Annexures 1 and 2. 18 Capital Options' opposition to the interlocutory application disregarded the known fact that there had been no disclosure to the Registrar of the liquidator's conclusions in the BDO Report and that, because of that non-disclosure, the Registrar's order must "almost invariably" be set aside. As was noted by Sheppard J in Colgate-Palmolive at 233-234: … some of the circumstances which have been thought to warrant the exercise of the discretion [to award costs other than on a party and party basis] … the fact that proceedings were commenced or continued for some ulterior motive (Davies in Ragata) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp (supra))… The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis. 19 I am satisfied that the circumstances of this case warrant an order for costs on an indemnity basis.

Who should pay? 20 It has been said that it is "rare" and "exceptional" for costs to be awarded against a non-party: see, eg, Vestris v Cashman (1998) 72 SASR 449 at 467; PMWorks Pty Ltd v Management Services Australia Pty Ltd (t/as Peak Performance PM) [2018] NSWCA 168 at [39]. 21 Nevertheless, it is clear that under s 43 of the FCA Act, the Court has power to award costs against a non-party. As was said by Thawley J in Hardingham v RP Data Pty Limited (Third Party Costs) [2023] FCA 480 at [19]: It is not in dispute that the power under s 43 extends to making costs orders against non-parties: Knight v FP Special Assets Limited [1992] HCA 28; 174 CLR 178. Plainly enough, the power to order costs against a third party would only be exercised in circumstances where a non-party has a connection to the litigation which is sufficient to warrant the exercise of the power. (Citations omitted.) See also Roberts-Smith v Fairfax Media Publications Pty Limited (No 42) [2023] FCA 750 at [6]-[9] per Besanko J. 22 In Knight v FP Special Assets Ltd [1992] HCA 28; 174 CLR 178, to which reference was made by Thawley J in Hardingham, Mason CJ and Deane J said (at 192-193): Obviously, the prima facie general principle is that an order for costs is only made against a party to the litigation. As our discussion of the earlier authorities indicates, there are, however, a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party. Thus, for example, there are several long-established categories of case in which equity recognized that it may be appropriate for such an order to be made. For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non- party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made. 23 As to the circumstances in which such an order might be made, "at least some, if not a majority" of the criteria were outlined by Basten JA (with whom Beazley and Giles JJA agreed) in FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 at [210] as follows: (a) the unsuccessful party to the proceeding was the moving party and not the defendant; (b) the source of the funds for the litigation was the non-party or its principal; (c) the conduct of the litigation was unreasonable or improper; (d) the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest; and (e) the unsuccessful party was insolvent or could otherwise be described as a person of straw. 24 In the present case, Capital Options is the unsuccessful party who commenced proceedings to seek summonses for public examinations. As I observed in the Judgment, Mr Bax is the sole director and shareholder of Capital Options. Capital Options has a paid share capital of $3: Affidavit of Kaushik Hazratwala sworn 17 January 2023 at Exhibit pp 48-49. There is no other evidence of Capital Options owning any other assets. In his affidavit, Mr Bax deposed he would instruct a solicitor if the litigation became complex: Affidavit of Craig Stephen Bax sworn 17 October 2022 at [21]. To the extent that funds were spent prosecuting the claim, Mr Bax was the source of those funds. 25 For the reasons given at [35]-[42] and [53] of the Judgment, the conduct of the litigation was unreasonable and improper. It was pursued exclusively for the benefit of Capital Options, and thereby Mr Bax, and not to confer a benefit on Consortium or its creditors considered as a whole. Mr Bax has a clear interest in the outcome of the proceedings: cf Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd (No 10) [2009] FCA 498. 26 As Thawley J observed in Hardingham at [23], albeit in the context of a costs order being sought against a litigation funder: When there is a sufficient connection between the litigation and a third party, and the circumstances are such that the making of a costs order is fair in all the circumstances, the making of a third party costs order is normal. 27 The personal conduct of Mr Bax must also factor into the exercise of the discretion. It was Mr Bax personally who swore the affidavits which contained material non-disclosures, who conducted the proceedings before the Registrar, and who refused to disclose to the defendants, upon their lawyers' undertaking, what he had not disclosed to the Registrar.

Should a lump sum costs order be made? 28 The Court has power to award costs to a party in a specified sum: FCA Act, s 43(3)(d) and the Federal Court of Australia Rules 2011 (Cth), r 40.02(b). 29 The principles applying to the Court's power to order lump-sum costs, and the quantification of costs where such an order is made were summarised by Markovic J in LFDB v MS S M (No 2) [2018] FCA 2062 at [6]-[8]: 6 The Court's power to order lump sum costs is discretionary and may be exercised whenever the circumstances warrant it: Su v Australian Fisheries Management Authority (No 3) [2008] FCA 2018 at [1] (Reeves J). 7 A Full Court of this Court (Allsop CJ, Besanko and Middleton JJ) in Paciocco v ANZ (No 2) (2017) 253 FCR 403 at [16]-[17] explained the following in relation to the Court making orders for lump sum costs: 16 On 25 October 2016 the Chief Justice issued the Central Practice Note: National Court Framework and Case Management (CPN-1) ('Central Practice Note') and the Costs Practice Note (GPN COSTS) ('Costs Practice Note'). The Central Practice Note states that the determination of the quantum of costs of a successful party (in a proceeding) should not be delayed and, to this end, the Court will, where appropriate, facilitate the making of lump sum costs orders. The Costs Practice Note provides that the Court's preference, wherever it is practicable and appropriate to do so, is to make a lump sum costs order so as to finalise costs and avoid potentially expensive and lengthy taxation hearings. It makes clear that the Court should now proceed on the basis that taxation "should be the exception" and confined to matters which are unable to be determined otherwise: Costs Practice Note at [3.3]. The guiding principles are to reduce delay and cost when quantifying costs: Costs Practice Note at [3.1]. 17 The Costs Practice Note provides for the Court to make use of sophisticated costs orders and procedures, and to take such steps as it considers necessary to ensure that it has the requisite level of detail to make a costs determination that is fair, logical and reasonable and to avoid orders that lead to potentially expensive and lengthy taxation hearings: Costs Practice Note at [3.3]. 8 In Bitek Pty Ltd v IConnect Pty Ltd (2012) 290 ALR 288; [2012] FCA 506 at [18] Kenny J said the following in relation to the determination of the appropriate quantum of a lump sum costs order: 18 The starting point for the fixing of costs is the charges rendered by the applicant's solicitors: Beach Petroleum at FCR 124; ALR 165 and Hamod v New South Wales [2011] NSWCA 375 at [820] per Beazley JA (with whom Giles and Whealy JJA agreed). The sum of costs fixed should also be proportionate to the nature, including the complexity, of the case: see Canvas Graphics Pty Ltd v Kodak (A'asia) Ptd Ltd [1998] FCA 23. As Beazley JA said in Hamod, at [820], citing, among others, Beach Petroleum at FCR 123; ALR 164: [820] The approach taken to estimate the costs to be ordered must be logical, fair and reasonable … This may involve an impressionistic discount of the costs actually incurred or estimated, in order to take into account the contingencies that would be relevant in any formal costs assessment … [Citations omitted.] 30 I gratefully adopt her Honour's summary. 31 In circumstances where Capital Options is a "person of straw" and no evidence has been adduced of Mr Bax's personal financial circumstances, it would be inappropriate to embark on a costly taxation hearing if the Court is otherwise able to arrive at a lump sum. I am satisfied that it is appropriate for the Court to make an order that costs be fixed in a lump-sum in this case. The Court has a wide discretion to make an order that costs be quantified on that basis and there is nothing in this case that persuades me that such an order should not be made.

Disposition 32 For these reasons, the appropriate order is that Capital Options and Mr Bax personally, jointly and severally, are liable to pay the costs of the defendants and Mr Falconieri, fixed in a lump-sum pursuant to Practice Note GPN-COSTS, on an indemnity basis. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Sarah C Derrington.