Clutha v Millar [2002] NSWSC 833 | Case summary

4834/00 CLUTHA LTD (IN LIQ) V FREDERICK WILLIAM MILLAR & ORS (NO.5) JUDGMENT 1 HIS HONOUR: For reasons given in four judgments delivered by me (Clutha Ltd (in liq) v Millar (Nos 1, 2, 3 and 4): [2002] NSWSC 362 (6 May 2002), [2002] NSWSC 523 (4 June 2002), [2002] NSWSC 642 (24 June 2002), and [2002] NSWSC 703 (12 August 2002)), I have made orders striking out the proceeding against the first seven defendants on the ground that the proceeding is time-barred under the Limitation Act 1969 (NSW). 2 The liquidation of the plaintiff company occurred consequent upon a voluntary administration. It was therefore treated under s 446A as a creditor's voluntary winding up. Mr Timothy Cuming was appointed liquidator by the Court on 14 January 1997, well after the winding up commenced. He was appointed pursuant to s 503, which authorises the Court to remove the liquidator and appoint another liquidator. He is not himself a party to the present proceeding, although he is a co-plaintiff in proceeding No 1428 of 2001, which arises out of the same facts. 3 The present judgment relates to an application by the first seven defendants for an order that Mr Cuming as liquidator personally pay their costs. The first seven defendants also apply, in the alternative, for an order that security for their costs provided by the plaintiffs in another proceeding arising out of the same facts (No 1428 of 2001) be available to them as security for their costs in the present proceeding. 4 The application for a personal costs order against the liquidator of the plaintiff raises questions about the scope and effect of Part 52A rule 4 of the Supreme Court Rules and the definition of "officer of the Court" in Part 1 rule 8, both before and after the recent amendment of the rule. It also raises questions about the exercise of the Court's discretion. I shall deal with those two aspects of the costs application first, and then deal with the alternative application. I have decided not to make a personal costs order against the liquidator of the plaintiff, nor any order extending the security for costs in the other proceeding to protect the first seven defendants in respect of the costs that I shall order the plaintiff company to pay them. Jurisdiction to make a costs order against a non-party 5 Section 1335 (2) of the Corporations Act 2001 (Cth) states that the costs of any proceedings before a Court under that Act are to be borne by such party to the proceedings as the Court, in its discretion, directs. It is not clear whether this provision prevents the Court from exercising its general powers under its constituting statute or rules to award costs against a non-party in proceedings under the Corporations Act: compare Re Wridgemont Display Homes Pty Ltd (1992) 117 ALR 479 with Australian Forest Managers v Bramley (1996) 19 ACSR 398. But the issue does not arise in the present case, because the proceeding, being a proceeding to assert breach of a common law duty of care, is not a proceeding "under" the Corporations Act. That being so, the question of this Court's jurisdiction to make a costs order against a non-party liquidator is to be determined under the Supreme Court Act 1970 (NSW) and the Supreme Court Rules. 6 Section 76 of the Supreme Court Act 1970 (NSW) provides that subject to the Act and the rules and any other Act, costs are in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent costs are to be paid. 7 Part 52A rule 4 provides as follows: "4 (1) The powers and discretions of the Court under section 76 of the Act (which relates to costs generally) shall be exercised subject to and in accordance with this Part. (2) Subject to subrule (5), the Court shall not, in the exercise of its powers and discretions under section 76 of the Act, make any order for costs against a person who is not a party. …. (5) Subrule (2) shall not limit the power of the Court to make any order - (a) under rule 43 or Part 42 rule 7 (f); (b) for payment by a relator in proceedings of the whole or any part of the costs of a party to the proceedings; (c) for payment by a person who - (i) is bound by an order made, or judgment given, by the Court in proceedings or is bound by an undertaking given to the Court in proceedings; and (ii) fails to comply with the order or the judgment or breaches the undertaking, of the whole or any part of the costs of a party to the proceedings occasioned by the failure or the breach; (d) for payment by a person who has committed contempt of court or an abuse of process of the Court of the whole or any part of the costs of a party to proceedings occasioned by the contempt or abuse of process; (e) in exercise of its supervisory jurisdiction over its own officers, including solicitors, barristers and court appointed liquidators; (f) against a person who purports without authority to conduct proceedings in the name of another person; or (g) against a person who commences, carries on, enters an appearance in, or defends proceedings as the authorised director of a corporation, or purports to do so." 8 The Court has the power, under Part 1 rule 12, to dispense with compliance with any of the requirements of the rules, but the order sought in this case does not involve dispensation from compliance with a rule. It appears that the Court cannot award costs against a non-party other than in accordance with Part 52A rule 4 (Leicester v Walton (Court of Appeal of NSW, unreported, 22 November 1995); Wentworth v Wentworth (2001) 52 NSWLR 602, paragraphs 160-168 per Heydon JA), notwithstanding the breadth of the Court's inherent jurisdiction and its general statutory power under s 23 (see Wentworth at 608 per Fitzgerald JA). This is because s 76 deals expressly with the Court's statutory discretion with respect to costs, and states that the discretion is subject to the rules, and Part 52A rule 4 (2) in terms prohibits the Court from making a costs order against a non-party except where subrule (5) permits it to do so. 9 In the present case, it is accepted by the parties to the costs application that the only relevant category in subrule (5) is in subparagraph (5)(e). Therefore, unless the costs order proposed by the first seven defendants would be an order made by the Court in the exercise of its supervisory jurisdiction over its own officers, the Court has no jurisdiction to make the order. 10 In Part 1 rule 8 the following definition appears: " officer of the Court does not include a solicitor, barrister or liquidator". 11 Prior to the amendments to Part 52 A rule 4 (5) (e) which took effect on 19 July 2002, there was some doubt as to whether the definition in Part 1 rule 8 applied for the purposes of subparagraph (5) (e). 12 In Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd (No 2) (2001) 39 ACSR 622, a case decided before the recent amendment to the rules, I considered whether the Court had jurisdiction to make a costs order against an administrator under a deed of company arrangement, where the company but not the administrator is a party to the proceeding. After considering the authorities, and in particular Leicester v Walton, Wentworth v Wentworth and Knight v FP Special Assets Ltd (1992) 174 CLR 178, especially at 182-193, I reached the conclusion (at paragraph 34) that the Court had no jurisdiction to make such an order. In the course of reaching this conclusion, I assumed that a court-appointed liquidator was an officer of the Court for the purposes of subrule (5) (e), with the result that the Court had jurisdiction to make an order for costs against such a liquidator in an appropriate case, although the liquidator was not party to the proceeding: Cresvale, at paragraph 32. But I observed that an administrator under a deed of company arrangement was not, when acting in that capacity, an officer of the Court, and so subrule (5) (e) had no application in that case. 13 As to a liquidator in a members' or creditors' voluntary winding up, I said in another context (Cresvale at paragraph 63): "In a voluntary winding up, the appointment of a liquidator is consensual but a liquidator's duties and powers are prescribed by the Corporations Act 2001 (Cth), and there are elements of supervision by the Court." However, I did not hold or suggest that a liquidator in a voluntary winding up was, by virtue of those "elements of supervision", an officer of the Court for the purposes of subrule (5) (e). 14 In Cresvale I did not refer to the definition in Part 1 rule 8. In Australian Security Estates Pty Ltd v Bluecrest Holdings Pty Ltd (in liq) [2002] NSWSC 491 (4 June 2002), also a case decided before the recent amendment to the rules, the question was whether leave should be granted to companies in liquidation to permit them to proceed against another company in liquidation, for the sole purpose of seeking to obtain a costs order against the liquidator as a non-party in a voluntary winding up. The question whether a liquidator in a voluntary winding up was an officer under the unamended subrule (5) (e) was directly raised. 15 Bergin J drew attention to the definition. After considering the history of Part 52A and the definition, and relevant cases from which a distinction emerged between officers within the Court structure and other officers of the Court, she concluded (at paragraph 59): "I am of the view that the definition of 'officer of the court' is intended to exclude solicitors, barristers and liquidators from all the other functions mentioned within the Rules for those officers within the court structure. It is not intended to exclude solicitors, barristers and liquidators from the capacity of the Court to award costs against them, as non-parties, when exercising its supervisory jurisdiction over not only them but also the officers within the Court structure." After noting my observation in Cresvale that there are "elements of supervision by the Court" in a voluntary winding up, her Honour said she was not satisfied that the term "its own officers" in subrule (5) (e) included a liquidator in a voluntary winding up. 16 I respectfully agree with the reasoning and conclusions of her Honour on this point. Counsel for the first seven defendants sought to challenge her Honour's conclusion by drawing attention to the duties of a liquidator in a voluntary winding up. He drew attention to the statutory duties of such a liquidator under s 506 (1), and the extension to such a liquidator, by s 506 (1A), of ss 477 (2A) and 477 (2B), which prevent a court-appointed liquidator from entering into certain transactions without the approval of the Court or the committee of inspection. One might add s 536, which empowers the Court to inquire into the liquidator's conduct. Apart from Cresvale, he cited ASC v Melbourne Asset Management Nominees Pty Ltd (1994) 121 ALR 626 at 640, National Australia Bank v Market Holdings Pty Ltd (2001) 37 ACSR 629 at 658 and Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 at 310. These cases explain the weighty and fiduciary nature of the liquidator's duties. 17 Nevertheless, the Corporations Act draws a clear distinction, supported by case law, between a court-appointed liquidator whose office arises when the Court makes an order under s 472 (1) after making an order for the winding up of the company upon the grounds prescribed by Part 5.4, and a liquidator in a members' or creditors' voluntary winding up, appointed under Part 5.5 by resolution of the members or in consequence of a decision by creditors in a voluntary administration not to approve a deed of company arrangement or to return the company to its directors (s 446A) . The distinction between modes of liquidation is between liquidation commencing by compulsion under a court order on established grounds, and liquidation commencing consensually. Under the Act only an official liquidator registered under s 1283 may act in the former case (ss 472 (1) and 532 (8)), while any registered liquidator may act in the latter case. 18 The distinctions in the modern statute reflect the history of the law of company liquidation: see Macphersons Law of Company Liquidation, 4th ed (1999) by Andrew Keay, p 25; and note Gibbons v LibertyOne Ltd [2002] NSWSC 274, paras 53-59. They reflect the fundamental proposition that in a winding up by court order, it is the Court that conducts the winding up, and the official liquidator acts as an officer of the Court on its behalf: Commissioner for Corporate Affairs v Harvey [1980] VR 669, 695; Cresvale at paragraph 22. That is not the case in a voluntary winding up, which is purely a statutory process. The liquidator in a voluntary winding up is not regarded as an officer of the Court carrying out tasks under the supervision of the Court, notwithstanding the substantial statutory and general law duties imposed on such a liquidator and the Court's statutory power to review some aspects of the performance of the administration. 19 Counsel for the first seven defendants contended that the position had been altered by the amendment made in July 2002, which added to subrule (5) (e) the words "including solicitors, barristers and court appointed liquidators". In my opinion the purpose of the amendment was to confirm Bergin J's conclusion that the Court has jurisdiction under subrule (5) (e) to make an order for costs against a solicitor, barrister or court-appointed liquidator notwithstanding the definition in Part 1 rule 8. It does not enable the Court to make a costs order against a liquidator in a voluntary winding up (or, for that matter, an administrator under a deed of company arrangement) because such a person is not an officer of the Court and is not within the newly added words of the subrule. 20 Counsel for the first seven defendants submitted that it would be contrary to policy to confer on a liquidator in a voluntary winding up an arbitrary immunity from costs. He drew attention to the frequency of creditors' voluntary liquidations arising from voluntary administrations. He noted the burgeoning phenomenon of speculative third party litigation funding, referring to the Market Holdings case, 37 ACSR at 661. He submitted that the combination of frequency of creditors' voluntary liquidations and the availability of speculative litigation funding created new risks of inappropriate conduct by liquidators, which should be addressed where appropriate by a personal costs order. He therefore urged the Court to adopt a liberal construction of its power to award costs against a non-party (citing the FP Special Assets case, 174 CLR at 185, 190, 191, 192, 202-3 and 205). 21 I have sympathy with the public policy argument to this limited extent. It is odd that the Court · does not have the power to make a personal costs order against a non-party liquidator in a voluntary winding up, in a proceeding under the Corporations Act or otherwise, while · it has the power, now expressed and conferred by the new words of subrule (5) (e), to make a personal costs order against a court-appointed liquidator, at least where the proceeding is not a proceeding under the Corporations Act. 22 This outcome has the effect of "quarantining" all liquidators appointed in a voluntary winding up from a personal costs order in this Court, whatever may be the situation in other courts. However, in light of the policy which, on one view, is reflected in s 1335 (2), it may be that the anomaly in policy terms arises in cases where the power to award costs against a non-party court-appointed liquidator exists, rather than in cases where there is no jurisdiction to award costs against a non-party liquidator. It seems to me that the policy issues are complex and the correct policy outcome is by no means self-evident. In those circumstances it would be wrong for the Court to create a new category of potential costs liability by a process of "liberal construction". 23 Counsel for the first seven defendants submitted that, even if a liquidator in a voluntary winding up was not within subparagraph (5) (e), Mr Cuming fell within the wording of the subparagraph because he was appointed by the Court rather than by the members or creditors. It is true that Mr Cuming was appointed by the Court, but in my view this does not make him a court-appointed liquidator for the purposes of subparagraph (5) (e). 24 Mr Cuming was appointed under s 503, which permits the Court to remove a liquidator in a voluntary winding out and appoint another liquidator. It may be that some consequences flow from the fact that the liquidator was appointed under that section rather than by virtue of a decision by the members under Part 5.5 or the creditors under Part 5.3A. For example, counsel for the first seven defendants submitted that a liquidator appointed under s 503 enjoys the same protection against suit without leave as every other court-appointed liquidator, referring to Pantzer v Mamone (2001) 36 ACSR 734. It is unnecessary for me to deal with that proposition here. Fundamentally, the section does not alter the character of the liquidation from a voluntary winding up to a court-ordered winding up. It does not alter the character of liquidator's office so as to subject the liquidator to the Court's special supervisory regime over official liquidators who are appointed to carry out the Court's winding up order. In my opinion the words "court appointed liquidators", which were added to subparagraph (5) (e) in the July 2002 amendments, were not intended to alter the position described by Bergin J in the Bluecrest case. The position was, and is, that subparagraph (5) (e) allows the Court to make a personal costs order against a liquidator who is under the Court supervisory jurisdiction, because the winding up is a court-ordered winding up under Part 5.4 or Part 5.4A, but not against a liquidator whose authority to act to arise from a voluntary decision by members or creditors under Part 5.3A or Part 5.5. 25 I received conflicting submissions as to whether, if the July 2002 amendments expanded the Court's power to make a personal costs order against a non-party liquidator, that power extended to the present case, where most of the costs were incurred before the rule amendment was made. One would expect, on general principles, that an amendment extending the power of the Court would be available to be used forthwith, subject to discretionary considerations. However, it is unnecessary for me to decide that question because in my view, the amendment merely confirms the position as stated by Bergin J. That conclusion is consistent with the explanatory note to the rule amendment, according to which the purpose of the amendment was to "make it clear" that the power in subrule (5)(e) extends to an order for costs against, inter alia, a court appointed liquidator. 26 For these reasons, I have decided that the Court has no jurisdiction to make the costs order against Mr Cuming sought by the first seven defendants in this case. Discretionary considerations 27 It is strictly unnecessary for me to deal with the submissions of the parties as to the exercise of my discretion to make a personal costs order, because my decision on jurisdiction means that I have no relevant discretion to exercise in this case. Nevertheless, discretionary issues were the subject of full submissions and it may be useful for me to indicate how I would have exercised my discretion, in case the matter goes further. 28 First, counsel for the first seven defendants submitted that the basic proposition that a costs order should compensate the successful party (citing Ohn v Walton (1995) 36 NSWLR 77 at 79), should lead to a personal costs order here. He drew attention to some evidence which indicates, though by no means conclusively, that the solicitor and client costs of the first seven defendants in the present proceeding and the 2001 proceeding are in the order of at least $280,000, a figure substantially exceeding the amounts of security for costs provided in each of the 2000 and 2001 proceedings ($75,000 in each case). It also appears that in future it is likely that they will incur substantial additional costs in the 2001 proceeding. It seems to me probable that their party/party costs to date in the present proceeding, when assessed, will exceed the amount of security for costs. In this proceeding, namely $75,000. 29 There is no evidence before me as to the value of the assets available to the plaintiff to satisfy any shortfall between assessed costs and the security, or indeed whether the plaintiff has any assets at all to meet a demand for costs. Nor is there any evidence of what priority claims may rank ahead of the plaintiff's costs liability. Counsel submitted that an order against Mr Cuming personally would not prejudice his right of indemnity, if he has one, against the plaintiff or any third party litigation funder. 30 These matters are relevant to the exercise of the Court's discretion to make a personal costs order, but in my opinion they are by no means conclusive. A personal costs order against a non-party is an exceptional order which should not be made simply because it is doubtful that the successful party will recover in full against the unsuccessful party in the proceeding. Counsel referred to the "man of straw" concept in the FP Special Assets case (174 CLR at 190-193). He submitted that there was sufficient justification for a personal costs order arising from the circumstance that the plaintiff is insolvent, and Mr Cuming had played an active part in the conduct of the litigation although a non-party, on behalf of others (presumably the creditors) who have an interest in the subject of the litigation. That being so, counsel submitted, the Court should exercise its discretion to make a personal costs order where the interests of justice require that be made (per Mason CJ and Deane J at 192-3). 31 I am prepared to accept that if the Court had jurisdiction in this case, it could take into account the "man of straw" principle upon which the first seven defendants rely. I agree with counsel for the first seven defendants that the "man of straw" principle and the general compensatory principle may lead to a personal costs order without any finding that the person subject to that order has been guilty of any fault or wrongdoing. 32 In my opinion, however, the application of both the "man of straw" principle and the general compensatory principle to the circumstances of this case is excluded by another consideration. As Mason CJ and Deane J pointed out in the FP Special Assets case (at 191), the availability at an earlier stage of the litigation of an order that a party provide security for costs is in many situations a strong argument for refusing to exercise a discretion to order that costs be paid by a non-party. It is true that there Honours qualified this proposition by pointing out that there are limitations attaching to the availability of security for costs, which mean that the application for such an order is not a remedy in all cases in which justice calls for an order for the award of costs against a non-party. But those limitations do not apply here. An order for security for costs was in fact obtained in this proceeding. It was obtained by consent. It was open to the first seven defendants to make a further application for security for costs. Perhaps they saw the strategy of pursuing summary dismissal on the limitation ground as an alternative to seeking further security for costs. The evidence before me does not provide an explanation for their omission to make a further application. Whatever their motivation, they chose not to protect themselves in this fashion. In my opinion, that consideration would weigh against a personal costs order if I had jurisdiction to make one. 33 Counsel also submitted that the conduct of the litigation by Mr Cuming warrants a personal costs order against him. On 13 August 2001 the plaintiff's solicitors sent a proposed amended statement of claim to the solicitors for the first seven defendants, and on 21 August 2001 the latter replied contending that the course of action in negligence was statute barred. On 10 September 2001 the plaintiff's solicitors responded, denying that the cause of action was statute barred for several reasons. The parties maintained their positions in later correspondence. These matters fall well short of the kind of conduct likely to influence the Court to make a personal costs order. The fact, if it be so, that there may have been some more substantial uncertainty and prevarication about the statement of claim in the 2001 proceeding does not bear on any matter I have to decide in the 2000 proceeding. The application for an alternative order 34 The first seven defendants submitted that, if I was not prepared to make a personal costs order against Mr Cuming, I should make an order giving them access in this proceeding to the security for costs provided in the 2001 proceeding. They submitted that the Court has jurisdiction to make such an order under Part 40 rule 9 (4). 35 Part 40 rule 9 deals with setting aside or varying a judgment or order. Rule 9 (1) authorises the Court to do so where a notice of motion for the setting aside or variation is filed before entry of the judgment. Subrules (2) and (3) deal with special cases where a judgment may be set aside or varied. Rule 9 then proceeds as follows: "(4) In addition to its powers under subrules (1), (2) and (3), the Court may, on terms, set aside or vary any order (whether or not part of a judgment) except so far as the order determines any claim for relief or determines any question (whether of fact or law or both) arising on any claim for relief and excepting any order for dismissal of proceedings or for dismissal of proceedings so far as concerns the whole or any part of any claim for relief. (5) Nothing in this rule affects any other power of the Court to set aside or vary a judgment or order." 36 It is at least doubtful that this provision authorises the Court to modify a security for cost order made in another proceeding, even though it is a proceeding between the same parties: see, generally, Ritchie's Supreme Court Practice, Vol 1, pp 2858-9. However, even accepting (without deciding) that in special circumstances an order of the kind sought by the first seven defendants can be made under this provision, I see no sufficient reason for doing so in the present case. As I have said, it was open to the first seven defendants to make an application for further security for costs in this proceeding, and they did not do so. There is no good reason for making available in this proceeding a provision for security for costs in another proceeding which is still alive between the parties. Conclusions 37 It is appropriate to make an order that the plaintiff pay the costs of the first seven defendants in the proceeding, other than the costs relating to their contention that Mr Cuming should be ordered to pay costs. The first seven defendants should pay the plaintiff's and Mr Cuming's costs in the latter category.

Clutha v Millar

At a glance

Court

Decision date

Before

Source

Judgment (7 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (11)

Cited By (3)