Cribb (Liquidator) v Jackson

1. The order made by McKerracher J on 21 March 2019 that the defendant pay the plaintiffs' costs of the amended cross-claim and of the amended interlocutory application filed by the plaintiffs on 7 March 2019 on a lump sum and indemnity basis be varied to provide for the payment of those costs in any event upon the determination of the application by the plaintiffs in application WAD153/2018.
2. The case management hearing be adjourned until 9.15 am on 16 October 2019. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

COLVIN J: 1 In these proceedings it is alleged that the defendant, Mr Keith Jackson, breached his duties as a director of Walcosra Pty Ltd, a company now in liquidation. The liquidator is Mr Neil Cribb. Both Mr Cribb and Walcosra are plaintiffs. They claim the amount of a taxation penalty incurred by Walcosra of over $920,000. It appears that the penalty was the reason for the liquidation of Walcosra and the Commissioner of Taxation is the only significant creditor in the winding-up. Mr Cribb is associated with the accounting practice RSM Australia Partners, a provider of audit, tax and consulting services. 2 The proceedings have been commenced under the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules). In such cases, the Federal Court Rules 2011 (Cth) (Rules) apply to the extent that they are relevant and not inconsistent with the Corporations Rules. The proceedings were commenced by application and statement of claim. Mr Jackson has been conducting his defence in person. He says that he lacks the financial resources to engage a lawyer but has been receiving some informal assistance. He filed a long form of defence. He also filed a form of cross-claim supported by an affidavit. Although there is no provision in the Corporations Rules for a cross-claim, a cross-claim was permitted by the Rules. They provide for the parties to a cross-claim to be named as cross-claimant and cross-respondent. 3 The cross-claim was brought against Mr Cribb and against two companies apparently associated with RSM Australia. Objection was raised to the cross-claim and an order was sought dismissing the cross-claim with costs. The application was brought by the plaintiffs, not the cross-respondents (although it is to be noted that Mr Cribb was both a plaintiff and the first cross-respondent to the cross-claim). 4 On 20 December 2018, I made orders by way of directions for the filing of submissions on the interlocutory application to dismiss the cross-claim. 5 On 21 January 2019, the plaintiffs filed submissions which contended that the cross-claim had no prospect of succeeding because it disclosed no cause of action at all and was frivolous, vexatious and an abuse of process. The submissions concluded by stating that it was appropriate for the Court to order the relief sought by the interlocutory application. 6 On 31 January 2019, Mr Jackson filed submissions in response. Amongst other things, they raised a question as to whether the plaintiffs had authority to act on behalf of the two RSM Australia cross-respondents in bringing the application to dismiss the cross-claim. The submissions also referred to the involvement of a litigation funder for the claims advanced by the plaintiffs, a matter referred to in notices convening creditors meetings of Walcosra. They asked for the interlocutory application to be dismissed and the matter to go to trial at the earliest possible date. 7 On 1 February 2019, McKerracher J ordered that the plaintiffs have leave to amend the application to claim summary dismissal of the cross-claim and to amend the name of the parties on whose behalf the interlocutory application was filed. 8 On 25 February 2019, Mr Jackson filed a short additional submission. It alleged that Mr Cribb had failed in an alleged duty to conduct an examination of a director of Walcosra who was said to be responsible for the steps that resulted in the taxation penalty and complained that Mr Cribb had not provided access to certain documents. These matters demonstrated some misunderstanding as to the nature of a cross-claim and its purpose. 9 On 26 February 2019, an order was made listing the interlocutory application for hearing on 21 March 2019. 10 On 7 March 2019, a somewhat strange amended interlocutory application was filed apparently in exercise of the leave given by McKerracher J. It named the three cross-respondents as plaintiffs who were seeking the orders on the application including summary dismissal of the cross-claim. It named Mr Jackson as the defendant. It sought orders that '[t]he Defendant pay the First, Second and Third Plaintiffs' costs of the Amended Cross-Claim and of this Interlocutory Application'. Of course, as to the cross-claim, Mr Jackson was not the defendant and the parties named as bringing the amended interlocutory application were not plaintiffs. 11 On 18 March 2019, Mr Jackson sent an email to the solicitors acting for both the plaintiffs and the cross-respondents which was copied to the Court. It attached a signed notice of discontinuance in the following terms: … the Cross-Claimant discontinues the whole of the proceeding of the Cross-Claim … The discontinuance is on the following terms: 1 Each party bears its own legal costs. 12 The email invited the solicitors to sign the notice. 13 A response was sent to Mr Jackson, also copied to the Court. It said: Our client will not agree to the discontinuance without his costs of the Cross-claim, which was hopeless from its commencement, being paid. If you wish to proceed on this basis, please let us know so we can provide the Liquidator's costs for agreement and incorporation into the orders. 14 Of course, the liquidator was only one of the cross-respondents. It was a matter for all cross-respondents as to whether they would consent to a discontinuance of the cross-claim and on what basis. 15 Email correspondence of this kind should not have been copied to the Court. A litigant acting in person may not be aware of such constraints until being informed by the Court. However, it was plainly improper for solicitors to forward to the Court a copy of their response to Mr Jackson. On the same day an email was sent to both parties informing them of the inappropriateness of copying the Court into such correspondence. 16 On 20 March 2019, in response to an inquiry from the Court as to their positions on the interlocutory application listed for the following day, the solicitors responded that there was no agreement between the parties to discontinue and the 'Applicants/Cross-Respondents intend to proceed tomorrow'. Mr Jackson sent an email stating that he 'was unable to reach agreement with the other party, with respect to costs'. He then said that the matter will be dealt with by McKerracher J in court 'tomorrow as scheduled'. 17 The matter came before McKerracher J on 21 March 2019 at which time Mr McWhirter, a friend of Mr Jackson, made submissions to the Court for Mr Jackson. At the outset, in response to a question from his Honour, Mr McWhirter confirmed that Mr Jackson was discontinuing the cross-claim. The reason for taking that step was not addressed. 18 Counsel appearing on that occasion, who seems to have appeared for both the plaintiffs and the cross-respondents did not announce the parties for whom he appeared. He is recorded in the transcript as appearing for 'the respondent'. He began by stating that the only issue on which the Court needed to be troubled was 'the issue of costs'. He stated: 'we would seek orders that the costs be determined on an indemnity costs basis, payable forthwith'. He also referred to the relatively small amount of those costs and ask for an order that they be dealt with by way of a lump sum costs order. 19 Mr McWhirter responded by saying that Mr Jackson was in an impoverished financial state and could not seek legal representation until things improved. He explained that what led to the cross-claim was the belief that the initial action was incorrect and baseless. 20 Counsel responded referring to a Calderbank offer and sought indemnity costs payable forthwith. In the course of an exchange with counsel, his Honour said: But it's not a case where - in my opinion - where a party has belligerently proceeded with a cause of action, knowing it is doomed to failure; it seems to be more of a misunderstanding - complete misunderstanding - of whether a cause of action was open. 21 Counsel then proposed a form of orders whereby Mr Jackson would be required to pay 'the first and second plaintiffs' costs of the amended cross-claim and of this interlocutory application, on an indemnity basis, and payable forthwith'. His Honour then indicated that he would not make an order for the costs to be paid forthwith. His Honour indicated that he would make orders for the costs to be fixed in amount. Otherwise, his Honour said he would make orders as asked. 22 The result is that the costs order made reflected the strange form of the application which named the cross-respondents as plaintiffs and the plaintiff on the cross-claim as defendant. 23 Since then, the costs have been assessed on a lump sum basis by a Registrar of the Court. In the result the costs claimed by the plaintiffs/cross-respondents were not relatively small in amount at all. They sought a lump sum costs order in the amount of $13,855.10. 24 Further, even though an order was not made for the costs to be paid forthwith, the cross-respondents have proceeded on the basis that the costs order was payable within 14 days after service pursuant to r 39.02 of the Rules. The cross-respondents have issued a bankruptcy notice on that basis. 25 Mr Jackson now brings an interlocutory application to vary the time for payment of the costs as assessed until after the determination of all the issues and matters in the main action brought by Mr Cribb and Walcosra. 26 It seems to me that the intention of McKerracher J was that the cost orders made on 21 March 2019 would not be payable until the outcome of the principal proceedings. That was the reason why his Honour refused to make an order that the costs be paid forthwith thereby leaving them to follow the event. The question is whether the event was the outcome of the whole of the proceedings or whether the discontinuance of the cross-claim was that event. The latter is very unlikely, given that the discontinuance was before his Honour at the time. There would be no point in refusing an application for the costs to be paid forthwith if they were to be left by the Rules to operate forthwith. Counsel appearing on that occasion certainly proceeded on the basis that there needed to be an order for the costs to be paid forthwith if the plaintiffs/cross-respondents were to be permitted to press for payment prior to the determination of the whole of the proceedings. Counsel certainly did not seek the costs orders on the basis that the Rules would operate to allow the costs orders to be enforced upon being assessed. Rather, counsel sought an order that the costs would be payable forthwith and McKerracher J refused to include any such provision in the orders made on that date. What the cross-respondents seek to do is to achieve a result that is inconsistent with that plain expression of intention. 27 The orders sought by Mr Jackson do no more than ensure that the orders operate in the manner originally intended. Whether orders be made on the basis of the slip rule or on the basis that it is appropriate in all the circumstances for there to be a variation of the interlocutory orders pending the outcome of the main action, I am persuaded that orders to the effect sought should be made. Given the manner in which the interlocutory application striking out the cross-claim was brought, in effect as an application by Mr Cribb and Walcosra, as well as the fact that the other two cross-respondents are entities of RSM Australia being the accounting practice with which Mr Cribb is associated, I am of the view that it is appropriate to grant the order even though those entities are legally separate to Mr Cribb and Walcosra. Indeed, as I have explained, for most of its course the interlocutory application was advanced by Mr Cribb and Walcosra in their own interests. Even when the application was amended, the form of the amendment belied the interest of Mr Cribb and Walcosra in the application. 28 Although a submission was advanced in writing that the cross-claim was, in effect, a separate proceeding and should be treated as such, counsel who appeared before me this morning, who was not responsible for the preparation of those submissions and was not counsel who appeared before McKerracher J, accepted that the costs orders, as made, operated as interlocutory orders and could be varied if the Court considered it appropriate to do so. That concession was properly made. An order allowing a discontinuance is interlocutory, as are the costs orders associated with any such order. This is recognised by the cases in which there have been applications to set aside a notice of discontinuance being applications that have been consistently held to be interlocutory: Mbuzi v AGL Sales Pty Limited [2016] FCA 1313 at [29]. So, the Rules provide expressly that a discontinuance in accordance with its provisions cannot be pleaded as a defence: r 26.14. Therefore, I am satisfied that the orders for costs made by McKerracher J may be varied. 29 In all the circumstances and for the reasons I have given I propose to order the variation sought. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Colvin.