Diamond Ace Super Fund Pty Ltd v Rodapa Development Pty Ltd

Federal Court of Australia|2020-11-02|Before: Mr P, Griffiths J

The second and third respondents and David Hunt are jointly and severally liable to pay the applicants' costs of and incidental to the proceeding on the normal basis, as agreed or taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

GRIFFITHS J: 1 By an interlocutory application filed on 19 February 2020, the applicants seek an order that the second and third respondents and a non-party, Mr David Hunt, are jointly and severally liable to pay the applicants' costs of the proceeding on the normal basis, as agreed or taxed. 2 For the following reasons, I consider that the second and third respondents and Mr David Hunt should be jointly and severally liable for the applicants' costs on the ordinary basis.

Costs 6 In support of their interlocutory application on costs the applicants rely on two affidavits by their instructing solicitor, Ms Shelley Mulherin, which are dated 19 February and 16 March 2020 respectively. The second and third respondents rely upon an affidavit by Mr David Hunt sworn 2 March 2020 and an affidavit sworn 2 March 2020 by their instructing solicitor, Mr Lachlan Thorburn. 7 The applicants say that the second and third respondents should pay their costs in accordance with the normal rule. They also contend that Mr Hunt should be liable to pay costs because: (a) he funded the opposition by the second and third respondents to the applicants' proceeding (before those parties consented in December 2019 to new trustees being appointed); (b) he had a personal interest in the subject matter of the proceeding, given that it principally related to his conduct as director of each of the respondent trustee companies and involved allegations of breach of duties in dealings with other entities related to him; and (c) he caused the proceeding against the first respondent to be delayed. 8 The second and third respondents' position was that there should be no order as to costs in the substantive proceedings, but that there should be costs orders made in their favour in respect of an interlocutory application filed by the applicants in June 2019, which was then not pursued, as well as the costs of the present interlocutory application concerning costs of the substantive proceeding. They also submitted that Mr Hunt should not be required to pay any costs. 9 The parties consented to the issue of costs being heard and determined on the papers. The applicants took advantage of an opportunity to file objections to evidence and rulings were subsequently made by the Court. The parties also provided several written submissions in support of their respective positions on costs.

The parties' submissions on costs summarised 10 It is convenient to summarise the applicants' submissions, before summarising those of the second and third respondents (which also dealt with the question whether Mr Hunt should be ordered to pay costs).

(a) Applicants' costs submissions summarised 11 The applicants' primary submission was that they were entitled to have their costs paid because the second and third respondents had effectively surrendered by not opposing the orders which were made on 25 March 2020 and which substantially reflected the relief sought by the applicants in their originating application. 12 Further, the applicants contended that the second and third respondents delayed the disposition of the application for the first respondent to be replaced as trustee of the Hood Trust. 13 The applicants' submissions in support of their application that Mr Hunt also be liable for their costs may be summarised as follows. 14 First, Mr Hunt is the sole director of the second and third respondents and in effective control of those companies. 15 Secondly, Mr Hunt and/or his entity Indigo Building Group Pty Ltd (Indigo) funded the litigation on behalf of the second and third respondents. 16 Thirdly, Mr Hunt (and/or Indigo, on whose behalf he was acting as sole director) had a personal interest in the subject matter of the proceedings - namely to refute allegations made against the respondents which were based on actions taken personally by him, such as failing to properly administer the trusts, dissipating profits and making loans to related parties including lndigo. 17 Fourthly, in relation to the first respondent, it was Mr Hunt's conduct (given the consent of the other directors) which delayed the disposition of the application for it to be replaced as trustee of the Hood Trust. Mr Hunt also had an interest in disputing the allegations relating to the conduct of this trust. 18 Fifthly, there is no suggestion that the respondent entities conduct any business outside of acting as trustees for the respective trusts or have any assets of their own. On their replacement as trustees, they will be shell companies without assets to meet a costs order. 19 Finally, the applicants are entities operated by individuals who have invested in the trusts from their superannuation investments and personal savings. It would be unjust for those unit holders to effectively be required to pay a portion of any costs order in their favour from trust funds. This was said to provide a further discretionary basis in favour of ordering Mr Hunt to pay costs.

(b) Second and third respondents' submissions summarised 20 In short, the second and third respondents submitted that they had acted reasonably at all times. They say that they took a "commercial approach" to resolve the substantive proceedings so as to avoid further costs to the beneficiary unit holders. 21 The second and third respondents made detailed submissions in relation to their conduct both before and after the substantive proceedings were commenced, which may be summarised as follows.

(i) Pre-proceeding conduct 22 There was an existing relationship between Mr Maroc (the director of the first applicant) and Mr Hunt (the director of the respondents). Mr Maroc, through his firm Kai Maroc Accounting, was the respondents' accountant for the three property development projects. The firm had responsibility for reviewing the bookkeeper's work in the online accounting database; preparing end-of-year accounting services such as reconciliation of accounts and preparation of annual financial statements; and preparing annual tax returns. 23 From May 2018 to March 2019, Mr Hunt's relationship with Mr Maroc, which dated back to 1990, deteriorated. They contended that Mr Maroc was not performing the accounting work he was engaged to undertake, particularly an audit of the first and second respondents' accounts, which Mr Hunt requested on at least three occasions. This impacted Mr Hunt's ability to know the true financial position of the developments. On 12 March 2019, Mr Maroc's retainer was terminated. 24 On 13 March 2019, Mr Maroc called for the appointment of independent directors. On 15 March 2019, Mr Hunt called a general meeting of the trusts to consider that request, as well as the appointment of replacement external accountants. That meeting did not resolve those matters. 25 In April 2019, the second and third respondents then appointed other external accountants, Cooper Reeves, to undertake accounting work for the developments. Once Cooper Reeves had access to the accounting records, it became apparent that the accounts were not in an acceptable state, and a significant amount of work was required to fix them. 26 On 12 April 2019 and 14 June 2019, the applicants threatened to commence Court proceedings. 27 On 21 June 2019, the respondents advised that it was premature for the applicants to commence proceedings, and instead proposed that the parties move forward by Cooper Reeves finalising the respondents' accounts, following which a general meeting of each of the trusts could be held to consider those accounts. 28 Without responding to that proposal, on 26 June 2019 the applicants commenced these proceedings by way of an ex parte application to the Court.

(ii) Initial interlocutory application 29 In late June 2019 the applicants also sought interlocutory orders for the appointment of receivers to the trusts. The application was to be heard on 2 July 2019. On 28 June 2019, the respondents offered undertakings to the effect they would not dissipate the trusts' assets. The applicants did not provide a substantive response to those proposed undertakings until immediately before Court commenced on 2 July 2019 - after the respondents' lawyers travelled to Sydney to oppose the application - at which time they accepted the undertakings in substantially the form offered, and did not press their application to appoint receivers.

(iii) Conduct in defending the proceedings 30 The second and third respondents described the applicants as a "disgruntled minority of unitholders". They claimed that the majority of unit holders in at least the third respondent supported the respondents continuing as trustees. 31 The second and third respondents contended that they were justified in defending the proceedings as it raised serious allegations of breach of trust, dissipating profits to related parties, failing to account, and improper loans. These claims were made in the context of allegations by the respondents of Mr Maroc's own failure adequately to maintain proper accounts for the respondents. 32 The second and third respondents' evidence filed in November 2019 included the updated accounts prepared by Cooper Reeves. All of the source documentation available to the second and third respondents that underpinned those accounts - which runs to over 7000 pages - was served on the applicants. A regime was proposed for the applicants to review and admit some of all of those accounts and source documents. The applicants rejected this proposal. 33 The second and third respondents say that they were justified in defending the proceedings until those accounts were completed and put into evidence to refute the serious allegations made against them. 34 Moreover, they say that once that evidence was filed, they continued to act in the best interests of the beneficiaries in offering to step down as trustees to avoid the likely significant costs of opposing the proceedings. There was no financial benefit to the beneficiaries in successfully defending the application. This is consistent with the respondents' proposal to the applicants before the proceedings commenced - that is, to have the accounts finalised, then call meetings of the unit holders to address any issues, and where possible, leave matters to a majority vote. 35 The second and third respondents also claimed that they had had some success in the proceedings, in that the applicants' nominated trustee, Mr Slaven, was ultimately not appointed a replacement trustee. The respondents opposed his appointment on the basis that he was not truly independent. The replacement trustee was one the respondents' nominees. 36 The second and third respondents emphasised that the applicants commenced the proceedings without availing themselves of their rights under the trust deeds to attempt to replace the trustees. 37 The second and third respondents contended that they also acted reasonably and discerningly in agreeing to be substituted as trustees before calling back payments made to unit holders as a return of their initial investments to acquire their units, made in advance of profits being declared. Given Mr Hunt's companies are the remaining major creditors, the second and third respondents did not want to be seen to be calling in such advances to pay those debts. They left the issue of whether to call back those payments to an independent mind.

(iv) Non-party costs 38 The second and third respondents submitted that the relevant principles concerning costs orders against a non-party are set out in cases such as Knight v FP Special Assets Ltd [1992] HCA 28; 174 CLR 178; Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd [2009] HCA 43; 239 CLR 75; Murphy v Mackay Labour Hire Pty Ltd [2018] QCA 90 and Arawak Holdings Pty Ltd v King Tide Company Ltd [2018] QCA 148. 39 They made the following submissions in support of their position that no costs order should be made against Mr Hunt. 40 First, the applicants have not established that the second and third respondents are insolvent or "men of straw". Contrary to the applicants' claim, the respondents are not shell companies without assets. They claimed that the second respondent has net assets of $1,623,133 and the third respondent still has one apartment to be sold. Moreover, they will continue to hold a right of indemnity out of trust assets. 41 Secondly, the applicants never raised the issue of seeking non-party costs orders against Mr Hunt at any time before late 30 January 2020. 42 Thirdly, Mr Hunt did not pay the second and third respondents' legal fees in these proceedings. Those fees were paid by Indigo. 43 Fourthly, being a director of the respondents alone is not sufficient to justify a non-party costs order. 44 Fifthly, these are not proceedings Mr Hunt caused to be instigated. Mr Hunt's attitude was to avoid the parties engaging in litigation. This was reflected in the respondents' proposals to have the accounts finalised and then allow the unit holders to decide how to proceed and deal with the matters the applicants raised. His conduct has been reasonable at all times. 45 Sixthly, Mr Hunt has not benefited from the proceedings. An independent trustee has now been appointed, who will rule on debts owed to entities such as Indigo.

(c) Applicants' submissions in reply 46 These submissions may be summarised as follows. 47 The applicant submitted that the second and third respondents' submissions were based on the wrong test. The submissions failed to engage with the central question whether the second and third respondents had effectively surrendered by not opposing the orders which finalised the substantive proceeding. Instead, the respondents' submissions wrongly focussed on the irrelevant question whether they acted reasonably in defending the proceedings. 48 The applicants contended that if the Court concluded that the second and third respondents effectively capitulated, in most cases this will end the enquiry and those parties should pay costs (subject of course to the Court's broad discretion when assessing costs issues). Only if the Court concluded that the defending parties have not effectively capitulated is it necessary to traverse the conduct of the parties in deciding on an appropriate costs order. 49 The applicants challenged the claim that the second and third respondents had had some success in the proceedings because the applicants' nominated trustee, Mr Slaven, was not appointed as the replacement trustee. The applicants emphasised that, in the orders sought in the applicants' originating process, their final relief was directed to ensuring replacement of the respondents with independent trustees. The applicants said that they had achieved this end. 50 The applicants responded to various other matters raised against them, mainly relating to disputed factual matters and other claims raised by the second and third respondents in seeking to justify their defence of the proceeding. 51 The applicants' response to the second and third respondents' submissions regarding the issue whether Mr Hunt should be ordered to pay costs may be summarised as follows. 52 First, the second and third respondents are trustee companies. The only business they conduct is in this capacity. Once replaced as trustees, they will have no assets, other than possible recourse to a right of indemnity from trust assets. There is no guarantee that such an indemnity would answer to an adverse costs order and in any event, at a minimum this could involve disputation with the new trustee which should not be visited on the applicants. 53 Secondly, it is not a threshold requirement that notice be given before a non-party costs order is made. 54 Thirdly, it is unclear which entity paid the costs of the second and third respondents. Although Mr Hunt now claimed that his company Indigo paid the legal fees of the second and third respondents, the applicants had previously been told that Mr Hunt had made those payments. In circumstances where Mr Hunt is the sole director and shareholder of Indigo, the applicant submitted that if it was Indigo who paid the relevant legal fees, this must have occurred at Mr Hunt's direction. They submitted that this is a further reason to make a non-party costs order against him. 55 Fourthly, the applicants did not contend that Mr Hunt should be liable for the costs solely because he is a director of the second and third respondents. 56 Fifthly, the allegations in the proceeding squarely (and solely) related to the conduct of Mr Hunt. He allowed the proceeding to continue for an extended period before capitulating to the relief sought by the applicants. 57 Sixthly, Mr Hunt's interests clearly have been advanced by the litigation, including in relation to the first respondent which, but for Mr Hunt's opposition, would likely have been replaced as trustee earlier.

(d) The parties' supplementary submissions 58 Both the applicants and the second and third respondents filed supplementary written submissions concerning the correct test to be applied in determining costs. To avoid adding to the length of these reasons, I will address that matter in the next section of these reasons for judgment.

Consideration and determination 59 In Australian Law Company Pty Ltd v Initiative Holdings Pty Ltd [2019] FCA 1561 at [16] to [21], I summarised some of the relevant principles relating to matters which are raised for determination in the present proceeding as follows: (a) The starting point is that costs normally are assessed having regard to the approach of McHugh J in Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex parte Lai Qin [1997] HCA 6; 186 CLR 622 at [9]. In a case where it appears that both parties have acted reasonably in commencing and defending the proceeding and that conduct continues to be reasonable until the litigation is settled, the proper exercise of the Court's cost discretion usually means that there is no order as to costs. (b) However, as McKerracher J pointed out in Travaglini v Raccuia [2012] FCA 620 at [13], a distinction is drawn in cases where one party effectively surrenders, as opposed to a case in which a supervening event renders the proceeding futile or moot. In the former case, it is often appropriate to make an award of costs in favour of the party receiving the effective surrender. This distinction was recognised by the Full Court in Chapman v Luminis Pty Ltd [2003] FCAFC 162 at [7]. (c) It is clear that the Court may make a costs order against a non-party (including on an indemnity basis): see, for example, Vanguard 2017 Pty Ltd; in the matter of Modena Properties Pty Ltd v Modena Properties Pty Ltd (No 2) [2018] FCA 1461 and Hooke v Bux Global Ltd (No 8) [2019] FCA 671. 60 I would also add a reference to the following passage from the recent decision of the Court of Appeal of the Supreme Court of Victoria in Zhao v Suzhou Haishun Investment Management Co Ltd [2020] VSCA 34 at [12] (Tate, McLeish and Hargrave JJA) (emphasis added): … We accept as a general principle that where a party litigates for some time and then acts so as to effectively surrender or capitulate to the other, that will usually be a strong ground to award costs against the party who has surrendered or capitulated. But each case will depend on its own facts. 61 The relevant principles concerning costs orders against a non-party are set out in cases such as Knight; Jeffrey & Katauskas and Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporation (No 4) [2012] FCAFC 50; 200 FCR 154. 62 As the Full Court observed in Dunghutti at [89]: We think that the only precondition to the exercise of power [to order a non-party to pay costs] would have to be that the non-party has a sufficient connection with the unsuccessful party and the litigation to warrant the Court exercising its jurisdiction. The connection between the non-party and the unsuccessful party in the litigation must be material to the question of costs… . The Full Court added at [90] that an order for costs against a non-party is only made in "exceptional circumstances". 63 The range of circumstances in which it has been found to be just and equitable (or in the interests of justice) for a non-party to be ordered to pay costs are wide-ranging, but examples of such circumstances include the following: (a) Where the non-party has played an active part in the conduct of the litigation: Knight at 192-193 and Yates v Boland [2000] FCA 1895 (per Full Court) at [13]. (b) Where the non-party, or some person on whose behalf the non-party is acting, has an interest in the subject matter of the litigation: Hooke at [20] and [41]-[42]. (c) Where the non-party has funded the proceedings: FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 at [210] per Basten JA (Beazley and Giles JJA agreeing); Vanguard 2017 Pty Ltd at [42]. (d) Where the non-party is the director of a corporate litigant and in effective control of the company and had a real or personal interest in the subject matter of the litigation, such that it may fairly be said that the director was the "real party" to the litigation: Dunghutti at [85] and Yates Property Corporation Pty Ltd v Boland (No 2) [1997] FCA 760; 147 ALR 685 at 695 per Branson J. (e) Where the relevant party to the litigation is insolvent: Hooke at [20]. 64 I accept the applicants' primary submission that the second and third respondents have addressed the wrong question in relation to whether they should be ordered to pay costs. That is because I find that the second and third respondents effectively surrendered in the substantive proceeding, thus the issue of the reasonableness of their conduct does not arise in the manner asserted by them. 65 This is not a case like Lai Qin, where an intervening event occurred which rendered the proceeding inutile. In such a case, the reasonableness of the parties' conduct is relevant. But the position is different here. There was no such intervening event. Rather, the second and third respondents elected to defend the proceeding. The various steps taken by the respective parties proceeding and post-dating the commencement of the litigation are described at some length in Mr Thorburn's affidavit. It is notable that, after the proceedings had been on foot for six months and multiple steps taken by the parties to prepare the matter for a final hearing, on 6 December 2019, the solicitors acting for the second and third respondents sent a without prejudice offer to the applicants' solicitors with a view to settling the proceeding. Thereafter, on 11 December 2019, an offer to replace the trustees was made by the second and third respondents on an open basis and without any admission of wrongdoing. There was then a dispute as to whether Mr Slaven should be appointed as the replacement trustee. This was resolved when, on 30 January 2020, the applicants agreed to the appointment of Mr Ian Currie as independent trustee. It is indisputable that the unopposed orders made by the Court on 25 March 2020 substantially reflected the orders sought by the applicants in their originating application. The evidence is overwhelming that the second and third respondents surrendered or capitulated. 66 Applying the principles established in cases such as Travaglini, Chapman and Zhao, I consider that it is appropriate to order the second and third respondents to pay the applicants' costs on an ordinary basis, substantially for the reasons advanced by the applicants. As the Full Court observed in Chapman at [7], where a party, after litigating for some time, effectively surrenders to the other "there will commonly be lacking any basis for an exercise of the Court's discretion otherwise than by an order of costs to the successful party". 67 I do not accept the second and third respondents' submission that they should not be ordered to pay costs because they have had "some success" in the proceeding in having Mr Currie appointed as the independent replacement trustee, and not Mr Slaven. In the originating application, the applicants sought an order seeking replacement of the respondents with independent trustees. This objective was accomplished, as is reflected in the terms of the unopposed orders. I also take into account that the second and third respondents raised no issue concerning Mr Slaven's independence until 11 December 2019, when they finally agreed to step down as trustees. 68 None of the other matters raised by the second and third respondents militate against making a costs order against them. They placed heavy emphasis on the adequacy of the previous accounting records prepared by Mr Maroc on behalf of the various trusts. As the applicants correctly point out, however, the concise statement dated 16 September 2019 identified the issues in the proceeding by reference to many issues which went beyond the question of accounting records. It is also relevant to note that the second and third respondents surrendered or capitulated to the substantive relief approximately six weeks before the applicants' evidence was due in response to the reconstructed accounts. I am not persuaded that requesting and obtaining updated accounts before they agreed to be replaced as trustees provides a sufficient reason to absolve the second and third respondents from having to pay the applicants' costs in circumstances where they ultimately capitulated or surrendered. 69 I turn now to the separate question whether Mr Hunt should also be liable for the applicants' costs having regard to the general principles summarised at [61] ff above. 70 For the following reasons, I consider that it is just and equitable, or in the interests of justice, for such an order to be made against him even though he is a non-party in the proceeding. First, as Mr Hunt's affidavit dated 2 March 2020 amply demonstrates, he has played a very active part in the proceeding. He makes clear there that he was responsible for terminating Mr Maroc's retainer as accountant for the three respondents and he describes how he personally worked closely with the replacement accountants in producing the respondents' updated accounts. 71 Secondly, it is plain that Mr Hunt had an interest in the subject matter of the litigation, in circumstances where he was at all relevant times the sole director of the second and third respondents and had effective control of those companies. Of particular significance is the fact that Mr Hunt had a very real personal interest in seeking to defend the applicants' allegations regarding improper administration of the trusts, dissipating profits and making loans to related parties, including Indigo, because these matters directly targeted him and the entities of which he was sole director. 72 Thirdly, although there is some uncertainty as to whether the second and third respondents' legal fees were paid by Mr Hunt personally or by Indigo, one or other made those payments. In circumstances where Mr Hunt is the sole director and shareholder of Indigo, the uncertainty need not be resolved. Likewise, Mr Hunt candidly acknowledged that Indigo had also paid Cooper Reeves's fees to undertake the accounting work after Mr Maroc's firm's retainer was terminated. Those accounting costs were well in excess of $150,000. 73 Fourthly, none of the other matters raised by the second and third respondents has sufficient substance to avoid requiring Mr Hunt to bear the other relevant parties' costs. No notice had to be given to him prior to late January 2020. In addition, Mr Hunt's status as a director is not the sole basis for making the order. While it may be accepted that Mr Hunt was a reluctant participant in the proceeding and sought to discourage the applicants from bringing and maintaining the proceeding, he was deeply involved in the defence of the proceeding until the second and third respondents ultimately capitulated. 74 Finally, there is no need to make findings as to the applicants' claim that Mr Hunt was responsible for delaying proceedings involving the first respondent. The other matters referred to above are sufficient to demonstrate that the requested costs order against Mr Hunt should be made. 75 For these reasons, and while acknowledging that a costs order is generally only made against a non-party in exceptional circumstances, I am satisfied that it is appropriate in the particular circumstances here that such an order should be made.

Conclusion 76 For these reasons, orders will be made that the second and third respondents, as well as Mr Hunt, pay the applicants' costs of and incidental to the proceeding on an ordinary basis, as agreed or taxed. Those costs include the costs of the interlocutory application filed on 19 February 2020. I certify that the preceding seventy-six (76) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Griffiths.

SCHEDULE OF PARTIES ACD 45 of 2019 Applicants Fourth Applicant: BRIASH PTY LTD (ACN 119 454 572)

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