DSHE Holdings Ltd (Receivers and Managers) (in liq) v Potts

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

JUDGMENT

1. THE COURT: On 26 August 2022 this Court upheld, in part, an appeal by DSHE Holdings Ltd ("DSH") against its former CEO and CFO, Mr Abboud and Mr Potts respectively: DSHE Holdings Ltd (Receivers and Managers) (in liq) v Potts; HSBC Bank Ltd v Abboud; Potts v National Australia Bank Ltd [2022] NSWCA 165 ("CA"). In the same judgment the Court rejected an appeal brought by Mr Potts against the National Australia Bank, and rejected an appeal brought by HSBC Bank Ltd against Messrs Abboud and Potts.
2. DSH had appealed with respect to the rejection by Ball J of its claim for breach of directors' duties in relation to the company's decision to pay an interim and then final dividend for FY2015: DSHE Holdings (Receivers & Managers Appointed) (In Liquidation) v Nicholas Abboud (No 3); National Australia Bank Limited v Nicholas Abboud (No 4) [2021] NSWSC 673 ("Primary Judgment"). This Court upheld the appeal with respect to the final dividend, but rejected it as regards the interim dividend. It was held that there should be no order for costs on the company's appeal.
3. In light of the company's partial success on appeal, an issue arose as to what orders should be made with respect to the costs of the company's claim against Messrs Abboud and Potts at first instance. An issue also arose as to interest on the judgment sum. The parties were given the opportunity to provide further written submissions and evidence on these issues. Agreement has been reached on the interest issue.
4. As regards the costs at first instance, given that the primary judge rejected DSH's claim against the two executive directors in toto his Honour had ordered that DSH should pay the costs of those two directors: see DSHE Holdings (Receivers & Managers Appointed) (In Liquidation) v Nicholas Abboud (No 4); National Australia Bank Limited v Nicholas Abboud (No 5) [2022] NSWSC 91 ("Costs Judgment"). His Honour also ordered that the NAB and HSBC be jointly and severally liable with DSH for these costs. In addition, he ordered that interest be payable on all costs orders.
5. DSH now seeks an order that each party bear its own costs at trial. The position of the two executive directors, put in joint submissions, is that an order should be made on an issue by issue basis ("Issues Approach"); alternatively they submit that the Court should order that DSH pay a set proportion of their costs ("Proportion Approach"), which they ask to be set at 60%. In their submissions in reply they appeared to prefer the Proportion Approach. They also seek interest on costs, an order that NAB and HSBC be jointly liable for those costs, and orders as to set-off and stay. It is appropriate first to address what order should be made as between the two sides, then to address the remaining issues.
6. It is sobering to note that the costs involved are extraordinary. The primary judge recorded that Messrs Abboud and Potts incurred actual costs of some $31.9 million in defending the claim brought by the company: Costs Judgment, [6]. The amount ultimately obtained by DSH, on appeal, was a sum of $11.826 million.

The appropriate costs order between DSH and the two directors

1. No order for costs was made in relation to the company's appeal to this Court because, although the issues relating to the final dividend occupied more time and resources than those on the interim dividend, there was significant overlap between the arguments made in relation to the two dividends: CA [299]. But that does not necessarily reflect the position in the first instance hearing.
2. Costs are, of course, in the discretion of the Court: Civil Procedure Act 2005 (NSW), s 98(1). Rule 42.1 of the UCPR provides that, subject to the Rules, if the Court makes any order as to costs, the Court is to order that the costs "follow the event" unless it appears that some other order should be made as to the whole or any part of the costs. In Allianz Australia Insurance Ltd v Rawson Homes Pty Ltd (No 2) [2021] NSWCA 334, White JA stated at [16] (with the agreement of Meagher and Leeming JJA): "Whether 'the event' should be characterised as the result of a particular issue or cause of action, or the overall result of the proceedings, may not be of practical significance once it is recognised that if a particular issue or group of issues is clearly dominant or separable, then it can be appropriate either to deny the successful party its costs in respect of particular issues on which it fails, or to require the otherwise successful party to pay the costs of that issue even though it did not act unreasonably in raising or defending the issues on which it failed. As Finkelstein and Gordon JJ recognised in Bowen Investments v Tabcorp Holdings (No 2) [2008] FCAFC 107 at [5], if an issue by issue approach produces a fairer result, then that approach should be adopted. Mathematical precision is illusory (James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWCA 296 at [36])."
3. Put simply, in this case the Court should seek to make an order that is fair in all the circumstances, taking account of the extent to which issues are separable, and without aspiring to the false hope of mathematical precision.
4. The following issues arise as to allocation of costs here: whether any order for costs should be made in favour of the two executive directors; if so, whether the Issues Approach or Proportion Approach should be adopted; if the latter is adopted, what the proportion should be.
5. DSH accepted that there should be some allowance in the costs orders for the fact that it ultimately only had partial success on its claims. It suggested that three approaches could be taken. The first would be to order that the two executive directors pay only the costs of DSH in relation to the claim for the final dividend. By implication, the company accepted that a converse order would also be made against it in relation to issues on which it failed. But DSH submitted, with good reason, that that would involve a difficult quantification process likely to lead to further disputation. The second approach would be to order that the two directors pay some proportion of DSH's costs (or, presumably, vice-versa). But DSH said that this gave rise to a difficulty in this Court estimating the appropriate percentage, where it did not have the advantages of the primary judge in understanding the relative significance of all the issues. The third approach - which DSH submitted the Court should adopt - was to make no order as to costs. It submitted that this would avoid complicated costs assessments.
6. DSH's submission with respect to the problems with the Issues Approach has significant force. The directors implicitly accepted as much in their reply submissions in submitting that the Proportion Approach would "avoid the need to allocate particular costs to particular issues, and would significantly simplify the quantification process". An order which required the parties, or an assessor, or the Court on the foreshadowed gross sum costs applications, to parse out what costs were directed to what issues could involve the expenditure of significant resources seeking to draw lines where, inevitably, there will have been work done and costs incurred where no clear attribution to one issue or another can be made. The need to draw such lines would then likely lead to further disputation. In this case, taking an Issues Approach in the orders would not be appropriate.
7. DSH did not seek to persuade the Court that it should be the net beneficiary of a proportional order. The real dispute is whether the executive directors should be awarded some proportion of their costs, or whether there should be no order as to costs.
8. DSH is correct to point out that this Court is not in the same position as the primary judge was in terms of estimating an appropriate proportion. Nevertheless, it has the benefit of the Primary Judgment, the Costs Judgment, its understanding of the case having heard this appeal, along with an affidavit from a solicitor on either side of this dispute addressing aspects of the way that the matter was conducted at trial. As noted, mathematical precision is not required.
9. DSH is also correct to note the following: there was inevitable overlap between all the issues in dispute below, including because there was a "common corpus of facts"; that overlap was especially significant as regards the claims for the interim dividend (on which it did not succeed) and the final dividend (on which it did); there was overlap between the case brought by the company and that brought by the two banks; there was overlap with the claims brought in the two class actions, which settled; and significant parts of the work done in defending the company's claims was undertaken by the legal teams for the non-executive directors. However, none of those points means that it is not possible to determine a reasonable, approximate measure of success of the two sides as regards the disputes between them.
10. The case brought by the company against the two executive directors involved the following claims based on breach of their directors' duties under s 180 of the Corporations Act 2001 (Cth): 1. a claim with respect to the payment of the interim dividend, in the amount of $16.555 million; 2. a claim with respect to the payment of the final dividend, in the amount of $11.826 million; 3. a claim that they had permitted the company to become overstocked with "Bad Stock" - the quantification of this claim was put in different ways at different times, but at highest was a claim for some $84.3 million.
11. DSH ultimately succeeded only with respect to the smallest component of its claim. There was some degree of overlap between these claims, not only insofar as there were some common issues in relation to the dividend claims, but also because the Bad Stock case was one of the matters said to be relevant to whether or not the dividends should have been paid. However, the company's ultimate success on appeal in relation to the final dividend did not involve the Bad Stock case: CA [248]-[250].
12. Further, a significant feature of the trial was that DSH alleged that there were material misstatements in both the HY15 and the FY15 accounts of the company. That was said to support all of DSH's claims, and it was also put as founding a distinct claim against the executive directors with respect to the FY15 accounts on the basis that they had no proper or adequate basis to conclude that the financial report gave a true and fair view of the company's position. This feature of the company's case led the executive and non-executive directors to bring cross-claims against the company's auditor, Deloitte. In the end, "during the course of the hearing, the allegation that the HY15 and FY15 accounts were materially misstated were struck out or abandoned, with the result that the case against Deloitte was dismissed": Primary Judgment, [10].
13. Substantial resources were directed by the various parties in the various proceedings to address the accounting and auditing issues raised by this attack. Some 32 expert reports were filed in relation to these issues. Many of those were filed in the two class actions, but those claims were being heard concurrently with the proceedings brought by the company and the banks, and evidence in one was evidence in all. The executive and non-executive directors were ordered to pay the costs of Deloitte, but DSH and the two banks were ordered to indemnify the directors in this regard. The cost liability to Deloitte has now been settled and paid by DSH and the banks. That fact does not address the costs expended by the executive directors in responding to the attack on the accounts.
14. Leaving the accounting and auditing issues aside, the evidence suggests that significantly greater resources were directed in closing written and oral submissions to the Bad Stock case than to the final dividend case, even making some allowance for the submissions on the latter topic building upon the former. That fact throws some light on the resources generally expended on the issues.
15. In the context outlined it is clear that the executive directors had a significantly greater degree of success than the company as regards the amounts that were claimed, and that the resources of the parties were directed to a significantly greater degree to the issues on which the company was unsuccessful than to the issue on which it ultimately succeeded. Whilst the issues all overlap to some extent, they were also meaningfully distinct in nature. In these circumstances it would not be fair for there simply to be no order as to costs, as sought by DSH.
16. The company notes that the burden on the executive directors of responding to the various claims was shared with the non-executive directors, against whom much the same claims had been made. It is apparent that different legal teams took the lead on different aspects of the evidence and submissions. That does not detract from the fact that the executive directors had claims against them to which they needed to respond.
17. Adopting a broad-brush approach taking account of all the circumstances - including the points made by DSH about the various forms of overlap and the fact that DSH had some success - we consider that it is fair and reasonable that the company should pay 50% of the costs of the two executive directors (see order 2). Whilst the executive directors had significantly greater than 50% success in terms of the resources spent on the issues on which they succeeded, that must be weighed against the fact that this order does not require the executive directors to pay the costs of DSH with respect to the final dividend claim.

The other orders sought by the directors

1. Four other issues arise with respect to the costs orders.
2. First, the short minutes of order proposed by the executive directors seek a variation of order 3 made by this Court on 26 August 2022. Although it is not addressed in the submissions, we understand that the point of the variation is to include the agreed interest calculation with respect to the successful claim for the final dividend. That order should be made (see order 1).
3. Secondly, as noted above, the costs order made by the primary judge in favour of the executive directors provided that the NAB and HSBC were jointly and severally liable, with DSH, for those costs. His Honour's reasons for doing so were explained in the Costs Judgment at [14]-[20]. The effect of this Court's orders is to reduce the banks' costs liability in this regard. Nevertheless, the Court provided the banks an opportunity to be heard on this issue. The banks submitted that it is unnecessary to make a costs order binding them as they had previously given an undertaking to meet any costs order made against the company which was not met by it. They noted that the primary judge had raised practical reasons for ordering that the banks should be directly liable on a joint and several basis which related to the set-off issue (which is addressed below). The banks suggested that those reasons were inappropriate given that, in their submission, a set-off should not be ordered, and that they had already met their portion of the directors' costs liability to Deloitte.
4. It is appropriate that the two banks remain jointly and severally liable with DSH for the costs ordered to be paid to the executive directors (see order 2). The banks did not themselves appeal the orders of the primary judge relating to being jointly and severally liable for the costs orders against the company, and such an order remains in place as regards the costs awarded to the non-executive directors. There is no reason why the executive directors should be in a different position to the non-executive directors in this regard. Further, as addressed below, set-off orders will be made, which does give some potential practical utility to there being joint and several liability.
5. Thirdly, the directors seek interest on their costs. This proposal was not opposed by DSH. The primary judge made a generic order that interest be payable by any party ordered to pay costs. It is not necessary to reproduce that order. An order can be made, for the avoidance of doubt, confirming that that order applies to the costs order now made (see order 2).
6. Fourthly, the executive directors seek orders to permit them to set-off the costs liabilities of DSH and the banks against the order made against them with respect to the final dividend. They also seek a stay on execution of the judgment debt created by this Court's orders until costs have been agreed or assessed. As regards the set-off, they point out that the primary judge made an order below that "[a]ny costs liability of NAB to Potts arising in [the proceeding brought by the Banks] or in [the proceeding brought by DSH] … are to be set-off against the judgment entered for NAB against Potts and any costs liability of Potts to NAB in this proceeding". The issue of a set-off arose below because the primary judge held that NAB had made out its claim against Mr Potts, and awarded judgment of some $57.278 million. The primary judge also made an order that a portion of that judgment sum be "stayed until NAB's costs of this proceeding and Potts's costs of proceeding 2017/81927 are assessed or agreed". His Honour's reasons for making these orders were explained in the Costs Judgment at [65]-[71] and [93]-[111]. Those orders remain in place. The issue now is whether further, similar orders should be made to take account of the judgment debt of the two directors created by the orders of this Court in relation to the final dividend.
7. DSH made no submissions opposing the proposed set-off order, other than to note that "if DSH's proposed costs order is made, there will be nothing to set off".
8. As for the proposed stay, the executive directors submitted (supported by evidence) that if they obtained one of the costs orders that they sought, then it is likely that DSH will end up owing them money rather than the other way around, even allowing for Mr Potts' large judgment debt to the NAB (but taking account of the fact that a payment of some $26.778 million has already been made on behalf of Mr Potts to the NAB as part payment of that debt). As it is, the costs order to be made is one of the variants they proposed, albeit with a proportion of 50% rather than 60%. The evidence is that the two directors claim to have little in the way of personal assets, and the directors and officers insurance policy would be exhausted by payment of the judgment debts (arising from this Court's judgment with respect to the final dividend, and the amount still outstanding in relation to Mr Potts' judgment debt to the NAB). The costs assessment process is expected to take significant time. If the executive directors are required to pay the judgment debt that now exists with respect to the final dividend, prior to obtaining whatever amount the company and the two banks are assessed as owing them on costs, then this may lead to their bankruptcy. These submissions have force.
9. DSH's submission in reply was, simply: "a stay is inappropriate. In any event, the Company agrees not to enforce this Court's orders beyond the funds remaining in the D&O Tower until the costs orders are resolved".
10. The two banks submitted that neither set-off nor a stay should be ordered as it would prejudice them by denying DSH the fruits of its success in its appeal as regards the final dividend. They said that any prejudice to the executive directors is answered by DSH's proffered "undertaking" not to enforce this Court's orders beyond the funds remaining in the policy until the other costs orders are resolved.
11. Orders for a set-off and stay should be made (orders 3-5). The company appears not to have offered a formal undertaking to the Court, despite what was said by the banks. In any case, the submissions of DSH and the banks do not grapple with the submission of the executive directors that there is a real prospect that there will be no net fruits of success payable to DSH given the substantial costs incurred by the executive directors below. On that understanding, the effect of the approach suggested would be to require the remaining amount available under the insurance policy to be paid out to the company, but with the real prospect that most or all of that amount would then have to be repaid once the costs assessment process is complete. It is difficult to see how such a result would serve the interests of justice. The banks submitted that they have no real prospect of obtaining interest with respect to the delayed payment. Even assuming that to be so, the point only has force insofar as a net amount is payable.
12. It is possible that the working out of the orders may give rise to the need to apply for further orders in the future. The regime we propose will include an entitlement to all parties to apply to this Court, on seven days' notice. In light of the fact that any entitlement to apply will probably be based upon new facts, and noting that an application for a gross-sum costs order is presently pending before the primary judge, it is likely that any proper application will be remitted to the Equity Division.
13. Two final points may be made. First, the above orders substantially replicates the regime ordered by the primary judge, in respect of which no party maintained any separate challenge on appeal. Secondly, the resolution of these issues relating to costs was an incident of determining the appeal. It is not necessary or appropriate to make some distinct order in relation to the costs of doing so.

Orders

1. The orders of the Court will be as follows: 1. Vary order 3 made by this Court on 26 August 2022, with effect from that date, to read: "In lieu thereof, judgment against each of Mr Potts and Mr Abboud in the amount of $15,541,835.16, to take effect from 7 October 2021, such liability to be joint and several." 2. In proceeding 2017/81927, the plaintiff, National Australia Bank Ltd ("NAB") and HSBC Bank Ltd ("HSBC") are to pay 50% of the costs of the first and second defendants of the proceedings at first instance (including their costs of the cross-claims), such liability to be joint and several. For the avoidance of doubt, order 9 made in proceeding 2017/81927 by Ball J on 11 February 2022 (with respect to interest) applies to this order. 3. Any liability of Mr Abboud to DSHE Holdings Ltd ("DSH") arising from order 1 above is to be set-off against any costs liabilities of DSH, NAB, and HSBC to Mr Abboud arising in proceedings 2017/81927 and 2017/81938. 4. Any liability of Mr Potts to DSH arising from order 1 above is to be set-off against any costs liabilities of DSH, NAB, and HSBC to Mr Potts arising in proceedings 2017/81927 and 2017/81938. 5. Execution of the judgment entered by this Court in favour of DSH, as varied by order 1 above, is stayed until the costs of proceedings 2017/81927 and 2017/81938 are assessed or agreed. 6. Grant liberty to apply on seven days' notice.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 December 2022