DSHE Holdings (Receivers & Managers Appointed)(In Liquidation) v Nicholas Abboud

Supreme Court of NSW|2021-12-16|Before: Ball J, Corporation Pty J

DSHE Holdings Limited ACN 166 237 841 (Receivers & Managers Appointed) (Administrators Appointed) (Plaintiff | Cross Defendant on Sixth Cross Claim ) Nicholas Abboud (First Defendant | Cross Claimant on Second Cross Claim | First Cross Defendant on Sixth Cross Claim) Michael Potts (Second Defendant | Cross Claimant on Third Cross Claim | Sixth Cross Defendant on Sixth Cross Claim) Phillip John Cave (Third Defendant | Cross Claimant on Fifth Cross Claim | Second Cross Defendant on Sixth Cross Claim) Robert Murray (Fourth Defendant | First Cross Claimant on First Cross Claim | Fifth Cross Defendant on Sixth Cross Claim) William Wavish (Fifth Defendant | Cross Claimant on Fourth Cross Claim | Ninth Cross Defendant on Sixth Cross Claim) Lorna Raine (Sixth Defendant | Second Cross Claimant on First Cross Claim | Seventh Cross Defendant on Sixth Cross Claim) Robert Ishak (Seventh Defendant | Third Cross Claimant on First Cross Claim | Fourth Cross Defendant on Sixth Cross Claim) Jamie Tomlinson (Eighth Defendant | Fourth Cross Claimant on First Cross Claim | Eighth Cross Defendant on Sixth Cross Claim) David Robert White and others listed in Annexure B t/as Deloitte Touche Tohmatsu (Cross Claimants on Sixth Cross Claim | Cross Defendants to First, Second, Third, Fourth and Fifth Cross Claims)

National Australia Bank (First Plaintiff) HSBC Bank Australia Limited (Second Plaintiff) Nicholas Abboud (First Defendant | Cross Claimant on First Cross Claim | Second Cross Defendant on Third Cross Claim) Michael Potts (Second Defendant | Cross Claimant on Second Cross Claim | Third Cross Defendant on Third Cross Claim) David White and others listed in Annexure A t/as David Robert White and others listed in Annexure B t/as Deloitte Touche Tohmatsu (Cross Defendants to First Cross Claim and Second Cross Claim | Cross Claimants on Third Cross Claim) DSHE Holdings Limited trading as DSHE Holdings Ltd ACN 166 237 841 (Receivers and Managers Appointed) (In Liquidation) (First Cross Defendant on Third Cross Claim) Representation: 2017/81927:

JA Arnott SC with JA Granger (Plaintiffs) RM Smith SC with N Simpson (First Defendant | Cross Claimant on Second Cross Claim | First Cross Defendant on Sixth Cross Claim) S Nixon SC with M Ellicott (Second Defendant | Cross Claimant on Third Cross Claim | Sixth Cross Defendant on Sixth Cross Claim) J Williams SC and J Entwisle (Third, Fourth and Sixth to Eighth Defendants | First to Fourth Cross Claimants on First Cross Claim | Cross Claimant on Fifth Cross Claim | Second, Fourth, Fifth, Seventh and Eighth Cross Defendants on Sixth Cross Claim) R Foreman SC with J Entwisle (Fifth Defendant | Cross Claimant on Fourth Cross Claim | Ninth Cross Defendant on Sixth Cross Claim) P Braham SC with A Shearer (Cross Claimants on Sixth Cross Claim | Cross Defendants to First, Second, Third, Fourth and Fifth Cross Claims)

JA Arnott SC with JA Granger (Plaintiffs | First Cross Defendant on Third Cross Claim) RM Smith SC with N Simpson (First Defendant | Cross Claimant on First Cross Claim | Second Cross Defendant on Third Cross Claim) S Nixon SC with M Ellicott (Second Defendant | Cross Claimant on Second Cross Claim | Third Cross Defendant on Third Cross Claim) P Braham SC with A Shearer (Cross Defendants to First Cross Claim and Second Cross Claim | Cross Claimants on Third Cross Claim)

Norton Rose Fulbright (Plaintiffs) Clayton Utz (First and Second Defendants | Cross Claimants on Second and Third Cross Claims | First and Sixth Cross Defendants on Sixth Cross Claim) Allens Linklaters (Third Defendant | Cross Claimant on Fifth Cross Claim | Second Cross Defendant on Sixth Cross Claim) Arnold Bloch Leibler (Fourth and Sixth to Eighth Defendants | Cross Claimants on First Cross Claim | Fourth, Fifth, Seventh & Eighth Cross Defendants on Sixth Cross Claim) Webb Henderson (Fifth Defendant | Cross Claimant on Fourth Cross Claim | Ninth Cross Defendant on Sixth Cross Claim) Clifford Chance (Cross Claimants on Sixth Cross Claim | Cross Defendants to First, Second, Third, Fourth and Fifth Cross Claims)

Norton Rose Fulbright (Plaintiffs | First Cross Defendant on Third Cross Claim) Hall & Wilcox (First and Second Defendants | Cross Claimants on First and Second Cross Claims | Second and Third Cross Defendants on Third Cross Claim) Clifford Chance (Cross Claimants on Third Cross Claim | Cross Defendants to First Cross Claim and Second Cross Claim) File Number(s): 2017/81927 and 2017/81938 Publication restriction: None

Introduction

On 11 June 2021, I delivered reasons for judgment in these matters in which I concluded (1) that the claims brought in the Company Proceeding by the receivers of DSHE Holdings Pty Ltd (Receivers & Managers Appointed)(In Liq) (DSH) in the name of DSH should be dismissed; (2) that the claim in the Bank Proceeding brought by National Australia Bank Limited (NAB) against Mr Potts for misleading and deceptive conduct should succeed, but that the claims in that proceeding brought by NAB against Mr Abboud and the claims brought by HSBC Bank Australia Limited (HSBC) against both Mr Potts and Mr Abboud should fail: see DSHE Holdings (Receivers & Managers Appointed)(In Liquidation) v Nicholas Abboud (No 3); National Australia Bank Limited v Nicholas Abboud (No 4) [2021] NSWSC 673 (Principal Judgment). In addition, the Court made orders on 12 February 2021 dismissing cross-claims that the defendants in both proceedings had brought against Deloitte, the auditors of DSH.
On 7 October 2021, formal orders were made to give effect to my judgment. Under the terms of those orders judgment was given in favour of NAB against Mr Potts in the sum of $57,278,091.44. The Court also made the following order by consent: Upon the undertaking of Mr Potts to prosecute the appeal expeditiously, the execution of the judgment be stayed on an interim basis until further order pending determination of the Stay Application.
Two issues remain. The first concerns the question of costs in both proceedings. The second is whether the stay of the judgment against Mr Potts in the Bank Proceeding should continue pending an appeal and the quantification of costs. This judgment assumes familiarity with my earlier judgment. It uses the same abbreviations as were used in that judgment.

Additional background

Before addressing the specific issues raised by the parties, some further background is relevant.
The defendants have the benefit of directors' and officers' liability insurance up to a limit of $150,000,000. The insurance is provided under a primary layer and a number of excess layers (together, the D&O Tower). As at 6 October 2021, the total amount of cover still available under the D&O Tower was approximately $52,087,000. The relevant D&O Tower insurers accept that they are liable to indemnify Mr Potts in respect of his liability to NAB as a result of my judgment and the defendants against any costs orders against them in favour of Deloitte. As things stand, there is a shortfall. Mr Potts' liability as a result of my judgment is $57,278,091.44. Deloitte's costs are estimated to be approximately $20,200,000, although they are likely to be significantly less than that on a party/party basis. The costs of an appeal by Mr Potts is estimated to be $300,000. HSBC and DSH have also appealed and no doubt the defendants will incur costs in defending those appeals.
On the other hand, the defendants' total costs of the proceedings are approximately $68,200,000 comprising: 1. $8,390,000 in respect of Mr Wavish's costs; 2. $9,570,000 in respect of the costs of Messrs Murray, Ishak, Tomlinson and Ms Raine; 3. $14,460,000 in respect of Mr Cave's costs; 4. $1,097,000 in respect of Mr Abboud's costs of the Bank Case; 5. $1,910,000 in respect of Mr Potts' costs of the Bank Case; 6. $31,900,000 in respect of the costs of Mr Abboud and Mr Potts in the Company Case.
Although there is a question of how much of those costs will be recoverable, it is apparent that as a result of the costs orders that will be made in favour of the defendants, the D&O Tower will be entitled to recover from DSH and the Banks more than enough to cover any residual liability of Mr Potts and any costs orders obtained by Deloitte.
These considerations have shaped a number of the orders sought by the parties. The defendants seek orders that they are entitled to recover any costs liability they have to Deloitte from the plaintiffs; and they seek an order that the plaintiffs be directly liable for those costs to avoid the possibility that the defendants have to pay Deloitte's costs before the D&O Tower is reimbursed from costs recoveries made by the defendants. Similarly, the defendants seek an order that the Banks be jointly and severally liable with DSH for the defendants' costs in the Company Case. One advantage of such an order is said to be that it would permit Mr Potts to set-off his liability to NAB against NAB's liability as a result of that order in favour of him. Moreover, one reason advanced in favour of a stay is that it would mean that Mr Potts would not be exposed to the risk of bankruptcy because he is unable to pay the full amount of the judgment against him now. NAB for its part accepts that it should not be entitled to bankrupt Mr Potts pending determination of the appeal. However, it submits that that can be more easily accommodated by an undertaking by it not to pursue Mr Potts personally pending the appeal.
Another matter that has shaped the orders sought by the parties is the substantial changes that occurred in the plaintiffs' cases during the course of the hearing.
DSH brought two claims against the defendants (in the Company Case). The first was that the defendants (more accurately, those of them who were directors of DSH at the relevant times) breached their duties by declaring and paying the interim dividend for FY15 and the final dividend for FY15. The second was that, as a consequence of the implementation of a policy to maximise O&A rebates, DSH bought what was described as "Bad Stock". It was alleged that the defendants breached their duties by failing to take appropriate steps to prevent that conduct occurring and that therefore they were liable for losses arising from that conduct.
As pleaded and opened, an important plank in DSH's case was that the defendants did not have a proper basis for approving the HY15 and FY15 accounts (together, the Accounts). That was said to be so for two main reasons. First it was said that the Accounts did not contain a proper provision in respect of obsolete stock. Second it was said that the Accounts incorrectly recognised O&A rebates at the time they were agreed rather than at some later time. Similarly, in the Bank Case, it was alleged that Mr Abboud and Mr Potts were aware of the matters pleaded in the Company Case, including the fact DSH did not have a proper basis for paying the two dividends and the matters than meant that the Accounts were misstated, and engaged in misleading and deceptive conduct by failing to disclose those matters. The allegations in relation to the Accounts prompted cross-claims against Deloitte in both the Company Case and the Bank Case. By the time of final submissions, the allegations concerning the Accounts had either been struck out or abandoned, which led to the dismissal of the cross-claims.
There were also substantial changes to the Bad Stock case. As originally put, the claim that DSH bought Bad Stock as a consequence of the emphasis on O&A rebates was put on the basis that Bad Stock was stock that was unattractive to consumers and was therefore unprofitable. However, that case ran into difficulties. One was that it was hard to maintain the case absent a contention that the Accounts were misstated because they did not make adequate provision for obsolete stock. Another was that some stock that was classified as Bad Stock was actually sold at a profit. Faced with those difficulties, as finally put, DSH's principal case was that, as a consequence of the emphasis on O&A rebates, DSH bought too much stock. However, a critical difficulty with that case was that DSH was unable to prove that it suffered a loss as consequence of buying too much stock. It did not seek to prove that it suffered a loss because too much capital was tied up in stock. And it was unable to prove that it suffered a loss because some of the excess stock that it bought became obsolete.

The defendants' costs of the Company Case

It is accepted that DSH must pay the defendants' costs of the Company Case. However, four questions arise. The first is whether an order should be made that the Banks also be liable for those costs. The second is whether an order should be made permitting the defendants to recover only one set of costs. The third is whether some part of the defendants' costs should be paid on an indemnity basis. The fourth is whether costs should bear interest from the date they were incurred.

Should an order be made that the Banks be liable for DSH's costs?

Section 98(1) of the Civil Procedure Act 2005 (NSW) provides: (1) Subject to rules of court and to this or any other Act - (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis.
It is not disputed that the Court has power under s 98 to order that a non-party pay costs. The overriding consideration in deciding whether such an order should be made is whether it is in the interests of justice to make it. In considering that question, the Court will generally take into account the following matters among others: 1. whether the unsuccessful party to the proceedings was the moving party and not the defendant; 2. whether the source of fund for the litigation was the non-party or its principal; 3. whether the conduct of the litigation was unreasonable or improper; 4. whether the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party, or if financial was a substantial interest, and 5. whether the unsuccessful party was insolvent or could otherwise be described as a person of straw. See FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 at [210] per Basten JA (with whom Beazley JA agreed).
In the present case, it is submitted that it is in the interests of justice to make the order because the proceedings were brought for the benefit of the Banks who effectively funded the litigation by foregoing distributions which would otherwise have been made to them. Moreover, the Banks, have agreed to indemnify the receivers in respect of DSH's legal costs. Consequently, an order that they pay the costs directly simply recognises the reality that they are ultimately liable to bear those costs in any event. In this respect the position of the Banks is said to be similar to a litigation funder who has agreed to indemnify the plaintiff against an adverse costs order. In such cases, it is common to make a costs order against the litigation funder: see Dwyer v Volkswagen Group Australia Pty Ltd t/as Volkswagen Australia (No 2) [2021] NSWSC 1137; Gore v Justice Corporation Pty Ltd [2002] 119 FCR 429.
The evidence is that the receivers currently hold approximately $16,600,000, which will not be sufficient to meet the defendants' legal costs. Consequently, an order will ensure that the defendants are able to recover their costs without the necessity of having to rely on the indemnity. Such an order is also said to have the advantage of permitting Deloitte to recover its costs in the event that those costs cannot be recovered from Mr Potts. Lastly, such an order is said to have the advantage of permitting Mr Potts to set-off costs he is entitled to recover from NAB in the Company Case against the judgment NAB has recovered against him in the Bank Case.
I have concluded that it is appropriate in this case to order that the Banks be liable for the defendants' costs in the Company Case. Standing back from the detail for a moment, the Banks suffered a loss because their loans were not repaid in full following the collapse of DSH. They sought to recover that loss from the directors of DSH. For that purpose, they appointed receivers who pursued a claim in the name of the company against all the directors and brought their own claims against Mr Abboud and Mr Potts. For obvious reasons, the two claims were brought in separate proceedings. However, the proceedings were pursued together. The same solicitors acted for the plaintiffs in both cases and the costs of both cases were met by the receivers out of DSH's funds (which would otherwise have been distributed to the Banks). As might be expected, the Banks agreed to indemnify the receivers against any costs liability they might have. Two things may be said about these circumstances. First, the proceeding brought by the receivers was clearly brought for the benefit of the Banks and was funded by amounts that would otherwise have been distributed to the Banks. It is to be inferred that the Banks, through their rights of appointment and removal of the receivers, exercised considerable control over the conduct of the Company Case. Those factors provide a proper basis for an order that the Banks themselves be liable for the defendants' costs in the Company Case.
Second, the Banks will directly or indirectly bear those costs in any event, either through foregone distributions or, to the extent that there is a shortfall, through the indemnities they have given. In the normal course of events, that may provide a reason for not making an order that the Banks be liable for those costs, on the basis that such an order is unnecessary. But in this case, the difference between making and not making the order may have important practical consequences. I have already indicated that it may have important practical consequences for Mr Potts because on any view he will not be fully indemnified in respect of the judgment against him by the amount currently available from the D&O Tower. It may also have important practical consequences for the other directors if the balance of the amount currently held by the D&O Tower is paid in respect of Mr Potts' liability, leaving nothing to indemnify the other directors against their costs liability to Deloitte. In my opinion, bearing in mind those possible consequences, it is not consistent with the interests of justice that NAB should be entitled to pursue the judgment it has obtained without giving credit for the costs orders that it will ultimately have to bear through the indemnity it has given when the two proceedings should be seen as a (quite proper) strategy adopted by the Banks to seek to recover their losses from the directors. It is true that the same consideration does not apply to HSBC, since it was wholly unsuccessful. However, for the reasons I have given, there is a proper basis for ordering that both Banks be liable for the costs of the Company Case. The fact that the practical reasons for making such an order arise because of the particular circumstances of NAB does not provide a sufficient basis for distinguishing between the two Banks.
Accordingly, the Banks, as well as DSH, should be ordered to pay the defendants' costs of the Company Case.

Should an order be made for one set of costs?

Mr Abboud and Mr Potts were represented together primarily by Clayton Utz. However, Hall & Wilcox were retained by them to deal with issues unique to the Bank Case. They were separately represented by counsel. Mr Cave and Mr Wavish were also separately represented. The other NEDs were represented by the same legal advisors.
The Banks submitted that the Court should order that the defendants only be entitled to recover one set of costs in the Company Case, on the basis that it was not reasonable for them to be separately represented in that proceeding. In making that submission, the Banks accept that the defendants should be entitled to recover for non-duplicative work. However, their submission in effect is that all the costs should be assessed as if the work had been undertaken by one set of legal advisors advising all defendants and that the question whether work was duplicative or not should be determined on that basis.
The defendants, on the other hand, submit that it was appropriate for Mr Abboud, Mr Potts, Mr Cave, Mr Wavish and the other NEDs to be separately represented because of the possibility of conflicts between them. They accept, however, that, to the extent that work undertaken by each set of legal advisors duplicated work undertaken by others, they should only be entitled to recover one set of costs for that work. In making that submission, the defendants make two points. First, they submit that the question is not whether the claim against the defendants gave rise to conflicts between them, but whether there was a realistic possibility that conflicts might arise: see Treasury Wine Estates Limited v Maurice Blackburn Pty Ltd (No 2) [2021] FCAFC 38 at [13]ff. Second, they submit that if some objection was to be taken to separate representation, then it should have been raised at the outset. In making that second submission, they rely principally on the decision of the Court of Appeal in HP Mercantile Pty Ltd v Hartnett [2017] NSWCA 79. In that case the Court (Bathurst CJ, Leeming and Payne JJA) said: 8 All parties were content to rely upon principles stated by Woodward J in Statham v Shephard (No 2) (1974) 23 FLR 244 and applied in numerous decisions in this Court, including in Taylor v Owners - Strata Plan No 11564 (No 2) [2013] NSWCA 153 at [6] (McColl, Basten, Hoeben JJA): "In Statham v Shephard (No 2) (1974) 23 FLR 244 at 246, Woodward J stated the general principle that, subject to three provisos, 'the court will not normally allow two sets of costs to defendants where there is no possible conflict of interest between them in the presentation of their cases'. The first proviso reduced the severity of the 'no possible conflict' test, saying that the defendants should make enquiries from the plaintiff if a conflict appeared possible but unlikely. The second proviso was that the defendants might be acting reasonably in remaining at arm's length despite their united opposition to the plaintiff, even, apparently, in the case of 'no possible conflict of interest'. Whether that proviso was added from an abundance of caution and would generally have no operation need not be determined. It was limited by the third proviso which stated that even if the defendants were acting reasonably in maintaining separate representation 'for some time or for some purposes, they may still be deprived of part of their costs if they act unreasonably by duplicating costs on any particular matter or at any particular time'. It might be added that, even if they did not duplicate costs, they would not necessarily obtain separate costs orders if the expense incurred was not one which should reasonably have been borne by the plaintiff." 9 HPM's submissions were straightforward. It submitted that it had put the respondents on notice some two months before the respondents' written submissions had been filed, that the appeal was heard and determined on the basis of a common statement of facts, that the interests of the two groups of respondents were identical, and that there was the absence of any conflict or any possibility of conflict between them.
The reference to the first proviso in Statham is a reference to the following statement of Woodward J in that case (at 246): In the first place, if a conflict of interest appears possible but unlikely, the defendants should make any necessary inquiries from the plaintiff as to the way in which his case is to be put if this would resolve the possibility of conflict between defendants.
Understood in that way, it is not correct to say that it was incumbent on the plaintiff to raise the question of conflicts. Rather, the position relevantly is that the defendants are not entitled to recover the costs of separate representation if (1) there was no possibility of conflict between them; or (2) there was a possibility of conflict depending on how precisely the plaintiff put its case and the defendants failed to raise the matter with the plaintiff in order to eliminate that possibility.
In my opinion, there was plainly the possibility of a conflict between the NEDs (other than Mr Wavish) on the one hand and each of Mr Abboud, Mr Potts and Mr Wavish on the other. Each of Mr Abboud, Mr Potts and Mr Wavish were involved in different ways in formulating the policies and procedures that led to the emphasis on O&A rebates and the provision for obsolete stock. They also each had extensive retail experience and were (for a limited period of time in the case of Mr Wavish) involved in the management of the Dick Smith business. Mr Potts also had detailed knowledge of Dick Smith's financial position and cashflows. Each of them therefore had different knowledge of and involvement in the matters that were said to give rise to liability on the part of the defendants. Moreover, each of the defendants pleaded a proportionate liability defence naming the other defendants as concurrent wrongdoers. It is to be expected that those defences would give rise to differences between Mr Abboud, Mr Potts and Mr Wavish on the one hand and the other defendants on the other, since it was in the interests of the other defendants to contend that Mr Abboud, Mr Potts and Mr Wavish bore a greater share of the responsibility for the losses claimed because of their different levels of knowledge and participation in the events that were said to ground that liability. The same is true of the position as between Mr Abboud, Mr Potts and Mr Wavish themselves.
The position is not as clear in the case of Mr Cave. He was the Chairman of DSH from the time it was floated until shortly before the Interim Dividend was paid. In many respects, his position was similar to the position of the other NEDs. He contends that what set him apart was the fact that he resigned as a director before the Interim Dividend was paid (but after it was approved at the Board Meeting on 16 February 2015). Consequently, it might be said that he had an interest in persuading the Court that the critical date was when the dividend was paid, whereas the other defendants had an interest in persuading the Court that it was when the dividend was approved (on the basis that DSH's financial position was better then). For similar reasons, it was open to Mr Cave to submit that the other defendants should bear greater responsibility for the loss compared to him. Taking these matters into account, I have concluded that it was appropriate for Mr Cave to be represented separately.
The possibility of a conflict arising from the different roles of the defendants, the fact that some defendants were likely to have placed some reliance on others and the pleading of the proportionate liability defences could not be described as unlikely. Nor did it arise out of the precise way in which the plaintiffs' put their case. Consequently, nothing turns on the fact that the defendants did not seek clarification from the plaintiffs in relation to any potential conflict.
It follows that I am not prepared to make an order to the effect that the defendants in the Company Case should only be entitled to recover one set of costs. However, as I have explained, that does not alter the position that the defendants should not be entitled to recover costs which are duplicative. Whether costs are duplicative or not, and how duplicative costs should be dealt with, is best left to assessment.

Should an order be made for indemnity costs?

The defendants put their claim for indemnity costs on three bases. First, they contend that DSH (and the Banks) should pay their costs of the Bad Stock Case or at least some part of them on the indemnity basis because the case was commenced or continued in circumstances where DSH, properly advised, should have known that it had no chance of success: see Baulderstone Hornibrook Engineering Pty Limited v Gordian Runoff Limited (No 2) [2009] NSWCA 12 at [4]; Bookarelli Pty Ltd v Katanga Developments Pty Ltd (No 2) [2017] NSWCA 94 at [9]. That is said to be so because it should have been apparent from the start, or at least from the time the issue was raised in a letter written by Clayton Utz dated 24 October 2019, that DSH would be unable to prove that it had suffered any loss as a consequence of buying Bad Stock. It is common ground that proof of loss was an essential component of the case.
Second, the NEDs claim that DSH should pay their costs of what they describe as the "Accounting Case" on an indemnity basis, again because it is said that the case was commenced or continued in circumstances where there was no proper basis for it.
Third, the NEDs rely on offers of compromise in seeking an order for indemnity costs. One offer was served by all the NEDs on 4 December 2019. A second offer was served by Mr Cave on 15 January 2020.
There is no doubt that the Bad Stock Case failed because DSH was unable to prove loss. The question is whether that ought to have been obvious to the plaintiff at some stage and, if so, when.
It could not be said to have been obvious from the start that DSH would be unable to prove loss as a consequence of buying Bad Stock. As I pointed out in my judgment, the term "Bad Stock" was used by DSH at various stages somewhat ambiguously to mean either stock that was unattractive to consumers or stock that was in excess of DSH's needs. But on either view, the acquisition of Bad Stock was capable of giving rise to loss, either because the stock was or would eventually become obsolete or at least because too much capital was tied up in stock. It might have been said that that conclusion was supported by the fact that on 30 November 2015, DSH took a non-cash impairment of $60 million in respect of its stock. However, DSH did not seek to put its case in that way. That is, DSH did not seek to prove that it was necessary to take the non-cash impairment because it had bought Bad Stock. Instead, it stated in the pleading that particulars of loss would be provided with expert evidence, and ultimately it relied on the expert evidence given by Ms Etlin and Ms Oliver.
Ms Oliver provided two methods for calculating loss. The first calculated the loss as the total of the second margin losses recorded by DSH on stock purchased from suppliers who provided O&A rebates together with the cost of stock acquired from suppliers of O&A rebates which was "abandoned" by the receivers following closure of the Dick Smith stores. That methodology took no account of profits made on stock purchased from those suppliers. The methodology was abandoned by DSH on 2 March 2020. The second methodology sought to calculate the loss made on the purchase of stock in respect of which DSH had obtained O&A rebates and which Ms Etlin had identified as excess stock because it was acquired at a time when the stock on hand already exceeded 16 weeks' cover. In a letter dated 24 October 2019 from Clayton Utz to Norton Rose Fulbright, the solicitors for DSH, Mr Abboud and Mr Potts took issue with the way in which DSH sought to calculate its loss. In relation to the methodology which was ultimately relied on by DSH, they submitted, relying on an expert report prepared by Mr Samuel, that that methodology was flawed because it failed to take account of profits earned on the sale of stock which, on Ms Etlin's analysis, was classified as Bad Stock. The letter stated that, for that reason, the claim for damages based on the analysis that was ultimately relied on by DSH had no reasonable prospects of success. The letter put DSH on notice that, if the claim was pursued and ultimately failed (which it did) "our clients will seek an order for indemnity costs for all costs incurred in connection with the trial of the Bad Stock case".
The issue was addressed by Ms Oliver in a joint expert report dated 5 June 2020 and when giving oral evidence. Her principal point was that, if DSH had not bought Bad Stock, it would have bought other stock which could have been sold at a profit. In principle, DSH's loss was the difference between the profit it earned on the stock that it did purchase and the profit it would have earned if it had bought alternative stock. In the absence of evidence of what that alternative stock might have been, the methodology she adopted was a reasonable approximation of the loss DSH suffered. That response may have had some force if DSH's case was that, as a result of the directors' breaches of duty, DSH bought the wrong stock (that is, stock that was unattractive to consumers). However, it was not an answer to what became DSH's primary case - namely, that as a result of the breaches of duty it bought too much stock.
The case that DSH bought the wrong stock was never wholly abandoned by DSH, although in the light of the evidence, that case took on a subsidiary role. As I observed in my principal judgment, there was some evidence in support of it. However, I concluded that the evidence was not sufficient to establish that case (see Principal Judgment at [375]ff), whereas the evidence did establish that, to the knowledge of Mr Abboud and Mr Potts at least, DSH bought too much stock.
If the case that DSH had bought the wrong stock had been made out, it was at least arguable that the way in which DSH sought to calculate its loss was a reasonable proxy for its actual loss, having regard to the difficulties of proof that DSH faced. And it was at least arguable, particularly having regard to Ms Oliver's evidence, that the answer to the point made in the Clayton Utz letter was the one that she gave. Having failed to establish that DSH bought the wrong stock, it might be said that it was obvious that DSH had not proved that it suffered a loss because it had bought too much stock. But, as I have said, that is not the only way that DSH sought to put its case. Consequently, the obviousness of that problem is not sufficient to justify an order for indemnity costs. Certainly with the benefit of hindsight, it might be said that the Bad Stock Case should have been thought through more clearly and had that happened it would have become apparent to DSH and those advising it that the difficulties of proof were too great to maintain the claim. However, I do not think that that conclusion was so obvious that it justifies an order for indemnity costs.
Mr Abboud and Mr Potts advanced an alternative submission that DSH should pay their costs on an indemnity basis of defending the damages claim based on Ms Oliver's first methodology. In my opinion, it is not appropriate to make that order. Whether an order of that type should be made raises similar issues to the question whether costs should be awarded against a successful party in relation to an issue on which that party failed. Normally, the Court will not make such an order unless the party acted unreasonably in pursuing that issue or the issue on which the party was unsuccessful was dominant or clearly separable from the issues on which it succeeded: see Oshlack v Richmond River Council (1998) 193 CLR 72 at 122; [1998] HCA 11; Sze Tu v Lowe (No 2) [2015] NSWCA 91 at [40]-[41].
I accept that the first methodology proposed by Ms Oliver was misconceived because it took no account of profit earned on stock acquired from suppliers of O&A rebates. That point was made to DSH by Clayton Utz in its letter dated 24 October 2019. Allowing for the Christmas break, the methodology was abandoned not long after, on 2 March 2020. It could not be said that DSH acted unreasonably in connection with the issue. Ms Oliver advanced one basis on which damages could be assessed. The difficulties with that approach were pointed out to DSH. DSH acted reasonably in abandoning that methodology in the light of those difficulties. It could not be said that the methodology was a dominant part of the case or clearly separable from other issues in the case so as to justify a separate and different costs order. It was one aspect of Ms Oliver's evidence. That evidence needed to be addressed by the defendants whether the first methodology was relied on or not. Moreover, the task of addressing that methodology was not clearly separable from the task of addressing Ms Oliver's evidence as a whole. Plainly, the evidence did not lengthen the hearing, since the methodology was abandoned before the hearing commenced.
The NEDs submit that DSH should pay their costs of the Accounting Case on an indemnity basis. The "Accounting Case" is described as the case to the effect that the NEDs breached their duties as directors by adopting certain policies concerning DSH's approach to accounting for rebates and inventory and by approving financial statements prepared on the basis of those accounting policies. That case was ultimately abandoned by DSH, after a number of paragraphs of the 3FACLS were struck out, following an application made by Deloitte.
It is not entirely clear on what basis the NEDs say that the Accounting Case was so hopeless that pursuit of it justifies an order for indemnity costs. As I have mentioned, there were two main accounting issues. One concerned the provision for obsolete stock and whether that provision was adequate. There was some evidence to suggest that it may have been inadequate. The evidence included the presentation prepared by Mr Holtzer and Mr Powell and the decision of the board on 29 November 2015 to take a non-cash impairment of $60 million in respect of stock. It also included evidence from Mr Basford, an expert accountant engaged by the plaintiffs. As it turned out, there were problems with this evidence. The material produced by Mr Holtzer and Mr Powell was not admitted as evidence of the truth of the assertions it contained. Mr Basford's evidence depended on assumptions concerning an appropriate provisioning methodology that were not supported by the evidence.
The other main accounting issue concerned the accounting treatment of rebates, particularly O&A rebates. The plaintiffs also led evidence from Mr Basford on that issue. But again there were difficulties with that evidence. One difficulty was that Mr Basford assumed that the only evidence that supported the existence of receivables in the form of O&A rebates was evidence that the rebates were recorded on Mr Skellern's whiteboard. The evidence went well beyond that, although there was evidence that some of the rebates were deliberately mis-described so as to justify their immediate recognition as income. Another problem was that the issue in relation to O&A rebates only affected the timing of when they were recognised. As a result, if the treatment of them was incorrect that would reduce the profit in the year in which they were recognised by the amount of the rebates but would increase the profit in the subsequent year by the same amount. DSH was unable to prove that once those adjustments were made, the accounts would be materially different.
These problems alone do not justify an order for indemnity costs. They demonstrate that ultimately DSH was unable to prove its case. Eventually, DSH recognised that that was the case and abandoned its case based on those allegations. However, I do not think that it could be said that that outcome was so obvious that that alone justifies an order for indemnity costs.
The NEDs' principal argument appears to be that they were entitled to rely on Deloitte. They submit that, in circumstances where DSH was not prepared to contend that Deloitte had breached its duties, it must have been obvious to it that the case against them in respect of the accounting issues would fail. I do not accept that submission. The NEDs had independent obligations in relation to the accounts of DSH. It was part of DSH's case that the NEDs failed to make appropriate enquiries in relation to rebates and provision for obsolete stock and failed to put in place appropriate systems to prevent the obvious consequences of a policy of maximising O&A rebates. That case failed. But it could not be said that it was obvious that the case would fail because the NEDs were entitled to rely on Deloitte's review report on the half yearly accounts or its audit report on the annual accounts and do nothing else.
The NEDs rely on two offers of compromise, which were made following an unsuccessful mediation in February 2019. By the time the offers were made, the defendants had served their evidence, including their expert evidence. Both offers were expressly made in accordance with the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) Pt 20 Div 4. The first offer was made on 4 December 2019 and was made on behalf of all the NEDs. It was to settle the case on the basis that the proceeding be dismissed as against the NEDs and that the NEDs pay the plaintiff the sum of $3 million in respect of its costs. At the time the offer was made, the plaintiffs' costs were $13,200,230.48. The NEDs knew that they were in the order of $11,750,000 as at May 2019. The second offer was made on 15 January 2020. It was made by Mr Cave alone. It was to settle the case against him on the basis that the proceedings against him be dismissed and that he would pay DSH the sum of $500,000 as a contribution to its legal costs. At that time, the plaintiffs' costs were $14,876,236.79.
The only issue in relation to both offers was whether they were genuine offers of compromise. That question is to be answered objectively having regard to the particular circumstances of the case. In order to be a genuine offer of compromise, the offeror must give something away: Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at 368 per Giles J. What that something is depends on the circumstances of the case. In some cases, an offer to "walk away" may be sufficient where, for example, the costs are substantial and the offeror's prospects of success are good: Leichhardt Municipal Council v Green [2004] NSWCA 341 at [26], [30] per Santow JA.
In my opinion, both offers were genuine offers of compromise. For the reasons set out in my principal judgment, the case against the NEDs was weak. DSH seeks to characterise the offers as offers that DSH capitulate and in support of that submission points to the fact that its legal costs were well in excess of $3 million at the time the offers were made. However, in my opinion, that submission mis-characterises the position. It appears that the amount of $13,200,230.48 was the plaintiffs' total costs of both proceedings. Obviously, the NEDs were not parties to the Bank Proceeding. Moreover, the costs had been incurred in relation to the claims against Mr Abboud and Mr Potts as well as the NEDs and, under the terms of the offers, those claims would continue in both proceedings. In addition, although each offer is characterised as an offer to contribute towards legal costs, looked at from the point of view of the NEDs, both offers involved the payment of significant sums of money. Both offers also involved the NEDs (or Mr Cave, in the case of the second offer) bearing their own costs, which by then were substantial, and bearing Deloitte's costs, which are also likely to have been substantial. Acceptance of the offers would have permitted DSH to dispose of the weakest part of its case, avoid any liability for substantial legal costs and receive a significant sum of money. Looked at in that way, both offers were genuine offers of compromise.
It follows that DSH should pay the NEDs' costs of the Bank Case on an indemnity basis from 5 December 2019. However, that conclusion does not affect the point that those costs must be assessed in a way that excludes any costs which are duplicative in accordance with the principle stated in para 29 above.

Should an order be made for interest on costs?

Sections 101(4) and (5) of the Civil Procedure Act provide: (4) Unless the court orders otherwise, interest is payable on an amount payable under an order for the payment of costs. (5) Interest on an amount payable under an order for the payment of costs is to be calculated, at the prescribed rate or at any other rate that the court orders, as from the date the order was made or any other date that the court orders.
Under these provisions, a party in favour of whom a costs order is made is entitled to interest on those costs unless the Court orders otherwise. Interest is calculated at the prescribed rate from the date of the order, again unless the Court orders otherwise. It is common now for the Court to order that interest be calculated from the time the costs were actually paid. Such an order is consistent with the compensatory nature of an order for costs: Lahoud v Lahoud [2006] NSWSC 126 at [82]-[83] per Campbell J; Drummond & Rosen Pty Limited v Easey (No 2) [2009] NSWCA 331 at [4]-[5] per Macfarlan JA, Tobias JA agreeing; Robb Evans of Robb Evans and Associates v European Bank Ltd (No 2) [2009] NSWCA 170.
DSH accepts that it should pay interest on costs. However, it submits that interest should only run from the date of the order. It submits that that is appropriate where there were substantial delays in the hearing of the case through no fault of its own.
I do not accept that submission. The delays were not caused by the defendants. They were caused by case management issues arising, first, from the desirability of hearing the Bank Case and the Company Case at the same time the Court heard three representative proceedings brought on behalf of shareholders of DSH and, second, from interruptions caused by the COVID-19 pandemic. An award of interest is essentially compensatory in nature. It reflects both the fact that the defendants have been out of pocket for the costs claimed and the fact that DSH has had the benefit of the amount claimed resulting from the delay.
Accordingly, the final orders to be made by the Court should include an order for interest on costs from the time the costs were incurred.

The costs of the Bank Case

It is common ground that NAB and HSBC should pay Mr Abboud's costs of the claim against him on the ordinary basis. However, there is no agreement in relation to the costs of the claim against Mr Potts. NAB was successful against Mr Potts. Normally, applying the principle in UCPR r 42.1 that costs follow the event, Mr Potts should pay NAB's costs of its claim and HSBC should pay Mr Potts' costs of its claim, since the first succeeded and the second failed. However, Mr Potts contends that, whilst he should pay NAB's costs of the claim that succeeded, NAB should pay his costs referrable to any expert accounting evidence, on the basis that any claim based on that evidence failed. On the other hand, HSBC contends that it should not be liable to pay Mr Potts' costs. In addition, the Banks resist paying interest on costs from the date the costs were paid.
I have already dealt with the question of interest on costs in relation to the Company Case. For the reasons stated in that context, in my opinion, interest on costs should run from the date the costs were paid. That leaves the question whether NAB should pay the costs referable to the expert accounting evidence and whether Mr Potts is entitled to recover his costs of the claim brought by HSBC.

Should NAB pay the costs of the accounting evidence?

In its submissions, NAB characterises this issue as raising the question whether the Court should make a separate costs order in respect of a discrete issue in the case. It resists such an order on the basis that it would represent a departure from the general rule that the Court will not usually apportion costs between issues, but instead awards costs on the outcome of the proceeding as a whole: see Cretazzo v Lombardi (1995) 13 SASR 4. In NAB's submission, this is not a case which falls within one of the exceptions to that principle. NAB alleged that Mr Potts had engaged in misleading and deceptive conduct. It succeeded in that claim. The fact that it did not do so in relation to the Accounts does not provide an adequate basis for apportioning costs.
The difficulty, however, with this submission is that it overlooks the fact that the accounting issues were not simply relevant to the case against Mr Potts, which succeeded. They were also relevant to the case against Mr Abboud, which failed. They were also relevant to DSH's case against all the directors in the Company Case, which also failed. The question in those circumstances is whether common costs should be apportioned in some way and, if so, how.
In my opinion, the appropriate order is an order that Mr Potts pay NAB's costs which are solely referable to NAB's claim against him. That does not involve making any special order in relation to the accounting evidence. Nor does it involve apportioning costs between the different claims. Rather, it leaves any other costs incurred by NAB, including costs in relation to the accounting evidence, to be dealt with in accordance with the other costs orders made by the Court. That seems to me to be appropriate where the case against Mr Potts only succeeded on a narrow ground and the accounting evidence was not relevant to the case that succeeded.

Should HSBC be liable for Mr Potts's costs?

HSBC submits that it should not be liable for Mr Potts's costs. It relies on two principles for that submission. The first was stated by Einstein J in Currabubula Holdings Pty Ltd v State Bank of New South Wales Ltd [2000] NSWSC 232 at [104] in these terms: There is no logical reason why a defendant who is sued by several plaintiffs who are variously successful and unsuccessful should be in a more advantageous position qua joint costs (ie., those costs not referable to any one plaintiff but necessary for the cases of all the plaintiffs), than would be an unsuccessful defendant sued by one successful plaintiff alone. Intuitively, justice would seem to require that a defendant, found to be in the wrong, should bear all the costs which the successful plaintiff would have to incur in bringing the action and should be spared only those costs occasioned by the joining of the unsuccessful plaintiffs.
The second principle relied on by HSBC is derived from the decision in Ritter v Godfrey [1920] 2 KB 47 where Atkin LJ said (at 60): In the case of a wholly successful defendant, in my opinion the judge must give the defendant his costs unless there is evidence that the defendant (1.) brought about the litigation, or (2.) has done something connected with the institution or the conduct of the suit calculated to occasion unnecessary litigation and expense, or (3.) has done some wrongful act in the course of the transaction of which the plaintiff complains. In this case it is said that Mr Potts fell within the third of these exceptions because I found that he had engaged in misleading and deceptive conduct in relation to the Extension Agreement: Principal Judgment at [580].
In my opinion, neither of these principles applies in this case.
The first principle states that a defendant should only be entitled to recover those costs referable to the claim brought by the unsuccessful plaintiff. It does not state that the successful defendant should not be entitled to recover any costs from the unsuccessful plaintiff. In the present case, although the claims by NAB and HSBC were brought in the same proceeding, they depended on largely different facts. In particular, they depended on different representations made to different bank officers which led to different conduct. The claim brought by HSBC failed because it failed to prove that Mr Potts had misled it, or, in the case of the Extension Agreement, that it had relied on his misleading conduct. To the extent that there is any overlap between the evidence relating to the claim brought by NAB and the claim brought by HSBC, the issue raised by HSBC can be addressed by ordering that HSBC pay Mr Potts's costs that are solely referable to the claim brought by it.
As to the second principle relied on by HSBC, later in his judgment (at 61), Atkin LJ makes it clear that the third exception he identified does not apply in the case of all conduct that might be characterised as "wrongful". Rather, it only applies "where the facts complained of … disclose a wrong to the public … by which I understand some criminal or quasi criminal misconduct, e.g., a fraud or crime or preparation for a fraud or crime, or possibly some act of serious oppression." It is plain that Mr Potts's conduct was not of that character.

Set-off and apportionment

Mr Potts seeks an order that he be entitled to set-off any costs liability NAB has to him in both proceedings against the judgment obtained by NAB against him and any costs liability he has to NAB in the Bank Proceeding.
It is not disputed that the Court has a broad power to set-off judgment for costs in different proceedings and in different courts, and to set-off judgment for costs against money judgments for debt or damages. As White J explained in Australian Beverage Distributors v Evans & Tate Premium Wines Pty Ltd [2006] NSWSC 560; 58 ACSR 22 at [68]: [S]et-off of judgments for costs in different actions and in different courts has long been allowed, as has the set-off of judgments for costs against judgments for debt or damages. Such set-offs do not depend upon the statutes of set-off, or the general equitable jurisdiction, but on the control a court exercises over its own proceedings. See also Tanilba Beach Pty Limited v JR and JB Pty Limited [2018] NSWSC 288 at [29] and the cases cited there.
NAB opposes an order for set-off principally on the basis that it is not appropriate to order set-off where there are two sets of proceedings and NAB is not a party to the Company Case.
The point raised by NAB has no force in circumstances where I have concluded that NAB should be liable for the costs of the Company Case. It might be thought, however, that an order for set-off is not appropriate for two other reasons. The first is that the rights sought to be set-off are principally the rights that Mr Abboud and Mr Potts have to recover costs in the Company Case. It is unclear whether those rights are joint or several or both and, if several, to what proportion of the recoverable costs each is entitled. But unless they are several, set-off appears to be inappropriate, since it would give Mr Potts the benefits of Mr Abboud's rights. The second is that the effect of permitting a set-off would presumably be to delay the payment of the judgment amount until the amount of costs is determined, since until that time it is not possible to know how much is to be set-off. There is no evidence before the Court on how long the assessment process will take. It may not commence until the appeal is determined. Having regard to the complexity of the cases and the issues that are likely to be raised on assessment, it could take in excess of a year. The result is that, even assuming Mr Potts's appeal fails, NAB may not be entitled to recover its judgment for a substantial period of time. That does not appear to be a just outcome.
The first of these points simply goes to the quantification of the amount to be set-off. On any view, Mr Potts incurred costs in defending the claim against him. There may be a question concerning how those costs are quantified. But once they are quantified, there is no apparent reason why a set-off should not be permitted.
The second point has more force. Absent a stay, NAB is entitled to recover the amount of its judgment now. Permitting a set-off may well have the effect of delaying NAB from recovering any part of its judgment until well after the appeal is determined. To some extent the force of this point is undermined by the fact that NAB owes the D&O Tower a substantial sum of money by way of costs, so that the true amount it is out of pocket is substantially less than the face value of its judgment. Correspondingly, if no set-off is permitted and no stay is ordered, NAB will be entitled to recover, at least temporarily, a windfall. In my opinion, the fairest way of addressing these points is to permit a set-off but only on the basis that Mr Potts (effectively, the relevant D&O Tower insurers) pay some proportion of the judgment amount which reflects the net amount that NAB is likely to recover. I return to this issue below.
One other matter should be mentioned in this context. I have concluded that the NEDs are entitled to recover their costs on an indemnity basis from 5 December 2019. That does not raise an issue where those costs relate solely to the defence of the NEDs and are not duplicative of costs incurred by Mr Abboud or Mr Potts. The defendants will be entitled to recover costs falling into that category on an indemnity basis. The question is what should happen in other cases. That question was not addressed by the parties. In those circumstances, it seems best to leave that question to be addressed on assessment if the parties cannot agree on the answer. It may, however, involve the apportionment of the relevant costs between the NEDs on the one hand and Mr Abboud and Mr Potts on the other and permitting recovery of the former but not the latter on an indemnity basis.

The costs of the cross-claims against Deloitte

It is common ground that Deloitte should be entitled to recover its costs from the defendants. Three questions remain. One is whether Deloitte should be entitled to recover those costs on an indemnity basis from 5 December 2020 or some later date in December. The second is whether the defendants should be entitled to be indemnified in respect of their own costs of pursuing the cross-claims and any order for costs in favour of Deloitte (a Bullock order), or whether, in addition to an order requiring the plaintiffs to indemnify the defendants against their own costs of the cross-claim, an order should be made requiring the plaintiffs to pay Deloitte's costs themselves (a Sanderson order). The third is what should happen to the costs of Deloitte's cross-claims against the defendants.

Should Deloitte be entitled to recover costs on an indemnity basis from 5 December 2020?

In all, seven cross-claims were brought against Deloitte: two in the Bank Case by each of Mr Abboud and Mr Potts and five in the Company Case by Mr Abboud, Mr Potts, Mr Cave, Mr Wavish and the other NEDs. The evidence is that Deloitte incurred approximately $20 million in connection with those cross-claims. The likelihood is that most of those costs were common to each of the cross-claims, and the orders sought by Deloitte, which do not appear to be opposed, is that each of the defendants pay Deloitte's costs of the proceedings. Although it appears to be appropriate that each of the defendants in each proceeding be jointly and severally liable for all of Deloitte's costs in each proceeding, it will be necessary to allocate those costs across the two proceedings. Plainly, it is not the intention of the orders that Deloitte be entitled to recover two sets of costs.
The claim for indemnity costs is made on the basis of an informal offer of compromise made by Deloitte by letter from its solicitors dated 20 November 2020, following the oral opening of its case (on 18 November 2020). The offer was an offer that the claims against Deloitte be dismissed on the basis that each party pay its own costs. It was conditional on all of the NEDs and Messrs Abboud and Potts accepting the offer in all proceedings, including the class action proceedings, which were still on foot at the time the offer was made. The offer was expressed to remain open until 4 December 2020. None of the NEDs, Mr Abboud or Mr Potts replied to the offer before it lapsed.
In the alternative, Deloitte contends that it is entitled to an order for indemnity costs from early December 2020 until the claims against it were dismissed on the basis that by that time it had become apparent that the case against it had no reasonable prospects of success.
At the time the offer was made, all evidence including expert evidence had been served, as had the joint reports prepared by the accounting and auditing experts. In addition, on 23 November 2020, in response to a direction by the Court, the plaintiffs served a "Note on Accounting Case", which made it clear that they continued to press a case that the Accounts were materially misstated because of the inadequate provision in respect of obsolete stock and the incorrect recognition of O&A rebates. However, the Court had not yet ruled on the admissibility of the accounting evidence. That occurred on 8 December 2020. Nor, obviously, had the Court heard Deloitte's application to strike out those paragraphs of the 3FACLS which alleged that the Accounts were materially misstated. That occurred on 15 and 16 December 2020.
It is common ground that rejection of an informal offer of compromise does not give rise to a presumption that the offeree should pay the offeror's costs on an indemnity basis: SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 (SMEC); Jones v Bradley (No 2) [2003] NSWCA 258 at [8]-[9]. Rather, the question is whether the offeree's rejection of the offer, in all the circumstances, justifies departure from the usual rule that party-party costs follow the event: see SMEC at [37] per Giles JA; Insurance Australia Ltd trading as CGU Insurance v MOS Beverages Pty Ltd (No 2) [2021] FCAFC 192 at [17] per Besanko and McKerracher JJ. The offeror must show that the offer was a genuine offer, capable of acceptance, and that it was unreasonable for the offeree not to accept it: see E Group Security Pty Ltd v Chief Commissioner of State Revenue (No 2) [2021] NSWSC 1296 at [61] per Ward CJ in Eq.
I am not satisfied that some special costs order should be made based on the offer of compromise. I am prepared to accept that the offer was a genuine offer of compromise. Although it was a "walk-away" offer, it involved Deloitte giving up a very substantial claim for costs in circumstances where it was becoming increasingly apparent that there were serious difficulties with the case against it. It involved Deloitte giving up something of real value.
However, in my opinion, it was reasonable for the defendants not to accept the offer. In determining whether to accept the offer, the defendants had to consider two questions. The first was whether the Accounts were materially misstated. The second was whether, if the Accounts were materially misstated, they could establish that Deloitte bore responsibility for that fact. During the time the offer was on foot, the plaintiffs indicated that they maintained their case that the Accounts were materially misstated and the events which provoked the successful strikeout action (the rejection of critical parts of the plaintiffs' accounting evidence) had not occurred. In those circumstances, it was reasonable for the defendants to assess the offer by reference to the fact that the plaintiffs still pressed a case against them that the Accounts were materially misstated. Looked at in that way, the critical question was whether the problems with the audit case were sufficiently clear to make it unreasonable for the defendants to reject a walk-away offer. As Deloitte explained in its opening, there were problems with the case that the audit had not been conducted properly. But the case that the audit had not been conducted properly was supported by expert evidence. In my opinion, the problems with the case were not so clear that those problems alone made it unreasonable for the defendants to reject the offer.
In my opinion, the position changed when the relevant paragraphs of the 3FACLS were struck out. It must have been apparent when that happened that the case against Deloitte was hopeless. It was not suggested that the defendants advanced some other case against Deloitte which did not depend on material errors in the Accounts. Indeed, Mr Nixon SC, who appeared for Mr Potts, expressly disavowed such a case. No other defendant took a different position.
Despite that, Mr Abboud and Mr Potts did not abandon their cross-claims in the Bank Case until 27 January 2021 and the defendants in the Company Case did not abandon their cross-claims until 12 February 2021, at which time all the cross-claims were dismissed. Accordingly, in my opinion, Deloitte should be entitled to recover its costs on an indemnity basis from 16 December 2020 until the date the cross-claims were abandoned.

Should the plaintiffs be liable for Deloitte's costs and, if so, what order should be made?

The principles applicable to the award of costs in respect of a cross-claim are well-known. They were recently affirmed by the Court of Appeal in Drive My Car Rentals Pty Ltd v Gabriel [2021] NSWCA 73 at [94] - [96] (per Gleeson JA, with whom Macfarlan and Meagher JJA agreed). The ultimate question is whether those costs "ought fairly be borne" by the unsuccessful party. In considering that question, the Court considers a variety of over-lapping factors including (1) whether it was reasonable or appropriate for the defendant to make the cross-claim. A common case where that is not the position is where the cross-claim raises "private issues" between the cross-claimant and cross-defendant and the cross-defendant was not necessarily joined because of the plaintiff's claim; (2) whether the plaintiff's claim was the catalyst for the cross-claim; and (3) whether there is a sufficient nexus between the plaintiff's claim and the cross-claim to justify the order.
In their submissions, the plaintiffs sought to demonstrate that the necessity to join Deloitte arose out of the defendants' list responses, by which they alleged that in signing off on the Accounts they relied on Deloitte, and the plaintiffs' reply, which took issue with that defence. The plaintiffs also point out that the defendants pleaded proportionate liability defences which named Deloitte as a concurrent wrongdoer.
In my opinion, the plaintiffs do not accurately characterise the position. From the start, the plaintiffs alleged in effect that the Accounts were materially misstated. That allegation was made express in the 3FACLS in the Company Case. It is not necessary to analyse the list statement in detail or to go through its various iterations. The point is sufficiently apparent from the following paragraphs in Section A, Nature of Dispute: 6 Further or in the alternative, there was no proper or adequate basis for the directors and officers to be satisfied that the financial statements of DSH accounted for inventory, and any rebates paid in connection with it, properly and in accordance with Australian Accounting Standards. … 7 … 8 These matters, both separately and together, led to DSH publishing financial reports which reported results, including in relation to profit, for which there was no proper or adequate basis. Had the directors and officers performed their duties to the standard they were required to, then: (a) DSH's reported profit for the 2015 half year and full year would either have been a loss or a substantially lower profit; (b) the 2015 interim and final dividends would either not have been paid at all or would have been substantially lower; (c) the DSE Group would not have acquired and accumulated Bad Stock at all or to any significant degree.
It is plain from this summary that what was alleged was that the Accounts contained material misstatements because they were not prepared in accordance with the relevant accounting standards and that, but for those misstatements, the dividends would not have been paid and Bad Stock would not have been acquired. As I have explained, those allegations were carried over to the Bank Case.
In my opinion, it was a reasonable response to those allegations to join Deloitte, who audited or reviewed the Accounts. Although the cross-claims were lengthy and complex, they did not raise private issues between the defendants and Deloitte. The cross-claims were conditional on the plaintiffs succeeding in their claims. The thrust of the cross-claims was that if the plaintiffs succeeded in the allegation that the Accounts were misstated, then Deloitte bore responsibility for that fact. There was plainly a nexus between the plaintiffs' claims and the cross-claims, since what was alleged was that the defects in the Accounts relied on by the plaintiffs, if they existed, were the responsibility of Deloitte.
The plaintiffs point out that they did not impugn the audit work of Deloitte. What was impugned were the Accounts. The defendants were responsible for approving the Accounts and indeed Deloitte relied on representation letters given by Mr Abboud and Mr Potts as part of the audit work that they did. Consequently, the joinder of Deloitte was not an inevitable consequence of the plaintiffs' claim. That much may be accepted. However, in my opinion, the plaintiffs' approach sets the bar too high. Once the Accounts were impugned on that ground, it was natural for the defendants to consider whether they had a claim against the auditors. The fact that that claim required the defendants to prove that the auditors had engaged in misleading or deceptive conduct or otherwise breached their duties does not itself sever the connection between the plaintiffs' claims and the cross-claims. The claim was still the catalyst for the cross-claims and as long as the allegations in the cross-claims depended on the allegations in the plaintiffs' claims, that is sufficient to establish the required nexus. The position might well be different if the plaintiffs were able to establish that the defendants had no reasonable prospect of establishing that Deloitte had breached its duties in respect of the matters about which they (the plaintiffs) complained. However, the plaintiffs have not sought to do that.
No compelling reason has been advanced for why a Sanderson order rather than a Bullock order should be made in this case. The defendants submit that it would be appropriate to order that the plaintiffs pay Deloitte's costs directly because the D&O Tower does not have sufficient funds to meet Deloitte's costs, with the result that there is a risk that the defendants could face bankruptcy. However, that risk is more theoretic than real, since under the alternative order they will be indemnified by the plaintiffs. It is true that DSH may not have sufficient funds to pay Deloitte's costs. But two points may be made about that. First, in practice little turns on it because DSH is entitled to be indemnified by the Banks and on the orders I propose to make, the defendants are entitled to recover their costs of the Company Case (including any liability they have to Deloitte) from the Banks. Second, to the extent that the point has any significance, it suggests that an order should not be made that the plaintiffs pay Deloitte directly because Deloitte should not be exposed to any solvency risk in relation to DSH.
A further difficulty with a Sanderson order is this case arises from the fact that both the plaintiffs and Mr Potts have filed appeals, whereas there is no appeal in relation to the orders made in favour of Deloitte. On any view, Deloitte is entitled to its costs. It should be entitled to recover those costs from the parties who made unsuccessful claims against it. It should not be exposed to the risk that the order in its favour requires amendment as a result of the outcome of the appeals.
Taking those matters into account, I have concluded that the appropriate order is that the defendants pay Deloitte's costs of the cross-claims on the ordinary basis other than costs incurred between 16 December 2020 and the time when the cross-claims were abandoned or dismissed. Those costs should be paid on the indemnity basis. The plaintiffs should pay the defendants costs of pursuing the cross-claims on the ordinary basis and should indemnify the defendants in respect of the amounts that the defendants must pay Deloitte.

The costs of Deloitte's cross-claims

Deloitte filed cross-claims against the defendants and DSH on the basis that if it was liable to the defendants then the defendants and DSH had themselves engaged in misleading and deceptive conduct arising from their respective roles in the preparation of the Accounts. The dismissal of that cross-claim followed the dismissal of the defendants' cross-claims. The NEDs (but not Mr Abboud and Mr Potts) seek their costs of the cross-claim against them.
I do not accept that submission. The costs in relation to that cross-claim are unlikely to be significant. The cross-claims were parasitic in the sense that they arose solely from the failed cross-claims against Deloitte. In my opinion, they should be treated in the same way as Deloitte's costs generally.

Mr Potts's application for a stay

The principles relating to a stay pending an appeal are well established.
The commencement of an appeal does not operate as a stay of the execution of a judgment: UPR r 51.44. Rather, the applicant must show that there is a proper basis for the stay that is fair to all the parties: Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685, 694 (Alexander).
In discharging that onus, the applicant "must show that the appeal raises serious issues for the determination of the appellate court, and that there is a real risk that he will suffer prejudice or damage, if a stay is not granted, which will not be redressed by a successful appeal": Kalifair Pty Ltd v Digi-Tech (Australia) Ltd (2002) 55 NSWLR 737, 741 at [18] per Handley, Sheller and Ipp JJA (Kalifair). However, it does not need to demonstrate that special or exceptional circumstances exist to grant the stay; "[i]t is sufficient that the applicant … demonstrates a reason or an appropriate case to warrant the exercise of discretion in his favour": Alexander at 694.
When determining the stay application, the Court must consider what is in the interests of justice: see New South Wales Bar Association v Stevens [2003] NSWCA 95 at [83]. Various factors may be relevant. For example, if there is a risk the appeal would be abortive unless a stay is granted, the Court "will normally exercise [its] discretion in favour of granting a stay": Classic Bet (NSW) Pty Ltd v KRM (Vic) Pty Ltd [2020] NSWCA 6 at [12] per Payne JA (Classic Bet) citing Alexander and Kalifair. Conversely, if there is a risk that the applicant's assets will be disposed if the stay is granted, the Court may refuse the stay: ibid. The Court may also require the applicant to pay part or the whole of the judgment sum as security to protect the status quo when exercising its discretion: see Kalifair at [28]; Classic Bet at [12].
Although much of the debate centred on the application of these principles to the facts of this case, as Mr Potts states in his submissions, what he is really seeking is a stay of NAB's judgment until the later of the determination of the appeal and the quantification of any costs orders made by the Court; and the real issue between the parties arises because there are insufficient funds in the D&O Tower to indemnify Mr Potts against his liability to NAB and to pay the costs orders in favour of Deloitte. However, as I have explained, once costs are quantified and are set-off or paid, it seems clear that there will be sufficient funds in the D&O Tower to indemnify the defendants in respect of any residual liability they have.
Those issues aside, there appears to be no reason to stay the judgment. NAB has been successful. In the normal course of events, it is entitled to the fruits of its success. Accepting that Mr Potts has an arguable case on appeal, there appears to be no reason for making an exception in this case. NAB is plainly a large and solvent financial institution and will be able to repay any amount paid to it if Mr Potts succeeds in his appeal. No doubt, the relevant D&O Insurers would prefer not to part with the judgment amount if they can avoid it. But they, too, are plainly large and solvent financial institutions whose business is to pay insurance claims. It is not suggested that they will suffer any particular prejudice if they have to pay the claims now. Nor is it suggested that the defendants would suffer any prejudice if they were fully indemnified by the D&O Tower.
The real issue arises from the fact that there is a shortfall until costs are quantified and, when costs are quantified, the net liability of the relevant D&O Tower insurers will be substantially less than the judgment sum in favour of NAB, with the result that the defendants will ultimately be fully indemnified. In addition, recovery by NAB of the full amount of its judgment now might be said to result in a temporary windfall, since it will need to pay a substantial amount back to the defendants and therefore the D&O Tower. It is those matters which are said to justify a stay.
Underlying these points is the idea that the D&O Tower insurers should be entitled to set-off against the judgment they must pay on behalf of Mr Potts the amount in costs they are entitled to recover from the plaintiffs and that the judgment obtained by NAB should be stayed until the costs have been quantified and that can happen. On any view, that would require the Court to take a very broad view of the question of set-off, since the "set-off" would effectively operate between the insurers and the Banks rather than the parties to the litigation. It would also mean that NAB would be deprived of any portion of its judgment until costs had been determined in circumstances where it seems plain that, as a result of the judgment it has obtained, it is entitled to be paid a significant sum of money, even allowing for a set-off of the amount it owes to Mr Potts. In my opinion, it is difficult to justify a complete stay in those circumstances.
Taking these matters into account, in my opinion, the fairest approach is to permit part of the judgment to be recovered now and to stay the payment of the balance of the judgment until costs have been determined.
In determining the amount that NAB should be permitted to recover now, a number of points need to be borne in mind.
First, on the orders that I propose to make, the defendants are entitled to recover their costs of the Company Case from any of DSH, NAB or HSBC. If they recovered their costs from one of the Banks only, that Bank would have a right of contribution from the other. Accordingly, it would be open to Mr Potts to recover all his costs of the Company Case from NAB. It would therefore be possible under the orders I propose to make for him to set-off all of his costs against the judgment obtained by NAB.
Second, on the orders I propose to make Deloitte is entitled to recover all of its costs from any of the defendants, including Mr Potts. If it recovered all of its costs from Mr Potts, Mr Potts would be entitled to contribution from the other defendants and he and the other defendants would be entitled to an indemnity from both NAB and HSBC for the costs that they had paid. In reality, the rights of contribution between Mr Potts and the other defendants would not need to be exercised since Mr Potts and the other defendants would all be indemnified by the D&O Tower and the D&O Tower insurers would be entitled to recover those costs from NAB and HSBC. It is reasonable in those circumstances to include in the costs that Mr Potts is entitled to set-off against the judgment he owes, the amount of costs that Deloitte is entitled to recover from one or more of the defendants, since payment of those costs go to discharge a liability that Mr Potts has.
On the orders I propose to make, Deloitte is entitled to recover most of its costs on the ordinary basis and a small portion on the indemnity basis. At present, it is unclear what those costs are. The evidence indicated that Deloitte's total costs are in the order of $20 million. For present purposes, it is reasonable to assume that its recoverable costs are in the order of 75 percent of its total costs - that is, $15 million. That assumption is consistent with unchallenged evidence given by Mr Klotz, a partner of Hall and Wilcox, that in his experience if costs are assessed on the ordinary basis, it is usual to recover between 60 and 70 percent of fees and around 90 percent of disbursements and if they are assessed on an indemnity basis it is usual to recover between 80 and 90 percent of fees and 100 percent of disbursements.
Third, on the orders I propose to make, Mr Potts and Mr Abboud are entitled to recover their costs of the Company Case on the ordinary basis. Although that is a joint right of Mr Potts and Mr Abboud, it seems reasonable to permit that amount to be set-off against the judgment against Mr Potts in circumstances where Mr Abboud has already been indemnified against those costs by the relevant D&O Tower insurers, it is a right that Mr Potts has and the D&O Tower insurers are liable to indemnify Mr Potts against the NAB judgment.
The evidence is that Mr Potts and Mr Abboud incurred $31,900,000 in respect of their costs of that case. That figure needs to be discounted to allow for duplication in the work done by the various defendants. For present purposes, it is reasonable to assume that Mr Potts and Mr Abboud's recoverable costs are in the order of 50 percent of their total costs - that is, $16,000,000 (rounding to the nearest million).
Fourth, NAB has obtained judgment against Mr Potts for $57,278,091.44. In addition, under the orders I propose to make NAB is entitled to its costs of the Bank Case solely referable to the claim against Mr Potts. There is no evidence concerning how much those costs might be. However, they are not likely to be large. They consist principally of lay evidence proving the representations made my Mr Potts and NAB's reliance on those representations. It is reasonable to assume for present purposes that those costs are in the order of $500,000 assessed on the ordinary basis.
Fifth, the other defendants incurred costs in defending the Company Case and Mr Abboud incurred costs in defending the Bank Case. They are entitled to recover those costs. However, it is difficult to see on what basis those costs could be set-off against the judgment obtained against Mr Potts.
Taking those matters into account, it seems reasonable to permit Mr Potts to set-off an amount of $31 million on account of legal costs against the judgment obtained by NAB and the costs order to which NAB is entitled. The amount of $31 million is, of course, only an estimate and "payment" of that amount is only on account of NAB's actual liability for costs. An adjustment will need to be made once the actual costs are determined by assessment or agreement. On that basis, the current stay should be discharged and that part of the judgment obtained by NAB that exceeds $26,778,091.44 (that is, $57,278,091.44 plus $500,000 less $31,000,000) should be stayed until Mr Potts' costs of the Company Case are assessed or agreed.
The parties should also be given liberty to apply on seven days' notice to vary the order for a partial stay in the event that, as a consequence of a change in circumstances, the continuation of a partial stay granted by the Court will or is likely to have an effect on the substantive rights of the parties.

Orders

The Court makes the following orders in proceeding 2017/81938 (the Bank Case): 1. The first plaintiff (NAB) and the second plaintiff (HSBC) are to pay the costs of the first defendant (Abboud) on the ordinary basis. 2. HSBC is to pay on the ordinary basis the costs of the second defendant (Potts) which: 1. are solely referrable to HSBC's claim against Potts in this proceeding; or 2. are referable to Potts's costs of the Second Cross-Claim and the Third Cross-Claim; 1. Potts is to pay NAB's costs which are solely referable to NAB's claim against him on the ordinary basis. 2. Abboud is to pay the costs of Deloitte of the First Cross-Claim and Third Cross-Claim: 1. Save as provided in paragraph (b) below, on the ordinary basis; 2. On the indemnity basis from 16 December 2020 until 27 January 2021. 1. Potts is to pay the costs of Deloitte of the Second Cross-Claim and Third Cross-Claim: 1. Save as provided in paragraph (b) below, on the ordinary basis; 2. On the indemnity basis from 16 December 2020 until 27 January 2021. 1. NAB and HSBC are to indemnify: 1. Abboud in respect of any costs that he must pay to Deloitte pursuant to the costs order in paragraph (4) above; 2. Potts in respect of any costs that he must pay to Deloitte pursuant to the costs order in paragraph (5) above; such liability to be joint and several. 1. Any party ordered to pay costs is to pay interest on those costs (including disbursements): 1. at the rate applicable from time to time under rule 36.7 of the Uniform Civil Procedure Rules 2005 (NSW); 2. on the Allowed Percentage (as defined below) of each amount of costs and disbursements actually paid by the party to favour of whom the order is made; and 3. from the date of payment of each such amount until such time as costs due under these orders have been paid. 1. Any costs liability of NAB to Potts arising in this proceeding or in proceeding 2017/81927 (the Company Case) are to be set-off against the judgment entered for NAB against Potts and any costs liability of Potts to NAB in this proceeding. 2. In these orders: Deloitte refers collectively to the first to 454th cross-defendants to the First and Second Cross-Claims and the first to 454th cross-claimants on the Third Cross-Claim. Allowed Percentage means ((Y/X) x 100)%, where: (a) X equals the total amount of costs and disbursements which the party has paid or is liable to pay in connection with these proceedings. (b) Y equals the total amount of costs and disbursements which either: (i) is allowed to the party in connection with these proceedings or (ii) is ordered to be paid to the party pursuant to any order made under s. 98(4) of the Civil Procedure Act 2005. 1. Discharge order (5) of the orders made by the Court on 7 October 2021. 2. The judgment entered by the Court on 7 October 2021 in so far as it exceeds the sum of $26,778,091.44 is stayed until NAB's costs of this proceeding and Potts's costs of proceeding 2017/81927 are assessed or agreed. 3. Liberty to apply to vary order (11) on seven days' notice.
The Court makes the following orders in proceeding 2017/81927 (the Company Case): 1. Subject to order (2), the plaintiff, NAB and HSBC are to pay each of the defendants' costs of the proceeding (including their costs of the cross-claims) on the ordinary basis, such liability to be joint and several. 2. The plaintiff, NAB and HSBC are to pay the costs of third, fourth, fifth, sixth, seventh and eighth defendants on the indemnity basis from 5 December 2019. 3. Abboud is to pay the costs of Deloitte of the Second Cross-Claim and Sixth Cross-Claim: 1. Save as provided in paragraph (b) below, on the ordinary basis; 2. On the indemnity basis from 16 December 2020 until 12 February 2021. 1. Potts is to pay the costs of Deloitte of the Third Cross-Claim and Sixth Cross-Claim: 1. Save as provided in paragraph (b) below, on the ordinary basis; 2. On the indemnity basis from 16 December 2020 until 12 February 2021. 1. The fourth, sixth, seventh and eighth defendants are to pay the costs of Deloitte of the First Cross-Claim and Sixth Cross-Claim: 1. Save as provided in paragraph (b) below, on the ordinary basis; 2. On the indemnity basis from 16 December 2020 until 12 February 2021. 1. The third defendant (Cave) is to pay the costs of Deloitte of the Fifth Cross-Claim and Sixth Cross-Claim: 1. Save as provided in paragraph (b) below, on the ordinary basis; 2. On the indemnity basis from 16 December 2020 until 12 February 2021. 1. The fifth defendant (Wavish) is to pay the costs of Deloitte of the Fourth Cross-Claim and Sixth Cross-Claim: 1. Save as provided in paragraph (b) below, on the ordinary basis; 2. On the indemnity basis from 16 December 2020 until 12 February 2021. 1. The plaintiff, NAB and HSBC are to indemnify: 1. Abboud in respect of any costs that he must pay to Deloitte pursuant to the costs order in paragraph (3) above; 2. Potts in respect of any costs that he must pay to Deloitte pursuant to the costs order in paragraph (4) above; 3. The fourth, sixth, seventh and eighth defendants in respect of any costs that they must pay to Deloitte pursuant to the costs order in paragraph (5) above; 4. Cave in respect of any costs that he must pay to Deloitte pursuant to the costs order in paragraph (6) above; 5. Wavish in respect of any costs that he must pay to Deloitte pursuant to the costs order in paragraph (7) above; such liability to be joint and several. 1. Any party ordered to pay costs is to pay interest on those costs (including disbursements): 1. at the rate applicable from time to time under rule 36.7 of the Uniform Civil Procedure Rules 2005 (NSW); 2. on the Allowed Percentage (as defined below) of each amount actually paid; and 3. from the date of payment of each such amount until such time as costs that are due under these orders have been paid. 1. In these orders: Deloitte refers collectively to the first to 454th cross-defendants to the First and Second Cross-Claims and the first to 454th cross-claimants on the Third Cross-Claim. Allowed Percentage means ((Y/X) x 100)%, where: (a) X equals the total amount of costs and disbursements which the party has paid or is liable to pay in connection with these proceedings. (b) Y equals the total amount of costs and disbursements which either: (i) is allowed to the party in connection with this proceeding; or (ii) is ordered to be paid by the party pursuant to an order made under s 98(4) of the Civil Procedure Act 2005.

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