- First Pacific Advisors LLC v Boart Longyear Ltd

Supreme Court of NSW|2017-08-14|Before: Black J

Solicitors: Ashurst Australia (Plaintiffs) Minter Ellison (Centerbridge Partners LP) Gilbert & Tobin (First Pacific Advisors LLC) Arnold Bloch Leibler (Ares Management LP and Ascribe II Investments LLC) Speed & Stracey (Snowside Pty Limited as trustee for the Snowside Trust and Maurici Nominees Pty Ltd as trustee for AP Maurici & Associates Pty Ltd Superannuation Fund) File Number(s): 2017/122411

The background to this application

Snowside Pty Ltd as trustee for the Snowside Trust and Maurici Nominees Pty Ltd as trustee for the AP Maurici & Associates Pty Ltd Superannuation Fund ("Snowside companies") seek orders for costs in respect of their appearance to oppose approval of two interdependent creditors' schemes of arrangement concerning the Plaintiffs. The Snowside companies are shareholders of the First Plaintiff, Boart Longyear Ltd ("BLY"), and are also potential creditors of BLY, if they are ultimately successful in oppression proceedings that they commenced against BLY after the schemes were proposed. The Snowside companies and several creditors of BLY were heard in the proceedings under r 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW). No question arises in respect of those creditors' costs of the proceedings, which were resolved between BLY and those creditors when agreement as to altered schemes was reached between them in circumstances to which I refer below. The Plaintiffs do not seek an order for costs against the Snowside companies, but resist an order that they be required to pay the Snowside companies' costs of the proceedings.

The applicable principles

I should first refer to the principles that generally apply in respect of an application for costs by a person who is heard in proceedings without becoming party to them, under r 2.13 of the Supreme Court (Corporations) Rules, although those general principles were not addressed in BLY's and the Snowside companies' submissions. In Re Pan Pharmaceuticals Ltd; Selim v McGrath [2004] NSWSC 129; (2004) 48 ACSR 681 at [20], Barrett J observed that the Court had power to make an order against a party to proceedings in favour of non-parties, but also noted that a person who is granted leave to be heard without becoming party under r 2.13(1) of the Supreme Court (Corporations) Rules chooses a course that involves limited costs exposure to it and can have little expectation of being awarded costs, and that such an award, if appropriate, would be "extraordinary and exceptional" and require "some very special factor outside the ordinary and expected course of events and engendering a justifiable expectation of compensation in the mind of the non-party". In Pan Pharmaceuticals, Barrett J held that such special factors were not present. On the other hand, in Re HIH Casualty and General Insurance Ltd [2006] NSWSC 6, Barrett J observed that parties there heard under r 2.13 made separate submissions that were highly relevant to the task of the Court in reaching its decision and special and unusual circumstances therefore warranted a costs order in the particular circumstances, although his Honour considered that only one set of costs should be ordered in the particular circumstances. I adopted the same approach in Re Gia Firenze Investments Pty Ltd [2013] NSWSC 99.
Dr Austin, who appears with Mr Mirzai for the Snowside companies, submits that the "orthodox position" is that an objector's costs in respect of an application concerning approval of a scheme are to be borne by the scheme proponent, whether the objector seeks to become a party to the proceeding or is a person who seeks to be heard at the second court hearing without becoming a party to the proceeding. He refers to the summary of the case law in T Damian and A Rich, Schemes, Takeovers and Himalayan Peaks: The use of Schemes of Arrangement to effect change of control transactions (2nd ed, 2009) at [4.6.2], and to the decision in Re Arrowfield Group Ltd (1995) 17 ACSR 649 at 661, where Cohen J made an order that a company seeking approval for a reduction of capital pay an objector's costs of resisting that reduction of capital. Dr Austin also refers to the decision in Re Crusader Ltd [1996] 1 Qd R 117; (1995) 17 ACSR 336 at 349 where Thomas J observed, in respect of the costs of several noteholders that had objected to a scheme of arrangement, that: "Although the objections have been unsuccessful, and they have to some extent increased the company's costs in obtaining approval of the scheme, in a context such as this it is exceptional to order costs against persons who exercise their right to object. Not uncommonly they are given their costs, especially where they raise matters which should properly be aired even if they are not upheld. In the present matter I have no hesitation in ordering that the costs of [several entities] should be paid by the company. Their intervention was limited and in any event did not contribute greatly to the extension of the litigation." His Honour also made such a costs order in favour of another intervening entity in that case, having found that its intervention was not made for an obstructive purpose. That decision deals, however, with objections by persons who would be bound by the scheme and it does not follow that that approach should be extended to a person, such as the Snowside companies, who is not bound by a creditors' scheme but will or may be adversely affected by its outcome in its capacity as shareholder or claimant in litigation against the scheme company.
In Quatro Ltd v Argo Investments Ltd [1999] VSC 231; (1999) 32 ACSR 480, in a case relating to a reduction of capital, Hansen J held that it would be unjust to require the relevant companies to pay all of an objector's costs in the particular circumstances and ordered that the company pay costs for the lesser period which he considered the trial ought to have taken. Mr Izzo, who appears for the Plaintiffs, relies on that decision as a case where the costs allowed to objectors were discounted in the circumstances, although the Court had held that the objections were justifiably advanced. Mr Izzo submits that, in this case, the Snowside companies "are at an even further remove", because they are not parties to the scheme although they are potentially affected by it as shareholders and subordinate claimants in the oppression claim, and "for that reason the Court would be justified in not awarding them costs at all".
In Wimpar Holdings Ltd v Goldfields Kalgoorlie Ltd [2000] NSWSC 855; (2000) 35 ACSR 363 at [11], Santow J observed that: "I do not wish it to be understood that Courts will automatically make costs orders in favour of successful objectors. There must be some limit based upon the reasonable plausibility of submissions and the absence of illegitimate timewasting, requiring some economy of presentation." I do not consider that there was any time wasting or lack of economy of presentation in respect of the Snowside companies' claim. There was, however, a substantial degree of overlap at the hearings on 4-5 and 13-14 July 2017 between the position adopted by First Pacific, which then opposed the schemes in their original form, and that of the Snowside companies. That overlap did not continue at the further hearings on 9 and 14 August 2017, when First Pacific supported the schemes and only the Snowside companies opposed them. I will return to the significance of that matter below.
Dr Austin also refers to Re NRMA Ltd [2000] NSWSC 82; (2000) 33 ACSR 595, where Santow J referred to an "ordinary rule" that "the scheme companies pay the objector's costs and do not suffer cost orders against them", provided that the objections advanced are "properly and justifiably advanced, even if unsuccessfully", and also referred to the assistance that the Court will obtain from having a contradictor at the convening and approval stages. However, that decision also deals with objections by members who would be bound by the scheme, rather than by an entity which is not itself party to the scheme but is affected by it.

The Snowside companies' and BLY's submissions

Dr Austin submits, and I accept, that the Snowside companies' objections to the original schemes and their continued objections to the altered schemes could not be characterised as being "frivolous or without substance" and that those objections dealt with matters of substance that were relevant to the Court's task and were addressed on their merits in the Second Judgment. Dr Austin also submits, and I accept, that the urgency of the matter required that the Snowside companies deal with a number of complicated matters of considerable importance with expedition. The Snowside companies also submit, and I also accept, that the hearing was not substantially lengthened by any conduct on their part. Although they led a substantial amount of expert evidence, and cross-examined two of the experts who prepared expert reports on which the Plaintiffs relied at the first hearing and one such expert at the second hearing, the time involved in those matters was not substantial by comparison with the range of other legal and factual issues addressed at those hearings. The recommencement of the second hearing on 9 August 2017 was deferred by reason of commercial matters, including the delay in the Plaintiffs' satisfaction of a funding condition precedent, but it proceeded relatively quickly, although it was adjourned from 9 to 14 August 2017 in order to allow the Snowside companies a fair, but abbreviated, opportunity to prepare submissions.
The Plaintiffs submit that they should not be required to bear the Snowside companies' costs in objecting to the scheme for several reasons. First, they submit that the cases to which I have referred above generally relate to the costs of objectors directly affected by the scheme, and the Snowside companies were not creditors bound by the schemes, although the schemes would have an effect upon them as shareholders in BLY or possibly as subordinate claimants in respect of proceedings that were only commenced against BLY after the schemes had been proposed. I accept that this is a matter which distinguishes the Snowside companies' position from that of, for example, First Pacific as a creditor bound by a secured creditors' scheme which initially opposed it. It seems to me that, in a proper case, the Court may allow the reasonable costs of an interested party, which is not party to the scheme, but is heard in opposition to it, although what are reasonable costs is likely to reflect the nature of that party's interest and the extent to which its evidence and submissions parallel or duplicate that of persons bound by the scheme and therefore more directly interested in the outcome. It does not, of course, follow that the Court would allow the costs of, for example, multiple shareholders or multiple employees who sought to be heard in opposition to a scheme.
In reply, the Snowside companies point to the observation in the Second Judgment that the Court may have regard, not only to the interests of members or creditors who are bound by the scheme, but the interests of other affected parties including shareholders and potentially other claimants against the Company (Second Judgment [57]). The Snowside companies submit that the rationale for ordering the Company to pay an objector's costs depends on the objector having an interest sufficient to be granted leave to appear, being an interest that "needs to be taken into account" in the Court's determination of the fairness and lawfulness of the schemes. I do not accept that submission. The authorities to which I have referred above are directed to the ordinary practice in respect of a party to the scheme rather than in respect of persons whose interests are affected by a scheme, and the ordinary practice as to costs of persons that are heard under r 2.13 of the Supreme Court (Corporations) Rules are inconsistent with that submission. The Snowside companies, other shareholders in BLY and indeed other interested persons such as employees of BLY were persons who could be heard in respect of the schemes under r 2.13 of the Supreme Court (Corporations) Rules, and their interests could be taken into account in a proper case, but it does not follow that they had an entitlement to costs as distinct from an expectation that costs might be awarded in their favour, in the exercise of the Court's discretion, if their submissions were of assistance in determining the application.
In reply, the Snowside companies also address, at some length, the historical origins of the practice of permitting interested persons to be heard in respect of schemes. It seems to me that those submissions do not take matters further than the authorities to which I have referred above. It does not seem to me that they support the conclusion that the Snowside companies draw from them, that an objector's costs are allowed where the objector's submissions against the proposed restructuring have been properly and justifiably advanced, even if unsuccessful, if that submission is intended to suggest that the objector's costs must be allowed in their entirety in that situation, or that that is not ultimately a matter for a discretionary judgment of the Court to be made in all the relevant circumstances. I do accept the Snowside companies' submission in reply that the fact that their interest was as shareholder would not, in itself, lead the Court to deny their application for costs. The Court has a discretion in any case where an interested person is heard under r 2.13 of the Supreme Court (Corporations) Rules to make an order for costs in favour of that person in a proper case.
Second, the Plaintiffs submit that this case is distinguished from the several cases to which I have referred above because, as the Court had found, the Plaintiffs were insolvent or near insolvency, at least prior to the implementation of the schemes. In reply, the Snowside companies rightly respond that the position of the insolvency or near insolvency of BLY should now have passed, since the schemes have been implemented. They also point out that the Snowside companies appeared only at the second court hearing, and that First Pacific's costs have been paid under the negotiated arrangement between the Plaintiffs and First Pacific. I give limited weight to the Plaintiffs' submission where the evidence indicates that the implementation of the schemes will, at least for the immediate future, have restored the Plaintiffs' solvency, and costs were allowed to an opponent in the HIH schemes where those companies were in liquidation.
Third, the Plaintiffs submit that the Snowside companies presented their objections in the manner of a party, cross-examined experts called by the Plaintiffs and led evidence from their own experts and the proceedings were stood over to 14 August 2017 at their request to allow them a further opportunity to make submissions. In reply, the Snowside companies respond that, obviously enough, the Court permitted the course which they adopted in participating in the second court hearing. They submit that their limited cross-examination of the Plaintiffs' expert witnesses was directed to testing two fundamental aspects of the Plaintiffs' case, relating to their financial position and the fairness and reasonableness of the recapitalisation with respect to non-associated shareholders. The Snowside companies fairly recognise that those matters were also contested by First Pacific. The Snowside companies also submit, rightly, that the time that was spent in dealing with issues as to the Plaintiffs' expert evidence was likely reduced by the detailed written submissions prepared by the Snowside companies, at least by comparison with the position had those matters been addressed orally.
In reply, the Snowside companies also addressed the circumstances in which they sought a short stay after delivery of the Second Judgment, a matter to which the Plaintiffs had referred in submissions. I do not consider that that matter provides is adverse to the exercise of a discretion to award costs in the Snowside companies' favour, where the effect of implementation of the schemes would have potentially been to render any appeal futile. The position in that respect is reinforced by the fact that the Court of Appeal granted leave to the Snowside companies to appeal against aspects of the Second Judgment, although that appeal was dismissed.
The Snowside companies also refer, in reply, to the circumstances preceding and surrounding the adjournment of the hearing from 9 August 2017 to 14 August 2017 and submit that that adjournment was consistent with the Court's observations as to the need to afford procedural fairness to all parties, and was also ultimately not opposed by Senior Counsel for the Plaintiffs. It also seems to me that nothing in that adjournment application is adverse to the exercise of a discretion as to costs in favour of the Snowside companies. The Snowside companies also point out, and I accept, that the hearing on 14 August 2017 also addressed additional issues to the Snowside companies' objections to the scheme, including the tender of further evidence by the Plaintiffs and the identification of further amendments to the schemes proposed by the Plaintiffs.
I also recognise that, in Quatro Ltd v Argo Investments Ltd above at 484, approved by Santow J in Re NRMA Ltd above at [43]-[44], Hansen J observed that a person bound by a scheme who objected to it and had actively opposed the scheme would ordinarily not be required to pay the costs of proceedings. It does not follow that a party with a less direct interest will necessarily have the full costs of an extended role in the proceedings ordered in its favour.
Fourth, the Plaintiffs submit that the Snowside companies' objections were ultimately not upheld by the Court. In reply, the Snowside companies rightly point out that costs orders were made in favour of a party to a scheme that had objected to the scheme in several cases. They also submit, and I accept, that the detail of the consideration of the Snowside companies' submissions in the Second Judgment suggests that none of those submissions was treated as frivolous or without substance, and that the importance of the Snowside companies' role as objector, in putting relevant issues before the Court, was enhanced after First Pacific no longer opposed the altered schemes.
The Plaintiffs' submissions that the Snowside companies' objections were not upheld by the Court is obviously correct, since the altered schemes were ultimately approved by the Court, but the case law to which I have referred above indicates that at least a party bound by the schemes which has made submissions that have merit may be allowed its costs of opposing the schemes. I would be inclined to extend that approach to a person with a real interest that is adversely affected by a scheme, although it again does not follow that it should recover all of its costs of an extended opposition to the schemes. I do not accept that the Snowside companies' submissions, including in respect of Ch 2E and Ch 6 of the Corporations Act 2001 (Cth) were "technical contentions", as the Plaintiffs submit, although I ultimately did not accept those submissions.
Fifth, the Plaintiffs refer, with substantial force, to the volume and scale of expert evidence led by the Snowside companies, including five reports of Mr Hall dated 2 June, 28 June, 29 June, 3 July and 9 August 2017, a report of Mr Silvia dated 3 July 2017 and two reports of Mr Samuel dated 3 July 2017 and 9 August 2017. The Plaintiffs submit that it would be unjust for them to have to bear the costs of so many experts and expert reports when they relied on only one expert (KordaMentha) in connection with the schemes and one other expert (KPMG) in connection with the shareholder meeting.
In reply, the Snowside companies respond that KordaMentha and KPMG led additional expert reports in response to the expert evidence of Mr Lonergan and Mr Hall. I give little weight to that submission, since it is no answer to overlap between the evidence led by First Pacific and the evidence led by the Snowside companies to say that, where both First Pacific and the Snowside companies had led overlapping evidence, the Plaintiffs were then required to respond to the evidence of both First Pacific and the Snowside companies. That proposition simply emphasises the extent to which the overlapping evidence of First Pacific and the Snowside companies impacted upon the extent of evidence that the Plaintiffs were required to lead in response. The Snowside companies also identify the matters that were addressed in Mr Hall's several reports, Mr Silvia's report and Mr Samuel's reports and I have regard to those matters. In any event, I give less weight to any counting of the number of reports led by Mr Hall than to the question of the overlap of those reports with the evidence led by First Pacific in respect of valuation issues.
I also recognise that Mr Silvia's report dealing with KordaMentha's solvency review and Mr Samuel's report dealing with issues as to the express limitation on the scope of KordaMentha's valuation were directed to discrete issues and did not involve a substantive overlap with Mr Lonergan's evidence. The Snowside companies also point out that their expert evidence needed to be supplemented when the schemes were altered. I recognise that matter and also recognise that the overlap of expert evidence ceased for expert evidence led by the Snowside companies after First Pacific had ceased to oppose the altered schemes. The Snowside companies also submit that they could have been criticised had they not led expert evidence. I do not consider that there was any room for such criticism, where they could properly have relied on the expert evidence led by First Pacific addressing similar issues to those which they put in submissions.
It seems to me that the Snowside companies should not, on any view, have costs of the report of Mr Hall dated 2 June 2017, which was prepared by them for use in other proceedings in which they were largely unsuccessful, and on which they placed little reliance in this application. I also consider, as I will note below, that costs allowed in favour of the Snowside companies should be reduced to reflect the extent to which the evidence of Mr Hall and Mr Samuel led at the hearing on 4-5 and 13-14 July 2017 overlapped with the expert evidence of Mr Lonergan, on which First Pacific relied. As I will note below, it seems to me that the Snowside companies should have their costs in respect of Mr Hall's report of 9 August 2017 and Mr Samuel's report of 9 August 2017, where they were then the only remaining opponent to the schemes, and had to lead such evidence in order to advance their opposition to the schemes.
In reply to the Snowside companies' submissions, the Plaintiffs submit that the decision in Re NRMA Ltd above indicates that objectors will not be awarded their costs where their submissions are not properly and justifiably advanced and does not establish the converse, and submit that costs orders in favour of objectors to a scheme of arrangement are in the Court's discretion. They otherwise repeat their submission in chief as to the relevance of factors such as the scope of the Snowside companies' intervention, the extent to which it contributed to the extension of the litigation, the fact that the Snowside companies were not entitled to vote on the relevant scheme and the financial position of the relevant companies in a creditors' scheme.

Determination

As I noted above, there was a substantial degree of overlap at the hearings on 4-5 and 13-14 July 2017 between the position adopted by First Pacific, which then opposed the schemes in their original form, and that of the Snowside companies. The position likely to be adopted by First Pacific was clear from its Statement of Particulars as to why the Court should refuse to approve the schemes of arrangement, filed on 15 June 2017, although it was always possible that First Pacific would change its position as it later did in respect of the altered schemes. First Pacific led expert valuation evidence to oppose approval of the schemes in their original form and made comprehensive submissions in opposition to the schemes in that form on 4-5 and 13-14 July 2017. Those submissions addressed all relevant issues of valuation of BLY, and I observed in the Second Judgment (at [90]) that: "I note, for completeness, that the agreement reached between the Plaintiffs and secured and unsecured creditors also provides for BLY to reimburse First Pacific for its reasonable documented out-of-pocket fees and expenses incurred in connection with the schemes and related proceedings, up to an aggregate amount not exceeding US$3 million, although this does not require an alteration of the schemes. In the ordinary course, it is likely that First Pacific would have recovered its costs of these proceedings, so far as it is plain that the objections it raised to the schemes in their original form were, at least, strongly arguable."
It seems to me that, on 4-5 and 13-14 July 2017, the Snowside companies' objections to the original schemes were largely parallel to, and in part derivative of, First Pacific's objections to the schemes. It also seems to me that the extent of evidence led by the Snowside companies, including the several expert reports of Mr Hall and Mr Samuel, was too great to fairly require the Plaintiffs to pay the costs of those reports, in circumstances that First Pacific was already leading expert evidence in opposition to the schemes and its and the Snowside companies' reports covered substantially (although not entirely) similar territory. So far as that expert evidence addressed the interests of the Snowside companies as shareholders, it largely paralleled (although extending) First Pacific's expert evidence and case, and it was not necessary to the position put by the Snowside companies as claimants in other proceedings against BLY. I am not persuaded that, applying either the principles generally applicable to the costs of a party that is heard under r 2.13 of the Supreme Court (Corporations) Rules or the possibly more generous approach that has been adopted where a person who will be bound by a scheme or a reduction of capital opposes that scheme or reduction of capital, the Plaintiffs can fairly be ordered to pay the Snowside companies' costs of preparing several expert reports that overlapped with aspects of the expert evidence led by First Pacific.
I do not doubt that, had I been persuaded that the expert evidence on which the Snowside companies relied should be accepted in preference to KordaMentha's and KPMG's reports on which the Plaintiffs relied, that would have advanced the Snowside companies' positions as shareholders and claimants in the oppression proceedings and opponents to the schemes, but that does not seem to be sufficient basis to require the Plaintiffs to pay the substantial costs that would be referable to those reports. I also accept that it may well be strategically advantageous to a person or many persons who is or are affected by a scheme in an economic sense, although not bound by it, to run a case in opposition to the scheme in parallel to that of a person bound by the scheme who opposes it, including against the contingency (which occurred here) that the scheme is altered to address the concerns of the person bound by it who previously opposed it. However, it does not follow that the scheme proponent should be required to fund that course, for one or many such persons not bound by the schemes, under the principles to which I have referred above.
I therefore do not consider the Snowside companies should have their costs of that expert evidence or of steps prior to the hearing commencing on 4-5 and 13-14 July 2017 which would largely have related to the preparation of that evidence and of submissions about it. It seems to me preferable to take that approach rather than to seek to segregate the smaller part of preparation costs that would not have related to that evidence, which would likely give rise to significant complexities, delay and costs in an assessment.
However, I am satisfied that the Snowside companies made useful and efficient submissions at the hearings on 4-5, 13-14 and 27 July 2017 and, on balance, I consider that the Plaintiffs should be required to pay their reasonable costs limited to their attendance at those hearings, as agreed or as assessed, on an ordinary basis. The overlap in submissions between First Pacific and the Snowside companies did not continue at the further hearings on 9 and 14 August 2017, when First Pacific supported the schemes and only the Snowside companies opposed them, and raised serious matters of fact and law in opposition to the altered schemes. I am satisfied that the Snowside companies should have their costs of and incidental to the preparation of expert evidence for the further hearing on those days (being Mr Samuel's second report and Mr Hall's fourth supplementary report dated 9 August 2017) and of their preparation of submissions for and attendance at the hearing on those days on an ordinary basis.

Orders

Accordingly, I order that the Plaintiffs pay the costs of Snowside Pty Ltd as trustee for the Snowside Trust and Maurici Nominees Pty Ltd as trustee for the AP Maurici & Associates Pty Ltd Superannuation Fund, as agreed or as assessed on an ordinary basis, limited to: (a) the attendance of their counsel and solicitors at the hearings on 4-5, 13-14 and 27 July 2017, excluding costs of preparation for and expert evidence led by them at those hearings; and (b) the preparation for and attendance at the hearings on 9 and 14 August 2017, including costs of preparation for and expert reports of Mr Samuel dated 9 August 2017 and Mr Hall dated 9 August 2017 led by them at those hearings.
Each of the Plaintiffs and the Snowside companies has had a degree of success in this costs application and there should be no order as to the costs of this application.

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: 15 September 2017

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