Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2012] FCA 344 | Case summary

REASONS FOR JUDGMENT 1 Fortress Credit Corporation (Australia) II Pty Limited (Fortress) seeks orders for costs against William Fletcher and Katherine Barnet (the Liquidators) in relation to two separate proceedings brought in the Court by the Liquidators. The Liquidators are the joint liquidators of Octaviar Administration Pty Limited (the Funder) and Octaviar Limited (the Claimant). 2 In proceeding NSD 149 of 2011 (the first proceeding), the Liquidators sought approval under s 477(2B) of the Corporations Act 2001 (Cth) (the Corporations Act) for the Liquidators, in their capacity as Liquidators of both the Funder and the Claimant, to enter into an arrangement for the funding by the Funder of proceedings against Fortress by the Claimant. On 23 February 2011, a judge of the Court (the primary judge) made orders in the first proceeding as claimed by the Liquidators. Fortress was not notified of the first proceeding prior to the making of those orders. 3 In proceeding 255 of 2011 (the second proceeding), the Liquidators sought ex post facto approval under s 477(2B) of the Corporations Act for the funding by the Funder of public examinations by the Liquidators, in their capacity as liquidators of the Claimant, of officers of Fortress. On 14 March 2011, the primary judge directed that the application and an affidavit by one of the Liquidators filed in the second proceeding be served on Fortress and on Messrs Stephen Parbery and Anthony Sims (the Receivers), who are the receivers and managers of the Claimant. The primary judge adjourned the hearing of the second proceeding to 16 March 2011 to enable Fortress and the Receivers to seek leave to be heard, if they so wished. 4 At the adjourned hearing on 16 March 2011, Fortress and the Receivers sought and were granted leave to appear and be heard. They informed the primary judge that Fortress opposed the orders sought in the second proceeding and had applied for leave to appeal from the orders made in the first proceeding. Fortress contended that the hearing in the second proceeding should be adjourned further, pending the resolution of the application for leave to appeal from the orders made in the first proceeding, and the hearing of the appeal, should leave be given. The primary judge refused the adjournment, and proceeded to make the orders claimed by the Liquidators in the second proceeding. 5 Fortress sought leave to appeal from the orders made in the first proceeding and the orders made in the in the second proceeding. On 25 July 2011, the Full Court unanimously granted leave and ordered that the orders made by the primary judge in the first proceeding and in the second proceeding be set aside and that each matter be remitted for further consideration. 6 On 26 July 2011, the solicitors for Fortress wrote to the Liquidators' solicitors inviting the Liquidators to consent to orders dismissing the first proceeding and the second proceeding on the basis that there was no prospect that the funding agreements that were the subject of those proceedings would be authorised by the Court. On 29 July 2011, the Liquidators' solicitors responded saying that the Liquidators intended to adduce further evidence in support of the relief sought in both the first proceeding and the second proceeding. On 3 August 2011, the solicitors for Fortress requested confirmation as to the matters, if any, that would be relied upon by the Liquidators to attract s 477 of the Corporations Act, saying that, in the absence of identification of any such matters, the Liquidators had no prospect of obtaining the relief sought. There was no substantive response. 7 Rather, on 19 August 2011, the Liquidators applied to the High Court of Australia for special leave to appeal from the orders of the Full Court made on 25 July 2011. On 10 February 2012, the High Court dismissed the applications for special leave with costs. 8 Both proceedings then came before the Court for directions on 17 February 2012. At that time, Fortress was granted leave under rule 2.13 of the Federal Court (Corporations) Rules 2000 (the Corporations Rules) to be heard in each of the first proceeding and the second proceeding without becoming a party to either proceeding. The Liquidators were also directed to indicate to the Court at the next directions hearing, fixed for 9 March 2012, what further evidence they would be adducing in both proceedings. However, on 9 March 2012, the solicitors for the Liquidators wrote to the solicitors for Fortress indicating that the Liquidators were abandoning their applications for orders under the Corporations Act in both the first proceeding and the second proceeding. They proposed that both proceedings be discontinued with no order as to costs. 9 On 9 March 2012, the Court made orders, by consent, granting leave to the Liquidators to discontinue the first proceeding and the second proceeding. The Liquidators and Fortress were directed to file and serve submissions as to costs. The Court has now received written submissions from the Liquidators and Fortress and has been requested to decide the question of costs on the papers. 10 Fortress is not a party to either the first proceeding or the second proceeding. It has not sought to be joined as a party to either proceeding. Rather, it sought leave to be heard in the second proceeding and subsequently, on remitter, sought leave to be heard in each proceeding. As I have said, it was also granted leave to appeal from the orders made in both the first proceeding and the second proceeding, notwithstanding that it was not a party to either proceeding. The basis upon which the Full Court concluded that Fortress was aggrieved or was otherwise sufficiently interested, for the purposes of the grant of leave to appeal from the orders made in both proceedings, is set out in the reasons of the Full Court (see Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2011) 281 ALR 38 at [33]-[38]). Those considerations apply equally to the question of Fortress appearing and being heard on remitter of each proceeding. 11 The nature of both the first proceeding and the second proceeding, being, in each case, an application under s 477(2B) of the Corporations Act, is such that normally no defendant is joined. That is relevant in considering the exercise of discretion based on the fact that Fortress was not a party to either the first proceeding or the second proceeding. 12 There is no doubt that the Court has power to order costs in favour of a non-party. Section 43 of the Federal Court of Australia Act 1976 (Cth) is cast in sufficiently wide terms to enable the Court to make an order for costs in the proceeding for the benefit of a non-party. Nevertheless, the making of an order for costs in favour of a non-party will be exceptional and any application for such an order must be treated with considerable caution. Regard must be had in each case to the particular circumstances and the requirements of reason and justice, and the nature of the relationship between the non-party and the litigation will be relevant in that regard (see O'Keeffe v Hayes Knight GTO Pty Limited [2005] FCA 1559 at [24]). In general, a special factor outside the ordinary and expected course of events, engendering a justifiable expectation, in the mind of a non-party, of compensation for costs, must exist before an order will be made for costs in favour of a non-party against a party. In general, a person who seeks, and is granted, leave under rule 2.13 of the Corporations Rules to appear and be heard, thereby limiting exposure to an order for costs, can have little expectation of being awarded costs (see Re Pan Pharmaceuticals Limited; Selim v McGrath (2004) 48 ACSR 681 at [20]). 13 The Liquidators oppose the orders sought by Fortress on the basis that: there are no exceptional circumstances that would justify an order for costs in favour of Fortress as a non-party; the first proceeding and the second proceeding have now been resolved without a hearing on the merits, and the Liquidators have acted reasonably; and the conduct of Fortress has increased the costs of both proceedings. 14 In order to put the present applications into context, it is necessary to say something more about the circumstances that preceded the commencement of the two proceedings, and the circumstances that have arisen following the orders of the Full Court. It is also necessary to examine the conduct of Fortress in some respects. 15 On 29 November 2010, the solicitors for Fortress wrote to the Liquidators' solicitors outlining the concerns of Fortress at the proposed funding arrangements that became the subject of the proceedings. On 17 January 2011, Fortress requested the Liquidators' solicitors to notify them of any proceeding commenced by the Liquidators for approval of the funding proposals by any court. They asked that, if the Liquidators decided to conduct any such proceeding ex parte, a copy of their letter, together with the letter of 29 November 2010, be provided to the Court and that the attention of the Court be drawn to the matters raised in the correspondence. Notwithstanding that request, no notification was given by the Liquidators' solicitors to Fortress or its solicitors of the commencement of the first proceeding. Notification of the second proceeding was given only after the primary judge made an order to that effect on 14 March 2011. 16 On 8 December 2011, the Supreme Court of New South Wales ordered that a special purpose liquidator be appointed to the Claimant to deal with the prosecution of the prospective claim against Fortress. The orders of the Supreme Court provided that the role of the special purpose liquidator was to include negotiating the provision of any necessary funding for that purpose. The Liquidators say that, in those circumstances, it is no longer appropriate to prosecute either the first proceeding or the second proceeding, and that it was proper to seek leave to discontinue both proceedings. They say that there has been no further hearing of the applications for orders under s 477(2B) of the Corporations Act, by reason of the discontinuance of both proceedings. 17 The Liquidators rely on the fact that the Full Court did not hold that the Liquidators did not have power to enter into the proposed funding agreements. Rather, the Full Court concluded that the primary judge had erred in failing to make a finding that there was a benefit to the creditors of the Funder from entering into the proposed funding agreements, beyond the possible commercial return to be earned as consideration for lending money or granting accommodation to the Claimant to enable it to prosecute its claims against Fortress (see Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2011) 281 ALR 38 at [49]). 18 The Liquidators also point to the fact that Fortress, having been granted leave to appear and be heard and the hearing of the second proceeding, did not ask for an order for costs. Nor did Fortress seek an order for costs following the making of the orders and the giving of reasons for those orders in the second proceeding. The primary judge ordered that the Liquidators' costs of both proceedings be costs in the liquidation of the Funder and the Claimant. The Full Court was not asked to, and did not, disturb those orders. 19 The Liquidators say that, in seeking leave to be heard as a non-party under rule 2.13 of the Corporations Rules, rather than applying to be joined as a defendant party, and thereby being exposed to an order for costs, Fortress cannot have engendered any reasonable or justifiable expectation of receiving compensation for its costs. That, the Liquidators say, is a factor tending strongly against the exercise of any discretion in favour of Fortress. 20 While the Court has power to make an order for costs where there has been no hearing on the merits and the moving party no longer wishes to proceed, it is normally inappropriate for the Court to try a hypothetical lis simply for the purposes of determining the question of costs. It is only where one of the parties has acted unreasonably that an order for costs should be made in those circumstances, or where the Court can feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the proceeding had gone to a final hearing (see Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 at 624-625). 21 But for the intervention of Fortress in the second proceeding and its application for leave to appeal from the orders made in both proceedings, there would have been no contradictor, and the orders of the primary judge would have stood. Fortress satisfied the Full Court that it had sufficient interest in both proceedings to warrant being heard and being given leave to appeal. By reason of the involvement of Fortress, the relief claimed in both proceedings was refused, subject to any further hearing that might be sought by the Liquidators. There was a hearing on the merits before the primary judge. Following the decision of the Full Court, the Liquidators have been shown to have been unsuccessful as to that hearing. 22 It is clear enough that an application by Fortress to the primary judge for an order for costs in the second proceeding, before the appeal to the Full Court, would have been futile. The primary judge rejected the contentions advanced on Fortress in the second proceeding. It is unlikely, therefore, that her Honour would have ordered the Liquidators to pay costs incurred by Fortress. 23 Fortress contends that the decision by the Liquidators to abandon both proceedings demonstrates that they had no prospect of success in obtaining the relief claimed following further hearing. It says that the invitations to dismiss both proceedings made on 26 July 2011, and subsequently on 3 August 2011, were warranted and should have been accepted. However, the Liquidators have proffered an explanation, indicating that they have now decided to take a different course, having had the special purpose liquidator appointed. There can be no certainty that a renewed application for approval of the original proposal would not have been successful. 24 From 22 August 2011 until 6 December 2011, the Liquidators' solicitors and the solicitors for Fortress exchanged emails and letters concerning the further conduct of the proceedings, pending the hearing of the application to the High Court for special leave to appeal. I am not persuaded that the conduct of Fortress after the decision of the Full Court was unreasonable or that it increased costs to any relevant degree. Naturally enough, one would not expect the Liquidators to keep Fortress fully informed as to their intentions in circumstances where they were contemplating proceedings against Fortress. On the other hand, Fortress was not unreasonable in seeking finality in relation to both proceedings. 25 In all of the circumstances, I consider that the appropriate order is that the Liquidators pay Fortress' costs of the second proceeding before the primary judge. Those costs would not include the costs of the various communications after the decision of the Full Court or the directions hearings held in February and March 2012. Since Fortress did not participate in the first proceeding, there is no basis for an order for costs in relation to the first proceeding. The costs ordered against the Liquidators should be costs in the liquidation of the Claimant. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher

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