Fortress Credit Corporation (Australia) Pty Ltd v William John Fletcher

Judgment 1On 8 November 2013 I delivered reasons for judgment in these proceedings on an application by the plaintiff under Uniform Civil Procedure Rules r 5.3 for preliminary discovery. 2I indicated that I proposed to make orders generally in the form that I set out at par 188 of my reasons. I directed the parties to bring in short minutes of order. I took that course because I was concerned that I might not have been aware of all of the practical reasons that might make my proposed orders inappropriate. 3After a brief hearing on 9 December 2013, I made orders in terms of modified draft short minutes of order that had been provided by the parties. That dealt with the substantive orders in the proceedings. 4I also heard the parties on the orders that should be made in relation to the cost of the proceedings, and the costs of the defendants in giving preliminary discovery in accordance with the substantive orders. I was not in a position to give an immediate costs ruling, and reserved judgment on the issue of costs. I indicated that I would give short reasons, and publish my reasons for judgment by sending them to the solicitors for the parties, in order to avoid the parties incurring unnecessary further costs. 5In essence, the plaintiff submitted that the Court should order the defendants to pay the costs of the application, and that the Court should defer making a ruling in relation to the costs of providing the preliminary discovery, so that that issue may be addressed when the work needed to be done in giving discovery is more fully known. 6The defendants submitted that the plaintiff should be ordered to pay their costs of the application and of complying with the Court's orders for preliminary discovery. The defendants relied upon three arguments. First, they relied upon authorities that suggested that, normally, the applicant for preliminary discovery should be ordered to pay the respondent's costs where the respondent acts reasonably in refusing to hand over materials without a court order. The defendants relied upon Bio Transplant Inc v Bell Potter Securities Ltd [2008] NSWSC 694 at [13], and referred to Steffen v ANZ Banking Group Ltd [2009] NSWSC 883 and J & A Vaughan Super Pty Ltd v Becton Property Group Ltd [2013] FCA 340 at [17]. 7In support of their first argument the defendants put five submissions in par 5 of their outline of submissions. They submitted that the information the subject of the plaintiff's application was, on its face, confidential and privileged information. There was real doubt as to whether the defendants were obliged to disclose to the plaintiff the broad category of information sought, or any information at all. The information related directly to proceedings in which the parties were engaged in litigation in the Supreme Court of Queensland. The disclosure of the material sought to the plaintiff would have the potential to prejudice that litigation, and therefore the rights of the companies of which the defendants had been appointed liquidators, and the creditors of those companies. Finally, much of the evidence upon which the plaintiff sought to rely at the hearing of the application was inadmissible, and the plaintiff did not remedy the evidentiary defects even after being invited to do so. 8The second argument put by the defendants was that, in the orders that the Court made, it substantially narrowed the categories of documents for which the defendants were required to give preliminary discovery, in comparison to the categories sought by the plaintiff in its application; and further restricted the obligation to give preliminary discovery in a manner that protected confidentiality in documents and claims for legal professional privilege. The defendants suggested that, in those circumstances, it was reasonable for the defendants to refuse to disclose privileged and confidential information without a court order. 9Thirdly, the defendants submitted that the plaintiff was unsuccessful in respect of several of the bases upon which it put its claim for relief, and in particular, in so far as the plaintiff sought to rely upon ss 536 and 598(2) of the Corporations Act 2001 (Cth). The plaintiff was also held not to be entitled to appeal from any court approval or decision by the defendants on the grounds that there was not an adequate commercial basis for the defendants' actions. 10For these reasons the defendants submitted that they, as liquidators, behaved reasonably and the plaintiff should pay their costs of the application. 11It is not necessary to set out again in detail any of the underlying facts that were considered at some depth in the principal judgment. It will be sufficient to make particular reference to the following: (1)The application for preliminary discovery should be considered in the context of the earlier litigation between the parties: principal judgment [40]-[63]. In essence the defendants had caused Octaviar Administration in Pty Ltd (in liq) (Octaviar Administration) to enter it into a funding agreement with a related company, Octaviar Ltd (Octaviar), to fund proceedings by that company against the present plaintiff in the Supreme Court of Queensland. The plaintiff has an interest in the assets of Octaviar Administration, as it has a charge over a substantial debt owed by that company to Octaviar. (2)After a contest before Stone J in the Federal Court of Australia, a successful appeal by the present plaintiff to the Full Court of the Federal Court, and a failed application by the defendants to the High Court for special leave to appeal, the defendants discontinued their application for approval of their decision to enter into the funding agreement. The defendants were ordered to pay the plaintiff's costs. (3)In the result the plaintiff succeeded in establishing that the defendants' decision to cause Octaviar Administration to enter into the funding agreement was not valid. In short, the plaintiff won. (4)Notwithstanding that victory, it subsequently became apparent that the defendants had caused Octaviar Administration to enter into a new funding agreement with Octaviar for the purpose of funding the same proceedings in the Supreme Court of Queensland, and that Octaviar Administration had paid substantial sums to fund that litigation: principal judgment [69]-[72]. (5)When the plaintiff discovered the apparent existence of the new funding agreement, it caused its solicitors, Baker & McKenzie, to write a letter to the defendants' solicitors, Henry Davis York, on 27 March 2013, in which the plaintiff's solicitors made a request for certain categories of information that were designed to enable the plaintiff to find out whether any change in circumstances may have justified the defendants in causing Octaviar Administration to enter into the new funding agreement, and if not, to enable the plaintiff to institute new proceedings to try to establish the invalidity of the new funding agreement. On 24 April 2013 Henry Davis York asserted that the defendants had had regard to all necessary matters in deciding to enter into the new funding agreement, and that the basis upon which the plaintiff had made its claim to be provided with information was not clear. (6)Baker and Mackenzie wrote a further letter on 13 May 2013 in which they explained more elaborately the reasons for the plaintiff's request for information. The request was rebuffed by Henry Davis York on 17 May 2013 in a very summary manner. They asserted "that the only purpose of your letter is to distract the Liquidators from the proper performance of their duties, including the advancing of the litigation in the Supreme Court of Queensland in respect of which our respective clients are currently involved." They asserted that there was no useful purpose in acceding to the request. (7)The material terms of this correspondence are set out in the principal judgment at [73]-[76]. 12The requests for further information that were made on behalf of the plaintiff were reasonable in the circumstances, even though they may partly have sought more information than was ultimately found to be appropriate. It is self-evident that the plaintiff, having succeeded in contested litigation in the Federal Court in establishing that the first funding agreement was invalid, was entitled to know whether any relevant change in circumstances had permitted the defendants validly to cause Octaviar Administration to enter into the second funding agreement, or whether it too was invalid. That conclusion is made stronger by the consideration, put somewhat too simply, that the defendants were causing Octaviar Administration to apply its assets, over which the plaintiff had a potential entitlement under the charge over the debt owed by Octaviar Administration to Octaviar, to fund litigation by Octaviar against the plaintiff. 13In essence, in the Federal Court proceedings, the defendants failed to establish the validity of the first funding agreement because Stone J had not made any finding as to how, apart from a commercial return by reason of success in the proposed litigation, the proposed arrangements were in the interests of the creditors of Octaviar Administration as a whole, as distinct from being in the interests of a particular group of creditors of that company. That is, there was no finding that there was a benefit to the creditors of Octaviar Administration as a whole from entering into the funding agreement. 14The plaintiff was entitled to believe that the second funding agreement was also invalid, unless circumstances had changed in a way that would support a finding that entry into the second funding agreement was in the interests of the creditors of Octaviar Administration as a whole. 15The proper and reasonable course for the defendants to take when their solicitors received the requests for further information in March and May 2013 was to enter into positive and reasonable negotiations with the plaintiff to ensure that the plaintiff was provided with the information which the circumstances clearly entitled it to receive, subject to the defendants insisting upon qualifications to the plaintiff's right to receive information that protected confidential information and any available claims for legal professional privilege. 16There is some force in the defendants' argument that, as liquidators, they have to act principally in the interests of the creditors of Octaviar Administration, and should ordinarily be entitled to require a court order before they voluntarily divulge information to a third party like the plaintiff. However, in considering the conduct of the defendants that would have been appropriate in the present case, the context of the existing proceedings and their failure to establish the validity of the first funding agreement cannot be ignored. 17As I noted at [102] [103] of the principal judgment, the absolute refusal by the defendants to provide any of the information that was requested by the plaintiff effectively compelled the plaintiff to make an application for preliminary discovery, as the plaintiff lacked the basic information to know where and how to attack the validity of the second funding agreement. 18The relevant authorities have been fully canvassed by McDougal J in Steffen v ANZ Banking Group Ltd [2009] NSW SC 883. I am indebted to his Honour's analysis of the principles. I agree, and see no need to set out again a full review of the authorities. 19The question is, in essence, whether the defendants properly resisted providing information to a third party, for which the third-party had no clear entitlement, without the authority of an order of the court, but otherwise cooperated reasonably to ensure that the third-party received that to which it was entitled. Alternatively, did the defendants act in a partisan and adversarial way in contesting the entitlement of the plaintiff to the orders that it sought? 20In this case, in my view, the defendants contested the plaintiff's claim in an adversarial manner. It seems clear that the defendants have committed themselves to the view that the proper course for them to take as liquidators of Octaviar Administration is to apply part of the funds of that company to fund Octaviar's claim in the Supreme Court of Queensland, and that having made that decision, they will continue to prosecute that course notwithstanding that the effect of the Federal Court proceedings was that the first funding agreement was found to be invalid. The defendants have, in effect, decided that the proper course is for them to apply Octaviar Administration's assets in that way even though, in some future events, that may involve expending money to which the plaintiff may ultimately be entitled to fund proceedings against it. I make no suggestion that there is anything improper or even inappropriate in the defendants conducting the liquidation of Octaviar Administration in the manner that they have, but the reality is that it has caused them to adopt an adversarial role in relation to the plaintiff's entitlement to know whether the second funding agreement is valid, and to take proceedings to establish the invalidity of the funding agreement if there are grounds to do so. 21It is also the case that the defendants conducted the proceedings in an adversarial manner, from the original point-blank refusal by their solicitors to entertain the provision of any information to the plaintiff, to the conduct of the hearing and the making of submissions. 22Consistently with the reasoning in Steffen, and the authorities to which McDougall J referred, I hold that the defendants should be ordered to pay the plaintiff's costs of the application for preliminary discovery, assessed on the ordinary basis. 23There is a question whether the Court should confine the cost order that it will make to a proportion only of the costs incurred by the plaintiff. McDougall J was required to deal with the same issue in Steffen at [39] and [40]. In my view here, as in that case, the plaintiff has enjoyed substantial success in its application. The relief that the plaintiff claimed in its amended summons was consistent with the information sought in Baker & McKenzie's 27 March 2013 letter. It is true that, in formulating the proposed orders set out in par 188 of the principal judgment, I introduced a number of refinements, and restrictions to the documents required to be discovered by the defendants. However, the plaintiff did not quibble with the restrictions. Taking, for example, the preservation of the defendants' right to maintain confidentiality and legal professional privilege, the defendants did not respond to Baker & McKenzie's letters by offering to provide information, subject to preserving confidentiality and legal professional privilege. The defendants did not give the plaintiff an opportunity to accept that restriction. It is most likely that, had the defendants taken that course, the plaintiff would have felt obliged to respond reasonably. It is also true that some of the plaintiff's arguments failed. I do not conclude, however, that in the circumstances it was wrong or inappropriate for the plaintiff to put its case as strongly as seemed arguable. I have concluded that there is no justification for the Court to discount the order for costs against the defendants. 24The second issue to be decided concerns the costs that the defendants will incur in providing the preliminary discovery that the Court has ordered that they provide. I propose to follow the course adopted by Bergin CJ in Equity in Nielsen Company (Australia) Pty Ltd v Paul Sinkinson [2011] NSWSC 848 at [34]. In my view in cases such as the present a defendant who is compelled to provide preliminary discovery should in the ordinary course be compensated for the cost of doing so, and that the cost order should be made immediately, and not await the availability of further information of any sort concerning the significance, or otherwise, of the documents that are discovered. Such a cost order in this case will apply to the defendants' cost of preparing the affidavit that the orders that the Court has made require them to prepare. As Bergin CJ in Eq observed, the defendant will only be entitled to its reasonable costs, and the reasonableness of the costs can be determined in any assessment of costs that takes place. 25In the present case the orders that I have made are slightly complex, and the process may possibly give rise to further dispute between the parties. I propose to add an order that the parties have liberty to apply to the Court on seven days' notice, with the intent that I will be best placed to resolve any issues that may arise. Given the somewhat uncertain scope of the work that may be required on the part of the defendants in preparing the affidavit and giving the discovery, the plaintiff may avail itself of the liberty to apply if it wishes to seek any special order confining or quantifying the costs that it must pay the defendants in relation to their compliance with the orders. 26I make the following orders: (1)Order the defendants to pay the plaintiff's costs of the proceedings on the ordinary basis. (2)Order the plaintiff to pay the reasonable costs of the defendants in complying with all of the orders made by the Court. (3)Liberty to the parties to apply on seven days' notice made to the associate to Robb J, including in relation to the resolution of any disputes that may arise between the parties concerning the implementation of the orders made by the Court, and any application by the plaintiff concerning the implementation of the order that the plaintiff pay the defendants' costs of complying with the orders made by the Court. 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: 11 February 2014