Gdanski v Palms Court Management Pty Ltd [2017] VSCA 348

1 The making of an order for costs against a non-party is an exceptional course for a court to take. The usual order, of course, is that the losing party pays the successful party's costs of the proceeding. There are, however, recognised sets of circumstances in which express provisions authorise, or the interests of justice require, the making of a non-party order for costs. Naturally, such an order can only be made if the circumstances of the case satisfy the conditions laid down for the exercise of the relevant power.

2 In the present case, the respondent ('Palms') sought a non-party costs order against the applicant, Mr Gdanski.[1] Mr Gdanski was a director and (through an associated entity) a shareholder in 1165 Stud Road Pty Ltd ('the company'), which had initiated the substantive proceeding against Palms. Mr Gdanski had also acted as the company's solicitor throughout that proceeding. When the company discontinued the proceeding, it was ordered to pay Palms's costs. But the company was insolvent and could not meet the order for costs.

3 Palms's application for a non-party costs order against Mr Gdanski invoked three separate heads of power, as follows:

• section 29(1)(a) of the Civil Procedure Act 2010, which empowers the Court to make a costs order against a person who has contravened any of the 'overarching obligations' which that Act imposes;
• rule 63.23 of the Supreme Court (General Civil Procedure) Rules 2005, which confers power on the Court to make a 'wasted costs' order against a solicitor for a party to litigation; and
• the general discretion of the Court under s 24(1) of the Supreme Court Act 1986 and/or in its inherent jurisdiction.

4 Only the third limb of the application succeeded. For that purpose, Palms had invoked the 'general category of case' identified by Mason CJ and Deane J in Knight v FP Special Assets Ltd.[2] As will appear, the circumstances which define that category of case - in addition to the insolvency of the named party - are that the non-party should have played 'an active role in the conduct of the litigation' and should have had 'an interest in the subject of the litigation.' Where those circumstances exist, the Court said, an order for costs should be made against the non-party 'if the interests of justice require that it be made.'[3]

5 In this case, the judge concluded that Mr Gdanski had played an active role in the conduct of the company's litigation. He also concluded that Mr Gdanski had had 'an interest in the subject of the litigation' - but only because, as the company's solicitor, he stood to benefit from the payment of legal fees for services provided. Palms had not relied on that circumstance in support of its application and did not seek to uphold this aspect of the judge's decision.

6 For reasons which follow, we have concluded that it was not open to his Honour to find that the present case fell within the Knight category. Put shortly, Mr Gdanski's active role in the litigation was entirely consistent with his fiduciary duties as respectively, director of and solicitor to the company. So far as his interest in the litigation is concerned, the earning of professional fees was immaterial. Further, Mr Gdanski was not guilty of any conflict of interest that might have suggested otherwise.

7 Mr Gdanski did have an interest in the company's success in the litigation, both as shareholder and because he had an interest in entities which were secured creditors of the company. But there was nothing in the circumstances of the case to suggest that any of those interests was sufficient to bring him within the Knight category.

8 His Honour made a number of adverse findings against Mr Gdanski concerning his performance as a solicitor in the litigation. We have concluded that none of those findings should have been made.

9 In 2002, Palms purchased a property on Stud Road, Rowville (the 'neighbouring property'). The land was subject to a carriageway easement allowing access to an adjacent property at 1165 Stud Road (the 'property'). The property was otherwise landlocked. In the period to April 2005, Palms constructed a building on its land, which resulted in the easement being built over. From that time onwards, Palms operated a Chinese restaurant in the building.

10 In early 2007, Mr Gdanski, acting for the company, commenced negotiations to purchase the property. The negotiations related particularly to the easement and access to the property. The company purchased the property in March 2007 without any condition concerning access or relocation of the easement. Mr Gdanski, through his then firm, Fetter Gdanski, acted as solicitor for the company in connection with the purchase and in subsequent negotiations with Palms in 2008 relating to relocation of the easement. Those negotiations were unsuccessful.

11 In the period 2007 to February 2014, Mr Gdanski was a director of the company and a major shareholder through his corporate entity, Beside Pty Ltd. Three other corporate entities, in which Mr Gdanski and his fellow director, Renato Chilelli, had interests, had lent substantial sums to the company. Those debts were secured by debentures over the company's assets. We deal with these debts in more detail below.

12 In May 2012, the company contracted to sell the property to Robert Power and Plenty Road Investments Pty Ltd (the 'purchasers'). Mr Gdanski, by then a director of a different legal practice, Sackville Wilks, prepared the contract of sale. Despite Mr Gdanski's knowledge, the contract gave no notice of the unresolved easement issue.

13 On 20 June 2012, the purchasers notified the company that the easement was obstructed and threatened to rescind the contract. There followed negotiations between the company and Palms, and between the company and the purchasers, in relation to relocation of the easement. The negotiations were unsuccessful and, in early August, the purchasers purported to rescind the contract. Later in August, Palms's application to the Knox City Council (the 'Council') to relocate the easement was approved. Mr Gdanski, acting for the company, brought an application in VCAT objecting to the Council decision. That application was later dismissed with costs, because of the company's failure to appear at a VCAT hearing.

14 On 7 September 2012, the company issued proceedings against the purchasers, alleging failure to complete the contract of sale. Palms was joined as third defendant. The company alleged that Palms had interfered with the easement and had engaged in misleading and unconscionable conduct. Mr Gdanski had the care and conduct of the proceeding for the company at all times from commencement until 19 May 2014, when a notice of discontinuance against Palms was filed.

15 In February 2013, the solicitors for Palms corresponded with Sackville Wilks for the company, raising the issue of security for costs. It is apparent from that correspondence that Palms was aware that the property was security for a mortgage to the National Australia Bank, and that the company's assets were subject to three security interests. Sackville Wilks responded to the security for costs inquiry by asserting that the company had sufficient equity in the property to meet any adverse costs order. Although the lawyers for Palms did not accept those assertions, they made no security for costs application at that time.

16 Mr Gdanski gave uncontested evidence that Mr King, the solicitor for Palms, was told in October 2012 that the property would be sold. During 2013, the property was on the market for sale and, in February of that year, a large real estate 'Sale' sign was erected on the property. Palms continued to operate the restaurant on the neighbouring property.

17 On 28 June 2013, Palms filed a further amended defence, alleging that Mr Gdanski and the company knew that the easement was obstructed and that Mr Gdanski, Fetter Gdanski and Sackville Wilks were concurrent wrongdoers, each at least partially responsible for any loss suffered by the company. No application was made, however, to join any of the alleged concurrent wrongdoers as parties to the proceeding.

18 The property was sold by the company in September 2013 to an independent purchaser. No notice of the sale was given by Mr Gdanski to Palms's solicitors, and Mr Gdanski did not cause the company to make discovery of documents relating to the sale. A 'Sold' sticker was placed on the real estate board on the property. Mr Hoh, the controlling director of Palms, did not give evidence on the costs application against Mr Gdanski. Mr King gave evidence that, in around November 2013, he was instructed by Mr Hoh that Palms suspected the property had been sold.

19 In around September 2013, a meeting of persons associated with the company, which included Mr Gdanski, decided to pay out all of the money from the company's bank account. Sale of the property settled in mid-December 2013. Between 30 November 2013 and 20 February 2014, all funds in the company's bank account were paid out. The funds were used to pay the company's secured creditors: National Australia Bank ($1.024 million), Pinocchio's Pty Ltd ($210,464), Pinocchio Asset Management Pty Ltd ($312,403) and Bayside Hospitality ($482,386). As mentioned earlier, the three private companies were owned and controlled by Mr Gdanski and Mr Chilelli and others.

20 From late February 2014 there was no intention by Mr Gdanski, or anyone else associated with the company, to lend or advance any further money to the company. In late February 2014, Mr Gdanski resigned as a director of the company and his associated entity sold its shares in the company.

21 The proceedings were listed for hearing on 4 June 2014. On 31 March 2014, the solicitors for Palms wrote to Rockwell Olivier, the legal practice at which Mr Gdanski had commenced working and which was then representing him, complaining that no notice had been given of the sale of the property and seeking security for costs. On 9 April 2014, the company was placed in voluntary liquidation. On 1 May 2014, Palms made application for security for costs against the company. The notice of discontinuance against Palms was filed by Rockwell Olivier for the company on 19 May 2014.

22 On 12 May 2014, Palms foreshadowed an application for a non-party costs order against Mr Gdanski and others. Nothing was done, however, until 23 December 2014, when a summons was filed, and it was not until the end of August 2015 that the application was heard. On 7 September 2015, Palms filed a detailed 'Outline of closing submissions', to which reference will be made below.

23 As noted earlier, the application made by Palms relied on three separate heads of power. The first was s 29(1)(a) of the Civil Procedure Act 2010. Palms contended that, in his conduct of the company's litigation, Mr Gdanski had contravened a variety of overarching obligations under that Act. The judge rejected that part of the application on the basis that it was out of time.[4]

24 Secondly, Palms invoked r 63.23 of the Supreme Court (General Civil Procedure) Rules 2005, which confers power on the Court to make a costs order against a solicitor for a party who has

caused costs to be incurred improperly or without reasonable cause or to be wasted by a failure to act with reasonable competence and expedition.

25 His Honour did not rule on that part of the application in respect of Mr Gdanski. He did, however, consider and reject an application under the same rule against Rockwell Olivier, the firm which employed Mr Gdanski from 30 September 2013. His Honour concluded that there was

nothing in the conduct of Rockwell Olivier, as an incorporated legal practice, in relation to the Proceeding which could justify an order that it pay all or some of the costs of Palms under r 63.23 of the Rules.[5]

26 The third head of power relied on by Palms was s 24 of the Supreme Court Act 1986, which confers the general discretion as to costs:

24 Costs to be in the discretion of Court

(1) Unless otherwise expressly provided by this or any other Act or by the Rules, the costs of and incidental to all matters in the Court, including the administration of estates and trusts, is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid.

(2) Nothing in this section alters the practice in any criminal proceeding.

27 On this branch of the application, Palms advanced two alternative contentions. The first was that the proceeding had been an abuse of process because - so it was said - it had been conducted for 'an ulterior purpose' or was so devoid of merit that it should never have been brought. The judge said that he was not in a position to assess the merits of the claim brought and, as a result, discounted this factor from consideration.[6]

28 The alternative contention was based on the decision of the High Court in Knight. Palms's closing submission quoted the following passage from the joint judgment of Mason CJ and Deane J in that case:

For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active role in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made_._[7]

29 The submission for Palms, as set out in his Honour's reasons, was that

the real parties to the litigation were Gdanski and Chilelli who each had a close connection with the litigation in important respects and that, in accordance with the principles in Knight, costs orders should be ordered [sic] against them personally.[8]

His Honour upheld this submission, but only in relation to Mr Gdanski who was ordered to pay Palms's costs of the proceeding on a standard basis until 27 September 2013 and thereafter on an indemnity basis.[9] The judge further ordered Mr Gdanski to pay Palms's costs of the non-party costs application on a standard basis.

30 Mr Gdanski seeks leave to appeal from those orders. He accepts that, because the decision was made in the exercise of a judicial discretion, he must demonstrate an error of the House v The King[10] kind to succeed on appeal. He contends that the trial judge erred by:

(a) concluding that he had 'an interest in the subject of the litigation' in the sense used in Knight, because as solicitor for the company he stood to benefit from costs in the proceeding, and that this gave rise to 'exceptional circumstances';[11]

(b) making serious adverse findings against him, and in the manner in which those findings were taken into account in exercise of the costs discretion;

(c) misapplying the 'interests of justice' test, giving no or no sufficient weight to the failure by Palms to make a security for costs application and finding that Mr Gdanski had been given warning of an application that he pay Palms's costs; and

(d) concluding that the company was insolvent 'at all material times' to justify a costs order against Mr Gdanski prior to February 2014 when proceeds of sale of the property had been paid from the company's account, or alternatively prior to 27 September 2013 when there was a contract to sell the property.

31 In the alternative, Mr Gdanski argues that any costs order against him should be on a standard basis. By its cross-appeal, Palms argues that all costs ordered against Mr Gdanski should have been awarded on an indemnity basis.

32 As indicated earlier, we have concluded that the judge's discretion miscarried and that the appeal must therefore be allowed. In lieu of the orders made below, we would order that the application for non-party costs be refused. The cross-appeal will be dismissed.

33 The judge referred to Knight, and to subsequent authorities in which it has been applied, before summarising the applicable principles as follows:

In application of the Knight principles, a number of matters are of relevance:

(a) Making a costs order against a non-party requires exceptional circumstances. In the vast majority of cases it would be unjust to make an award of costs against a non-party;

(b) The principles apply where proceedings have been discontinued;

(c) It is sufficient if a company, which is the relevant party, is insolvent at the time of the application for a non-party costs order;

(d) A real, direct and material connection with the principal litigation must be established such that the non-party can be described as a 'real party' to the litigation. For this purpose, it is sufficient to establish an 'active role in the conduct of the litigation' if the non-party is sufficiently closely connected with the prosecution of the litigation and can be fairly described as a 'real party' in 'critical' or 'important' respects.

(e) For there to be an interest in the subject of the litigation, a direct financial interest is not required. It is not enough that the fruits of success in the litigation either belonged to the non-party or were substantially within his gift;

(f) It may be appropriate to exercise the power against a person who may be characterised as no more than a real party to the litigation in 'critical' and 'important' respects, albeit not the only such party. It is not necessary to demonstrate that the relevant non-party exclusively controlled the conduct of the proceedings. It is enough if the role of the non-party is sufficiently closely connected with the prosecution of the litigation, so that the non-party may fairly be described as one of the actors in 'important' and 'critical' respects;

(g) As the breadth of the concept affirms, there are numbers of factors which may be taken into account in determining whether the interests of justice call for an order to be made. They include factors such as those as illustrated in the current case-law ... In making these observations, it is important to recognise that each of the examples is no more than one of the many relevant matters that may be considered when weighing the interests of justice in an application for costs against a stranger to the litigation. The examples include:

(i) a recognition that there are two important principles at stake: on the one hand the proper ambit of limited liability, and on the other a facility to provide fair costs compensation for successful defendants. An application for security for costs at an early stage reconciles these imperatives;

(ii) whether an application for a security for costs order was made promptly at an early stage of the proceeding, and whether any decision not to apply for security for costs was reasonably justified and satisfactorily explained;

(iii) whether the non-party was warned or put on notice of the risk of a non-party cost application at an early stage, and whether the failure to give such a warning was justified or unreasonable in the circumstances and satisfactorily explained;

(iv) whether the Plaintiff company was used simply as a vehicle set up to conduct the litigation in order to protect the individuals standing behind it;

(v) whether there are findings of fact at trial which may be relevant in considering the conduct of the non-party; and

(vi) when standing back and weighing each of the relevant factors which relate to a particular case, it would be unjust, in the circumstances, if the successful defendants were unable to recover their costs.[12]

34 Addressing the first two elements identified by Mason CJ and Deane J in Knight, the trial judge said:

In relation to Gdanski it was conceded that the [company] was at material times an insolvent person and that he Gdanski, as a non-party, played an active part in the conduct of the litigation.[13]

His Honour considered that the company's insolvency dated from a time between the distribution of the proceeds of sale of the property (which ended in February 2014) and April 2014, when the company went into voluntary winding up.[14]

35 His Honour's findings regarding Mr Gdanski's role in the litigation were of central importance. His Honour said:

I am satisfied that Gdanski played an active part in the conduct of the litigation for the purposes of the Knight principles, as he frankly conceded. In fact he was the principal mind behind the proceeding on behalf of the [company]. He drove the litigation and had an intimate knowledge of all steps in the Proceeding. His role placed him in an exceptional position in relation to the conduct of the litigation by the [company], well beyond that to be expected of a reasonable director carrying out the duties of his office.

In short, I am well satisfied that Gdanski had a sufficiently active role in directing the litigation beyond that of his co-partners, which included Chilelli, to be fairly described as a 'real party' in 'critical' or 'important' respects. Gdanski attended all relevant mediations, settlement discussions and directions hearings and controlled the litigation.[15]

36 His Honour's detailed findings as to Mr Gdanski's role should be set out in full:

The evidence as to the central role played by Gdanski on behalf of the [company] in the litigation was that:

(a) he was, until late February 2014, a director, the company secretary and a shareholder, both personally and through a corporate entity, of the [company];

(b) he was actively involved in negotiations in relation to the [company's] purchase of the Property in 2007 and in raising issues concerning access to the Property at that time;

(c) he was actively involved in meetings with the Council concerning plans to develop the Property;

(d) he was actively involved in negotiations with Palms to secure a rear easement on the Neighbouring Property;

(e) he was a principal/director or employee solicitor of the various law practices which acted for the [company] in the underlying transactions the subject of these proceedings and in the prosecution of this proceeding. He was:

(i) the principal of Fetter Gdanski, the law firm which acted for the [company] in purchasing the Property;

(ii) a director of Sackville Wilks, the law practice which acted for the [company] in selling the Property to the [purchasers], and the solicitors on the record for the [company] in prosecuting these proceedings until October 2013; and

(iii) an employee solicitor at Rockwell Olivier, the law practice which acted for the [company] in re-selling the Property in September 2013 and in prosecuting these proceedings from October 2013 until May 2014;

(f) he signed the overarching obligations certificate required by the Civil Procedure Act 2010 as officer of the [company] when these proceedings were issued in September 2012;

(g) he issued a VCAT application on behalf of the [company] opposing a Council decision to enable a variation of the easement and then failed to appear at a hearing of the application;

(h) he attended each of the without prejudice meetings and mediations conducted in relation to this proceeding;

(i) he attended at least one directions hearing on behalf of the [company] and as instructing solicitor;

(j) he was an officer of the [company] and the solicitor on the record when the Property was re-sold in September 2013;

(k) he was the solicitor on the record for the [company] when he was at Sackville Wilks;

(l) he was solicitor on the record at Rockwell Olivier, which acted for the [company] between October 2013 and May 2014;

(m) he arranged for the liquidator to be appointed.[16]

37 On the issue of Mr Gdanski's interest in the litigation, Palms submitted to the judge that he had

a real and direct interest in the fate of the proceedings beyond the recovery of legal fees and a proportion of the proceeds of any successful claim because he was personally exposed to proceedings for negligence and breaches of retainer by the [company] arising from his conduct as the solicitor in the underlying conveyancing transactions, he would be providing contested evidence as a material witness, and he had both personal and reputational interests to protect.

[H]is interest was greater than that of the [company] given his conflicting role and his exposure to claims in the underlying transactions and in the litigation.

38 His Honour did not address this issue of Mr Gdanski's alleged personal exposure to an action for negligence and whether it gave him a relevant 'interest in the litigation'. The point was, however, maintained on the appeal by counsel for Palms and we deal with it below.[17]

39 The only other interest said by Palms to be relevant for this purpose was identified in these terms:

Gdanski personally and/or through their [sic] corporate entities had a direct financial interest in the outcome of the proceedings in circumstances where the [company] was seeking to recover losses from a sale of the property in 2012 which did not proceed.

40 The nature of Mr Gdanski's financial interest was not elaborated in the submission. In particular, no distinction was drawn between the corporate entity associated with Mr Gdanski which held shares in the company, and the separate entities associated with both Mr Gdanski and Mr Chilelli which were creditors of the company.

41 His Honour summarised the submission on financial interest as being that both Mr Gdanski and Mr Chilelli had an interest in the subject of the litigation by reason that:

(i) they were each shareholders (whether individually or through a corporate vehicle) of the [company];

(ii) in relation to the proceeds of sale from the 2013 contract, both Gdanski and Chilelli, it may be inferred by virtue of their interests in the ownership of the [company], each received (whether individually or through a corporate vehicle) the benefit of some of the proceeds of sale from the 2013 contract;

(iii) the claims in the proceeding sought to recover alleged losses arising from the lost 2012 sale and the consequent holding costs which each stood to benefit from if the claims were successful.[18]

42 His Honour rejected each part of this argument. His conclusions bear repeating:

These factors, standing alone in my view, do not amount to a relevant interest in the subject of the litigation for the purpose of the application of the Knight principles.

There is nothing exceptional in Gdanski and Chilelli, as human agents and as persons having an interest as shareholders in the [company], standing to benefit directly or indirectly from success in the Proceeding or anything exceptional in some of their corporate entities as shareholders standing to gain directly or indirectly from a successful outcome, having regard to the nature of 1165 Stud Road as a commercial entity and a private company.

Further, there is nothing unusual in a director having an interest in a corporate entity which lends money for working capital to the company in which the director is an office holder, or that money loaned in these circumstances is ultimately repaid.[19]

43 These conclusions accord with what has been said consistently in this context about the position of directors and shareholders of a company involved in litigation. As Muir J said in Rushton (Qld) Pty Ltd v Rushton (NSW) Pty Ltd:

In my view the mere fact that a person is the sole director and shareholder of an unsuccessful litigant corporation will not, without more, suffice to justify a costs ordered against that person. And that is so even if the person was the corporation's sole principal or ultimate decision maker in relation to the litigation.

To conclude otherwise would be to ignore the principle that costs orders against non-parties are 'exceptional' and ought be made only if appropriate in the interest of justice. The control of a corporate litigant by a director who is also its sole or majority shareholder is an unremarkable occurrence. It is sanctioned by a long established legislative framework which recognises that a company has an independent legal personality distinct from that of its members and that neither members nor directors, as a general proposition, are personally liable for its acts and defaults.[20]

44 In his Honour's view, the only circumstance which gave Mr Gdanski a relevant 'interest in the litigation' was that he stood to benefit from the payment of fees for legal services provided to the company in connection with the litigation. His Honour's conclusion was as follows:

Conducting the Proceeding as a solicitor on behalf of the [company], as Gdanski did, serves to satisfy the 'interest in the litigation' element of the Knight principles as far as he is concerned. The firm of which he was a principal, Sackville Wilks, and later the firm where he was employed, Rockwell Olivier, stood to benefit directly by deriving fees from the [company] for the legal work performed for it and by potentially benefiting from any costs order to be paid by any of the defendant parties in the event that the litigation produced such an order in favour of the [company]. Gdanski, in his capacity as a principal of Sackville Wilks and later as an employee of Rockwell Olivier, could be expected to benefit either directly or indirectly from these outcomes.[21]

45 In his Honour's view, the fact that Mr Gdanski was the company's solicitor throughout 'gave rise to exceptional circumstances'.[22] By contrast, his Honour said, Mr Chilelli 'who was not legally qualified and provided no legal services to the company, gained nothing from the litigation'.[23] For that reason, the application for an order against Mr Chilelli failed.

46 As will be apparent from what we have already set out, it was no part of Palms's argument before the judge that the expectation of earning legal fees could have constituted a relevant interest in the litigation for this purpose. Nor, as will appear, did counsel for Palms seek to uphold his Honour's conclusion in this respect.

47 His Honour moved to consider the interests of justice, and referred to the following portion of the judgment of the Full Court of the Federal Court in Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations [No 4]:

Although an order for costs is discretionary, a successful party generally can expect to be compensated for that party's costs. Costs usually follow the event. An order for costs is made because the successful party has been put to expense which that party would have avoided if the litigation or particular application had not been brought. The order for costs seeks to compensate the successful party for that result and for the costs to which that party has been put. The order is not in any sense meant to be a penalty; costs are awarded to indemnify a successful party in litigation, not to punish an unsuccessful party.[24]

48 His Honour identified six factors which he considered to be relevant to the interests of justice. First, his Honour noted that Palms had incurred substantial legal costs, and that it would be deprived of the benefit of a costs order made following discontinuance of the proceeding unless a non-party costs order was made. He considered this to be a 'substantial' factor to be weighed in considering the interests of justice.[25]

49 The second factor was conflict of interest. His Honour said:

It is clear that Gdanski, in conducting the Proceeding as a solicitor on behalf of the [company], in respect of which he was not only a director but also, through a corporate vehicle, a shareholder, was in breach of paragraphs 9.2 and 13.4 of the Professional Conduct and Practice Rules 2005 and placed himself at serious risk of being in breach of paragraph 13.1 of the rules. As a solicitor in active practice, Gdanski ought to have been aware of the effect of these Rules.

This placed Gdanski in a conflict of interest and rendered his conduct of the litigation on behalf of the [company] improper.[26]

50 The Rules referred to by his Honour provided as follows:

9.2 A practitioner must not accept instructions to act or continue to act for a person in any matter when the practitioner is, or becomes, aware that the person's interest in the matter is, or would be, in conflict with the practitioner's own interest or the interest of an associate.

13.1 A practitioner must not act as the mere mouthpiece of the client or of the instructing practitioner and must exercise the forensic judgments called for during the case independently, after appropriate consideration of the client's and any instructing practitioner's wishes where practicable.

13.4 A practitioner must not unless exceptional circumstances warrant otherwise in the practitioner's considered opinion:

13.4.1 appear for a client at any hearing, or

13.4.2 continue to act for a client,

in a case in which it is known, or becomes apparent, that the practitioner will be required to give evidence material to the determination of contested issues before the court.[27]

It is likely that Gdanski was not able to bring an independent mind to decisions made on behalf of the [company] in the conduct of the Proceeding by reason of his conflict of interest and it is likely that a number of the decisions he made were infected with this conflict.

An order for costs against a non-party is not dependent upon, but can take into account, any improper conduct by the non-party. I take into account the conduct of Gdanski in breaching the Professional Conduct and Practice Rules 2005 as being a relevant factor of some significance in considering whether a non-party costs order should be made against him.[28]

52 Third, the trial judge considered the resale of the property and the company's voluntary liquidation, noting:

Palms was not informed, and had no knowledge, of the resale of the Property, the distribution of the proceeds to the shareholders of the [company] or their corporate entities and the entry of the [company] into voluntary liquidation.[29]

His Honour concluded that, while Mr Gdanski did not have any general duty to inform Palms of these matters, he did have an obligation to discover the contract of sale and associated documents from 2013. Further, Mr Gdanski participated in the exchanges with the solicitors for Palms in relation to security for costs between February and April 2013, and gave what his Honour concluded were assurances as to the capacity of the company to meet a costs order.[30]

53 His Honour concluded that, in the circumstances, 'it was sharp practice on [Mr Gdanski's] part not to have advised Palms of the change of position'.[31] His Honour was here referring to the sale of the property, the distribution of the proceeds of sale and the appointment of the liquidator. He concluded that Mr Gdanski's conduct fell short of the standard of 'absolute professional propriety'.[32] His Honour continued:

In my view, this brought him into the category of exceptional circumstances which justify a non-party costs order being made against him.[33]

54 Fourth, the trial judge considered the issue of security for costs, and concluded:

I am not satisfied that Palms had any reasonable basis for not proceeding with an application for security for costs at a much earlier time, in April of 2013.

This is a matter which bears directly upon the interests of justice in the present application by Palms for a non-party costs order against Gdanski and ... clearly favours [Gdanski].[34]

55 Fifth, his Honour considered whether there was a failure to warn Mr Gdanski that a non-party costs application would be made against him, and concluded:

In the circumstances, I am satisfied that Gdanski, at least from 12 May 2014, was put on notice by Palms that a non-party costs application against him was within the active contemplation of Palms.[35]

56 Finally, the judge considered the conduct of the proceedings by Mr Gdanski, noting again his failure to discover the September 2013 contract of sale which, his Honour concluded, was a breach of Mr Gdanski's obligations under s 26 of the Civil Procedure Act 2010. In his Honour's view, this was a factor of relevance to be taken into account against Mr Gdanski.[36]

57 After noting that the relevant factors pointed in different directions, the judge concluded:

After standing back and making an informed decision, taking into account and giving due weight to my findings on the relevant matters, and making qualitative appreciation of the whole, the interests of justice call for a non-party costs order to be made against Gdanski ...[37]

58 Mr Gdanski's application for leave to appeal was originally limited to three proposed grounds, each of which related to the adverse findings made by the trial judge against him in relation to the Professional Conduct and Practice Rules 2005. In the week before the date fixed for the hearing of the appeal, however, Mr Gdanski applied to amend the application for leave and to file a supplementary written case, the effect of which was to add nine further grounds of appeal and to expand the issues on appeal considerably.

59 At the request of the Court, counsel for Palms prepared at very short notice a supplementary written case addressing each of the proposed new nine grounds of appeal. This was of very great assistance to the Court, and to Mr Gdanski, as it averted what would otherwise have been an inevitable adjournment of the hearing of the appeal. In the event, both sides were able to make very helpful oral submissions on all grounds. We would grant leave for those grounds to be added.

60 Counsel for Palms were informed that, should it appear by the end of argument on the application that further time was needed to respond to any of the new grounds, that would be provided. In the event, at the conclusion of full argument, senior counsel for Palms informed the Court that he had addressed all of the points raised by counsel for Mr Gdanski. Counsel was nevertheless given leave to file a 'short note' if, on reflection, it was thought that a particular point had been missed.

61 Surprisingly in the circumstances, counsel for Palms proceeded to file what purported to be 'further submissions', running to some 18 pages. Quite reasonably, Mr Gdanski's representatives objected that this went far beyond the limited leave granted, and that the submission should not be received by the Court. In the alternative, they sought leave to respond to the further submissions.

62 Ordinarily, we would have refused to grant leave to Palms to file the supplementary submissions. They went far beyond the very limited leave granted at the conclusion of the hearing. It is not open to a party to file uninvited submissions after the close of oral argument.[38] Given, however, the very late and very substantial expansion of the grounds relied on by Mr Gdanski, and the commendably prompt response by counsel for Palms, we consider the circumstances to be quite exceptional and as warranting the grant of the additional leave. We have, therefore, taken into account both the supplementary submission filed on behalf of Palms and the reply submission filed on behalf of Mr Gdanski.

The nature of the discretion to order a non-party to pay costs

63 As noted earlier, the case which Palms put to the judge on this branch of its application, and which his Honour upheld, was that the circumstances of this case brought it within the category of case identified by Mason CJ and Deane J in Knight. It will assist if we set out again the relevant passage:

For our part, we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active role in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made_._[39]

64 Their Honours had earlier noted that there were other categories of cases in which considerations of justice might support an order for costs against a non-party. But the 'general category' here defined has since been widely recognised, and frequently invoked, both in Australia and overseas.[40] In 2016, for example, the English Court of Appeal in Deutsche Bank AG v Sebastian Holdings Inc quoted a passage from the 2004 decision of the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd as follows:

Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is 'the real party' to the litigation, a concept repeatedly invoked throughout the jurisprudence - see, for example, the judgments of the High Court of Australia in the Knight case ...[41]

65 As will appear, there was discussion on this application as to whether particular aspects of Mr Gdanski's conduct were relevant either to the enlivening of the discretion or to its exercise. It is necessary, therefore, to identify the basis on which the discretion to order costs against a non-party is enlivened in this 'general category' of such cases.

66 The informing principle is clear enough. It is that, if a party to litigation is liable to pay the costs of the successful party but is unable because of insolvency to do so, justice may require the costs to be paid by a non-party if it can be shown that the non-party played an active part in conducting the litigation and stood to benefit from a successful outcome. Senior counsel for Palms accepted that this was the operative principle of justice.

67 Thus understood, an order for non-party costs in a case of this kind is a corollary of the usual rule as to costs. In the usual case, where a person prosecutes or defends a civil claim, and fails, justice requires that that person should pay the costs which the other party has been obliged to incur. As the Full Federal Court explained in Dunghutti:

An order for costs is made because the successful party has been put to expense which that party would have avoided if the litigation or particular application had not been brought. The order for costs seeks to compensate the successful party for that result and for the costs to which that party has been put. The order is not in any sense meant to be a penalty; costs are awarded to indemnify a successful party in litigation, not to punish an unsuccessful party.[42]

68 The Knight exception applies where recourse to the losing party is unavailable because it is insolvent, and where the non-party can be seen to have, in substance, prosecuted the claim (or defence) in pursuit of his or her own interests. As was made clear in Dunghutti, an order for costs is not punitive but compensatory. An order for non-party costs is made out of

a recognition that it is just that the compensation which is made to the [successful party] for the costs to which the [successful party] has been put should be paid by someone other than the [losing party].[43]

69 Decisions since Knight have drawn on the language used in the joint judgment, as well as that of Dawson J, to describe the twin requirements that the non-party have an active role in the litigation and an interest in its subject matter as a single requirement that the non-party be 'a real party' to the litigation in 'critical' and 'important' respects. This formulation was approved by the Full Court of the Federal Court in Keboro Pty Ltd v Saunders,[44] in passages cited with approval by this Court in Ipex ITG Pty Ltd (in liq) v Victoria.[45] It may therefore be convenient to describe the threshold issue as being whether the non-party is 'a real party' to the litigation.[46] Whether or not that language is apt to describe every situation in which the Knight discretion is attracted need not be explored in this case, as the parties accepted the formulation for the purposes of the present appeal.[47]

70 Where (as here) a case is said to fall into the Knight category, the discretion will therefore only be enlivened if the non-party is shown to have been a 'real party' to the litigation in this sense. As we have explained, it is that which makes it just to order the non-party to pay the costs of the successful party. Unless the non-party can be properly so characterised, no question of the 'interests of justice' - or of 'exceptional circumstances' - arises.

71 Accordingly, the question raised by Palms's application was whether Mr Gdanski, rather than the company, was to be viewed as 'a real party' to the litigation in the sense explained above. Senior counsel for Palms accepted that this was so. To use the language of the joint judgment in Knight, it was common ground that this question was to be answered by examining - as the trial judge did - Mr Gdanski's role in the conduct of litigation and his interest in its outcome.

72 We set out earlier the judge's findings about the role which Mr Gdanski played.[48] Given that Mr Gdanski was acting in his capacity both as a director of the company and as its solicitor, the activities listed are unremarkable. As the authorities recognise, and as senior counsel for Palms properly conceded, a company is an artificial legal entity which must, of necessity, conduct its commercial activities through natural persons, who represent it in commercial dealings and make decisions on its behalf. Likewise, when it engages in litigation, the company must do so through natural persons, who act as its legal representatives.

73 It is unsurprising, therefore, that Mr Gdanski was actively involved as director:

• in negotiations regarding the company's purchase of the property;
• in meetings with the local council concerning plans to develop the property; and
• in negotiations with Palms to secure a rear easement on the neighbouring property.

It is likewise unsurprising that, in his capacity as solicitor for a company engaged in litigation, he attended directions hearings, 'without prejudice' meetings and mediations.

74 It is important to point out that decisions in relation to the conduct of the company's litigation were not made by Mr Gdanski alone. On the contrary, his Honour found that the instructions which the company gave to Mr Gdanski as to the conduct of the proceeding

appeared to be provided by all of the joint venture partners. Chilelli [the other director] was not the only source of those instructions. The four joint venture natural person partners which included Chilelli, reached a collaborative consensus before making decisions in relation to the litigation.[49]

75 That was a critical finding, in our view. It demonstrated that - as might have been expected - the joint venture partners were well aware of the purpose of the litigation and of its progress, and were responsible for deciding what instructions should be given to the company's lawyers. Doubtless it is true that, as a solicitor, Mr Gdanski had a far superior understanding of the dynamics of the litigation process and of what steps could or should be taken. Nor can it be doubted that, as the company's solicitor, he played 'an active part in the conduct of the litigation'. That is, of course, what litigation solicitors do. In that sense his Honour was correct to say that Mr Gdanski was 'directing' and 'controlling' the litigation.[50] But none of his Honour's findings as to Mr Gdanski's role in the litigation could have supported a conclusion that he was, as a result, a 'real party ... in "critical" or "important" respects'.[51]

76 In its submissions filed after the hearing, Palms pointed to the fact that, in concluding that Mr Gdanski was a 'real party' to the litigation, the judge had relied in part on what was said to be a concession by Mr Gdanski that the first two aspects of the Knight test were satisfied (including the 'role in the litigation' element).[52] Palms submitted that Mr Gdanski should not be permitted to resile from this concession and that it was therefore not open to him to seek to persuade this Court that he did not have an active role in the litigation in the Knight sense. As we understand it, Mr Gdanski does not seek to do so.

77 On the other hand, to the extent that the judge relied solely on the 'role in the litigation' aspect to conclude that Mr Gdanski was a 'real party' to the litigation, we consider that he was in error. The 'real party' question is to be answered by reference both to the 'role' and the 'interest' of the non-party in the litigation. However, nothing may turn on the terminology used, as the judge explicitly considered the Knight elements in turn and did not base his decision on the above conclusion. Argument in this Court proceeded on the basis that the primary issue for the purpose of answering the 'real party' question was whether Mr Gdanski had the requisite 'interest in the litigation'.

78 In that regard, his Honour's decision rested solely on the fact Mr Gdanski was the company's solicitor and therefore stood to benefit from the payment of legal fees. The first of Mr Gdanski's additional grounds of appeal challenged this conclusion. It was submitted that the mere fact that a solicitor acting on behalf of a company in litigation stood to benefit from the payment of legal fees for the provision of those professional services could never suffice to render the solicitor 'a real party' - let alone 'the real party' - to the litigation in the Knight sense.

79 That submission is plainly correct. Were it otherwise, any solicitor acting on behalf of a company in litigation would potentially be at risk - should the company be unsuccessful and then be unable to meet an order for costs - of being ordered to pay the costs of the successful party.

80 As noted earlier, counsel for Palms did not seek to defend this part of the ruling. They even disavowed the factual basis of his Honour's conclusion. Counsel conceded that 'in truth and reality in this case Mr Gdanski never expected to earn legal fees'. Counsel continued:

What was really going on was not the expectation of earning legal fees from the ordinary conduct of legal proceedings in a law firm. What was really going on here was to save Mr Gdanski's skin and that of his co-venturers really in their capacity as creditors.[53]

81 What has been said so far is sufficient to demonstrate that the discretion miscarried.

82 It was not open to the judge, on the findings which he made, to conclude that this case fell into the category of case identified in Knight. As a result, the discretion was simply not enlivened. Senior counsel for Palms properly conceded that, unless the 'real party' contention was made good, no question of the 'interests of justice' could arise.

83 For that reason, it is not necessary to deal with a series of challenges which Mr Gdanski made in his additional grounds of appeal to the manner in which the judge approached the 'interests of justice' question. We make some brief observations as to some of those matters at the end of these reasons. It is also not necessary to consider whether the judge erred in stating that Mr Gdanski had conceded that the company was insolvent 'at all material times'[54] and in ordering costs to be paid by Mr Gdanski referable to a period before the company was 'demonstrably insolvent'.

84 It remains, however, to deal with two issues. The first is the contention advanced by Palms with respect to Mr Gdanski's interest in companies which were secured creditors of the company. Counsel submitted that, in the event that the judge's exercise of discretion was set aside, this Court in re-exercising the discretion should find that this interest was sufficient, viewed in context, to satisfy the 'interest in the litigation' requirement. The second is the alleged misconduct of Mr Gdanski in his capacity as the company's solicitor, in respect of which the judge made adverse findings. This too was said to bear on the 'interest in the litigation' question.

85 As noted earlier, Palms submitted on this application that Mr Gdanski's real 'interest in the litigation' was his interest as a creditor of the company or, more accurately, his interest in companies which were creditors. There are two obvious difficulties with this argument. First, as was pointed out in the course of the hearing, the trial judge made a specific finding that such an interest was not a relevant interest for this purpose. It is convenient to repeat what his Honour said:

There is nothing exceptional in Gdanski and Chilelli, as human agents and as persons having an interest as shareholders in the Plaintiff company, standing to benefit directly or indirectly from success in the Proceeding or anything exceptional in some of their corporate entities as shareholders standing to gain directly or indirectly from a successful outcome, having regard to the nature of [the company] as a commercial entity and a private company.

Further, there is nothing unusual in a director having an interest in a corporate entity which lends money for working capital to the company in which the director is an office holder, or that money loaned in these circumstances is ultimately repaid.[55]

Palms did not file a notice of contention challenging that finding.

86 Secondly, and in any event, his Honour's finding was plainly correct. Senior counsel for Palms conceded in argument that, as a director of the company, Gdanski had an obligation to act in the interests of the company's creditors, both secured and unsecured. To that end, counsel accepted, if the company had available to it a potentially valuable cause of action, Mr Gdanski had a responsibility to prosecute the action. That duty was unaffected, in our view, by the fact that one of the creditors who would benefit from the success of the action was an entity associated with Mr Gdanski.

87 It is finally necessary to consider whether the judge's findings that Mr Gdanski engaged in improper conduct by virtue of having a conflict of interest with his client lead to the conclusion that he was a 'real party' to the litigation.

88 As noted earlier, the judge found that Mr Gdanski should have been aware that he was in a position of conflict of interest and that this was 'a relevant factor of some significance' in considering the exercise of the Knight discretion. His Honour accepted a submission by Palms that

an order for costs against a non-party is not dependent upon, but can take into account, any improper conduct by the non-party.[56]

89 The authority on which Palms relied for this proposition, and which his Honour cited in his reasons, was the judgment of Lander J in the Full Court of the South Australian Supreme Court in Vestris v Cashman.[57] It is important, however, to understand the context in which the relevant statement was made. The full passage from the judgment was in these terms:

The circumstances in which it is just to order costs against a person who was not a party to the litigation will be both rare and exceptional ... If the order for costs which is sought against a non-party is in lieu of, in substitution for or complementary to an order for costs against a party, the circumstances for making such an order will not arise unless there is some connection or association between the party to the litigation and the non-party against whom the order for costs is sought. The connection must be of a kind that makes it just to make an order for costs in that the connection must be material to the question of costs ...

Whilst the circumstances to make an order for costs against a non-party will be both rare and exceptional such an order can be made without the moving party having to demonstrate any improper conduct of any kind on the part of the non-party. An order for costs against a non-party is not dependent upon any improper conduct on the part of any party. Of course in some cases improper conduct on the part of the non-party will be a relevant factor in the exercise of the discretion.[58]

90 As can be seen, Lander J was here concerned with the 'rare and exceptional' circumstances in which a non-party costs order will be just. Consistently with Knight, his Honour stated that the 'circumstances for making such an order' would not arise unless there was shown to be a connection between the non-party and the nominal party, being a connection which was 'material to the question of costs'.[59] It was only if the discretion was enlivened - the requisite connection having been demonstrated - that improper conduct might become a relevant factor 'in the exercise of the discretion'.

91 Thus, in Heath v Greenacre Business Park Pty Ltd,[60] the New South Wales Court of Appeal (in the re-exercise of the Knight discretion) made a costs order against a director of a company which had been a defendant in civil proceedings. The director had 'caused' the company to defend the proceeding and issue a cross-claim and, following the withdrawal of the company's solicitors, had taken over the conduct of the proceeding for the company.[61] Furthermore, he had a direct financial interest in the success of the cross-claim.[62] The discretion being thus enlivened, the Court held that his conduct in maintaining the proceeding after a particular date was 'so unreasonable' that he should be required to pay the costs of the successful party from that date onwards.[63]

92 On the present application, there was extensive discussion of the relevance to the Knight discretion of Mr Gdanski's professional conduct. Senior counsel for Palms conceded - properly, in our view - that unless Mr Gdanski had been shown to have been a 'real party' to the litigation, no shortcoming in his professional conduct could have justified an order for costs against him. At the same time, so far as the availability of the discretion is concerned, allegations of conflict of interest may be relevant insofar as they might shed light on the threshold question whether Mr Gdanski was to be so characterised.

93 Counsel also conceded - again, quite properly - that the Knight discretion did not exist, and could not be exercised, for the purpose of censuring or punishing a solicitor for misconduct, or for causing 'wasted costs' to be incurred. (As we have pointed out, Palms had separately relied on r 63.23 of the Supreme Court (General Civil Procedure) Rules 2005, where unsatisfactory performance by a solicitor is the foundation of the costs power.)

94 As noted earlier, the judge found that Mr Gdanski had breached both rr 9.2 and 13.4 of the Professional Conduct and Practice Rules 2005. He did not, however, make any finding of fact which could have supported the conclusion that r 13.4 had been breached. His Honour's only relevant finding related to r 9.2. His Honour found that Mr Gdanski, as director and shareholder of the company, should have known that to act as solicitor for the company would put him in a position where his commercial interest as a shareholder might conflict with his professional duty as solicitor.

95 With respect, there was no basis for a finding of breach of either rule. We deal first with r 9.2 and what was said to be a conflict so far as it concerned Mr Gdanski's position as director and shareholder. The interest of the company in the litigation was clear enough. The company had attempted to sell the property and, to that end, had contracted with the purchasers. Before settlement the purchasers discovered that the easement allowing access to the property was obstructed, and for that reason terminated the contract. The company commenced the proceeding against the purchasers, seeking damages for failure to complete the contract, and as against Palms for damages relating to obstruction of the easement.

96 In short, the company's purpose was to recover damages caused by the loss of the contract and by obstruction of the easement. It is an unsurprising, and unexceptional, outcome of the purchasers' termination of the contract that the company would seek to recover its loss. The company was the party which stood to benefit from the litigation, and in whose interests the litigation was pursued.

97 Mr Gdanski's duty to the company, as its solicitor, was to prosecute its cause(s) of action in the litigation to the company's best advantage. As director, shareholder and creditor, Mr Gdanski's interests were coincident with those of the company. Senior counsel for Palms conceded that this was so. Maximising the company's prospects of success in the litigation - which Mr Gdanski was bound to do in his capacity as solicitor - was therefore entirely consistent with his own interests. There was no conflict.

98 In any case, there was no evidence (and no finding) that Mr Gdanski had failed to pursue diligently the company's interest in the litigation, or that he had pursued the litigation for some separate, divergent interest of his own. In other words, even if Mr Gdanski had been in a position of conflict as alleged, there was nothing to suggest that that circumstance was material to Palms's costs in the proceeding.

99 We turn now to the second basis on which Mr Gdanski was found to have had a conflict, namely, that he should have realised that he was exposed personally to claims against him and that he might have to give evidence on his own behalf. In argument on this application, senior counsel for Palms suggested that this had been a very real consideration for Mr Gdanski at the time when the company repaid its loans. The oral submission was as follows:

[I]n the circumstances of the present case, Mr Gdanski had his hands on all of the levers, all of the levers. So when the end comes, and we see this when the end game comes, when Mr Gdanski realises, actually, this case is a disaster for me and there is a real and genuine chance that the concurrent liability, the proportionate liability complaints are going to come home against me, my law firms, et cetera, et cetera, and there's nothing to be gained from this, he pulls the trapdoor and empties the money out. He resigns within a day of that happening. The evidence as to this was quite clear. He empties the money out, resigns within a day, and sells his shares. All of that, we submit, is instructive, namely that the company was only ever a vehicle for him to try to achieve some financial upside for himself and once he's concluded there is no financial upside, the case evaporates.[64]

100 As we have said, the judge made no finding of fact which could have supported the conclusion that Mr Gdanski had breached r 13.4. Nor was any notice of contention filed by Palms, arguing that such findings ought to have been made or that they properly supported the decision which his Honour had made.

101 There was no basis, in our view, for this adverse finding either. Although Palms made allegations in its further amended defence that Mr Gdanski was a concurrent wrongdoer, he was never joined as a party to the proceeding.[65] There was thus no allegation of personal liability and, accordingly, no reason for Mr Gdanski to expect that he would be 'required to give evidence material to the determination of contested issues before the court'. In any event, Mr Gdanski gave unchallenged evidence that, following the pleading of the 'concurrent wrongdoer' allegation, he had sought advice from counsel, on the basis of which he continued to act as the company's solicitor.

102 Furthermore, it is clear from the terms of the Rules that no finding of breach could have been made unless the requisite mental element had been established. Thus, in relation to r 9.2, the prohibition on continuing to act is only engaged when the practitioner 'is, or becomes, aware' of the actual or potential conflict. The judge's finding was merely that Mr Gdanski 'ought to have been aware'.[66] Likewise, the prohibition in r 13.4 is not engaged unless 'it is known, or becomes apparent' that the practitioner will be required to give evidence material to the determination of contested issues before the court. The judge made no finding on that issue.

103 For these reasons, there was no basis for the findings that Mr Gdanski had breached the Rules.

104 For completeness, we should mention that Mr Gdanski's initial grounds of appeal complained of a breach of the rules of procedural fairness in connection with these findings. Having reviewed the transcript of his cross-examination, we think there is real force in the contention that the allegations of conflict - especially in relation to r 13.4 - were not put as squarely, or specifically, as they should have been, given the seriousness of a finding of breach of the Rules. Given our conclusion, however, it is not necessary to explore this question further.

105 Taking all the matters advanced by Palms into account, the only interest that Mr Gdanski had in the litigation was that of a director and shareholder of a party seeking to recover alleged losses. Mr Gdanski was not the only director and shareholder of the company. Despite his significant role in the litigation on behalf of the company, it could not be said that he was a 'real party' in any critical or important respect.

106 That conclusion suffices to dispose of the appeal. The order made against Mr Gdanski must be set aside. However, in light of other adverse findings made by the trial judge as to Mr Gdanski's conduct, it is desirable that we make some brief observations on that subject.

107 In the course of evaluating the interests of justice, the judge took account of Mr Gdanski's failure to inform Palms or its solicitors of the sale of the property, the distribution of the proceeds or the appointment of the liquidator. His Honour did not consider that Mr Gdanski was under any 'general legal duty' to provide this information but nevertheless

in the circumstances where Gdanski had given the earlier assurances as to the financial position of the [company] in his correspondence between February and April 2013 in relation to security for costs, it was sharp practice on his part not to have advised Palms of the change of position.

In contrast to the manner in which the litigation was conducted in Manderson ... that was found to be reasonable and proper, and conducted with 'absolute professional propriety'. The conduct of the Proceeding by Gdanski on behalf of the [company] fell short of this standard.

In my view, this brought him into the category of exceptional circumstances which justify a non-party costs order being made against him.[67]

108 With respect, this circumstance had no relevance to the question before the Court. First, there was no suggestion that Mr Gdanski's failure to inform Palms of those matters had had any impact on Palms's costs of the litigation. That being so, there was no occasion to investigate, or determine, the propriety of Mr Gdanski's non-disclosure. The position in Manderson,[68] to which his Honour referred, was quite different. There, Croft J was addressing the pertinent issue of whether the conduct of the litigation itself had been 'unreasonable or improper'.[69]

109 Secondly, as we have explained, there is no free-standing 'exceptional circumstances' test for non-party costs. It is the circumstances which engage the Knight discretion - demonstrating that the non-party was a 'real party' - which are exceptional. The propriety of Mr Gdanski's conduct arose for consideration only if the discretion was first enlivened.

110 Finally, his Honour considered four issues arising from Mr Gdanski's conduct of the proceeding. He concluded that:

(a) he could not evaluate Palms's contention that the proceedings were devoid of prospects of success and, accordingly, discounted this consideration;[70]

(b) Mr Gdanski had taken reasonable steps to settle the proceeding in the course of acting as solicitor to the company and that, in this respect, his conduct was consistent with the overarching purposes of s 7 of the Civil Procedure Act 2010;[71] and

(c) Mr Gdanski had not caused any material delay in the conduct of the proceeding.[72]

111 The only criticism of Mr Gdanski's conduct of the proceeding which his Honour upheld concerned the fact that, as the company's solicitor and with full knowledge of the sale of the property in September 2013, he had failed to discover the contract of sale and other documents to Palms.[73] As counsel for Mr Gdanski pointed out, however, his Honour made no finding as to whether the failure to discover was deliberate or inadvertent. Moreover, there was no suggestion that the failure to discover had affected in any way the costs incurred by Palms in defending the litigation. Again, it was not conduct which had any relevance to the Knight discretion unless that discretion was first enlivened.

112 For the reasons we have given, the judge erred in concluding that the Knight discretion was available in relation to Mr Gdanski.

113 As we have explained, the material before the Court did not establish that Mr Gdanski's role in conducting and promoting the litigation extended beyond what would have been expected of him in his capacity as a director and shareholder of the company and as its solicitor. He did not, therefore, play any 'active part' in his personal capacity. Nor did the material establish that he had any personal interest in the outcome of the litigation of the kind which is necessary to enliven the discretion.

114 The appeal must be allowed and the order for costs set aside. In its place, we will order that the application for non-party costs be refused.

[1] Orders were also sought against one other person and a law firm.

[2] (1992) 174 CLR 178 ('Knight').

[4] 1165 Stud Road Pty Ltd v Power [No 2] [2015] VSC 735 [102] ('Reasons').

[7] Knight (1992) 174 CLR 178, 192-3.

[10] [1936] HCA 40; (1936) 55 CLR 499.

[11] (1992) 174 CLR 178, 192-3 (Mason CJ and Deane J).

[12] Reasons [80] (emphasis in original) (citations omitted).

[17] See below [99]-[102].

[19] Ibid [126]-[128] (emphasis added).

[20] Rushton (Qld) Pty Ltd v Rushton (NSW) Pty Ltd [2004] QSC 47 [12]-[13] (citations omitted); see also FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 [206], [214] (Basten JA, Beazley JA agreeing) ('FPM Constructions'); Manderson M&F Consulting v Incitec Pivot Limited [2011] VSC 441 [37] ('Manderson'); Permark International Interiors Pty Ltd v Amoveo Pty Ltd [2013] VSC 563 [79], [83]; Deutsche Bank AG v Sebastian Holdings Inc [2016] EWCA Civ 23; [2016] 4 WLR 17 [50]-[51]; cf Ballantyne Suites Pty Ltd v Ballantyne Chambers Pty Ltd (in liq) [No 2] [2014] VSC 147 [24] ('highly unusual circumstances').

[24] [2012] FCAFC 50; (2012) 200 FCR 154, 171 [93] (citations omitted) ('Dunghutti').

[26] Reasons [138]-[139] (emphasis added); see also Law Institute of Victoria Limited, Professional Conduct Practice Rules 2005 rr 9.2, 13.1, 13.4 (at 30 September 2005).

[32] Ibid [150] quoting Manderson [2011] VSC 441 [37].

[38] See, eg, Lo v Russell [No 2] [2017] VSCA 14 [12] and the authorities there cited.

[39] Knight (1992) 174 CLR 178, 192-3.

[40] See, eg, Kebaro Pty Ltd v Saunders [2003] FCAFC 5 [103]; Flinn v Flinn [1999] VSCA 109; [1999] 3 VR 712, 760 [159].

[41] Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39; [2004] 1 WLR 2807, 2815 [25] (citations omitted) quoted in Deutsche Bank AG v Sebastian Holdings Inc [2016] EWCA Civ 23; [2016] 4 WLR 17 [19].

[42] [2012] FCAFC 50; (2012) 200 FCR 154, 171 [93] (emphasis added) (citations omitted).

[44] [2003] FCAFC 5 [111], [113]-[114].

[45] [2014] VSCA 315 [36], [42].

[46] See, eg, FPM Constructions [2005] NSWCA 340 [205]-[206] (Basten JA, Beazley JA agreeing).

[47] See Dunghutti [2012] FCAFC 50; (2012) 200 FCR 154, 168-71 [80]-[89]; FPM Constructions [2005] NSWCA 340 [204]-[214] (Basten JA, Beazley JA agreeing).

[48] See above [36].

[49] Reasons [121] (citations omitted).

[57] (1998) 72 SASR 449.

[58] Ibid 467 (Lander J) (emphasis added) (citations omitted).

[59] Ibid citing Bischof v Adams [1992] VicRp 61; [1992] 2 VR 198, 205.

[60] [2016] NSWCA 34.

[65] Cf Wrongs Act 1958 s 24AI(3). On this point Palms referred the court to the decision in HSD Co Pty Ltd v Masu Financial Management Pty Ltd [2008] NSWSC 1279. It is important to note that that decision relates to provisions of the New South Wales Civil Liability Act 2002, which differ in material respects from the Wrongs Act 1958 provision.

[67] Ibid [149]-[151] (citations omitted).

[68] Manderson [2011] VSC 441.