Grocon Constructors Pty Ltd v Kimberley Securities Ltd [2019] FCA 113 | Case summary

PERRAM J: 1 There now arises the question of costs. The administrators (now liquidators) of the company ('Mossgreen') originally asserted an equitable lien over various lots of property which were in Mossgreen's possession as bailee and refused to return the lots to their owners unless the owners paid $353.20 per lot. Mossgreen had conducted a business as an auctioneer. The lots in question belonged to persons who had consigned the goods to Mossgreen for sale but where the auction had not occurred or the lots had been passed in at auction or where they had been sold at auction but the successful bidder had not yet collected them. 2 In each case, the relevant feature of the property was that Mossgreen did not have title to the goods which were held only as bailee. There were a lot of lots (between 8,000 and 12,000 lots according to employees of Mossgreen, up to 34,000 according to the administrators). Continuing to hold the lots was expensive for the administrators in terms of renting premises to hold them and maintaining insurance so they desired to return the lots to their owners. In order to facilitate that return in an orderly fashion, the administrators said they were required to conduct a stocktake since Mossgreen's inventory system was claimed to be inadequate. They did so at a cost which ultimately exceeded $1 million. Having done so they determined to assert the existence of an equitable lien in each lot. They then demanded from the owners the payment of $353.20 per lot before releasing each lot to its owner to cover that expense. 3 Having encountered significant resistance from the owners of the property to the proposition that they should have to pay for the return of their own property the administrators then applied for a direction on 7 March 2018 that they would be justified in treating the lots as being subject to an equitable lien. A number of consignors, including Dr Pemberton and Ms Asprey, were granted leave to appear to oppose that application. On 9 April 2018, I concluded that such a direction should not be made as I did not accept that the equitable lien asserted existed: White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) [2018] FCA 471; affirmed on appeal in White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) v Robertson [2018] FCAFC 63 at [93]-[96]. 4 Ms Asprey and Dr Pemberton now seek an order that the administrators (who on 4 May 2018 became the liquidators) should pay their costs of successfully opposing the administrators' application for the direction relating to the equitable lien on an indemnity basis. Dr Pemberton also seeks an order that Mossgreen should pay those costs. 5 It is not in dispute that the Court has the power to make an order in favour of Dr Pemberton and Ms Asprey notwithstanding that they are not parties to the litigation. This is consistent with the Full Court's reasoning in Life Therapeutics Limited v Bell IXL Investments Limited (No 2) [2008] FCAFC 158 ('Life Therapeutics') at [24] per Ryan, Goldberg and Gordon JJ although that case does not precisely cover the present situation. In Life Therapeutics the third parties seeking the costs order had been brought before the Court on a foreshadowed application by a party to the proceeding who had indicated it would seek costs against the third parties. In this case that is not so as there was no foreshadowed application against the consignors. Nevertheless, I consider that the principle in Life Therapeutics may be extended to a case where a third party is practically compelled to seek to intervene in the proceeding in order to protect its interests, certainly their proprietary interests. That extension is consistent with the breadth of the Court's power to order costs under s 43 of the Federal Court of Australia Act 1976 (Cth), as to which see Knight v F.P. Special Assets Limited [1992] HCA 28; 174 CLR 178 at 190 per Mason CJ and Deane J (Gaudron J agreeing at 205). 6 I do not think, however, that the costs order sought by the consignors should be made. 7 A direction sought by an officer of a company has only two effects in general. First, if the officer seeking it acts in accordance with it, it will protect the officer from any liability for breach of duty so long as full disclosure was made to the Court of all relevant facts and circumstances. Secondly, if the direction is to do or not to do something then the officer may be punished for not obeying the direction (for both propositions see Re G B Nathan and Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 679 per McLelland J). Where the Court decides a legal issue involving a third party that does not determine that issue in any formal sense. Thus, for example, where a liquidator is directed to accept a proof of debt this does not definitively determine the validity of the proof nor does it prevent an appeal from a decision by the liquidator pursuant to the direction to accept the proof: Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742 at 745 per McLelland J. 8 In this case, that has the consequence that the question of whether the administrators have an equitable lien as against the consignors has not been definitively determined in this proceeding and, further, cannot be determined in this directions suit. All that has occurred is that the Court has expressed the view that there is no such lien and has hence declined to direct the administrators that they could act as if they did have one. Had the Court granted the direction sought by the administrators they could not subsequently have been sued by any creditor or contributory for breach of duty by proceeding on the basis that there was a lien. Significantly, however, it would not have prevented the consignors from suing the administrators for the return of their lots and, accordingly, any declaratory relief that there was no equitable lien. It is only in such a proceeding that the issue could be determined and give rise to a res judicata between the parties. It was, in part, for that reason that I declined to permit another unhappy class of former Mossgreen clientele - the unpaid vendors - to determine the question of whether they were entitled to assert a trust claim in the present proceeding by way of separate questions: White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) (No 3) [2018] FCA 711 at [12]. 9 Consequently, whilst there is a certain initial attraction in describing what occurred in the present case as resembling inter partes litigation, in fact it was no such thing. The administrators were approaching the Court for a direction whose only effect was to protect them from personal liability for breach of duty. At a legal level, only the administrators had any interest in that question and the consignors certainly did not. On the other hand, it is true that at a practical level there were excellent strategic reasons for the consignors to seek to prevent that direction being made. This was because it is unlikely the administrators would have asserted the equitable lien without first being sure that the contributories would not sue them should the whole stocktake affair turn out to be, as it did, something of a misadventure. 10 The truth of that proposition may be grasped by pausing to observe that nothing whatsoever would have happened if, after the Court refused to make the direction, the administrators had still refused to return the consignors' goods to them. This is because, if for no other reason, the Court did not tell them to do so. The same would have happened if the administrators had decided not to seek the direction in the first place and had instead persisted in their initial strategy of simply refusing to hand the lots back to their owners. In either case such a turn of events would have forced the consignors to sue the administrators for the return of their goods in a properly constituted suit. 11 Despite that reality, the approach by the administrators to the Court for their own reasons for a protective direction created a tactical opening into which the consignors could step and it enabled them to have a costs-free argument about the equitable lien without having to commence their own proceeding. It is true that r 2.13(2) of the Federal Court (Corporations) Rules 2000 (Cth) confers a power on the Court to order that a party who is given leave to be heard (without being joined as a party) pay costs. But the terms of that rule must be paid close attention. The rule provides: 2.13 Leave to creditor, contributory or officer to be heard (1) The Court may grant leave to any person who is, or who claims to be: (a) a creditor, contributory or officer of a corporation; or (b) an officer of a creditor, or contributory, of a corporation; or (c) any other interested person; to be heard in a proceeding without becoming a party to the proceeding. (2) If the Court considers that the attendance of a person to whom leave has been granted under subrule (1) has resulted in additional costs for any party, or the corporation, which should be borne by the person to whom leave was granted, the Court may: (a) direct that the person pay the costs; and (b) order that the person not be heard further in the proceeding until the costs are paid or secured to the Court's satisfaction. 12 The costs which are covered by this rule are not the costs of the opposite party but rather the 'additional' costs to another party which have resulted from the Court hearing from the third party. Furthermore, the course of authority about the rule confirms not only that view but also that it reflects a jurisdiction whose exercise will be extraordinary and exceptional: Re Pan Pharmaceuticals Ltd; Selim v McGrath [2004] NSWSC 129; 48 ACSR 681 ('Re Pan Pharmaceuticals Ltd') at 686 [20] per Barrett J. The exceptional nature of r 2.13(2) carries with it the implication that a third party can have very little expectation of being awarded costs. So much was explained by Barrett J in Re Pharmaceuticals Ltd at 686 [20]: These considerations, coupled with the emphasis by members of the High Court in Knight's case on the extraordinary nature of the aspect of the general costs power that involves orders against non-parties, lead me to think that some very special factor outside the ordinary and expected course of events and engendering a justifiable expectation of compensation in the mind of the non-party would have to be found before any relevant aspect of the comprehensive jurisdiction with respect to costs might be regarded as properly and regularly invoked in favour of a non-party as against a party. In other words, such an award, if ever appropriate, will be extraordinary and exceptional. Someone who seeks and is granted leave under r 2.13(1) chooses a course entailing the limited costs exposure described in r 2.13(2). Such a person can have very little expectation of being awarded costs. See also Re HIH Casualty and General Insurance Ltd [2006] NSWSC 6 at [10] and Grocon Constructors Pty Ltd v Kimberley Securities Ltd [2009] NSWSC 691 at [3] where Barrett J adhered to the same view. Barrett J's views in Re Pan Pharmaceuticals Ltd at 686 [20] were expressly approved by Farrell J in Ingram, in the matter of 5Star Sinai Limited (administrators appointed) (No 2) [2018] FCA 1047 at [27]. 13 I consider I should follow Barrett J. Consequently, the effect of r 2.13(2) was not to create an arena in which the administrators would have been likely to have obtained a costs order against the consignors if they had succeeded. Far from it. It is most unlikely that they would have obtained the exercise of such an extraordinary and exceptional jurisdiction. Furthermore, as Re Pan Pharmaceuticals Ltd shows, the same principle usually operates in the opposite direction too. A third party will very rarely have an expectation of obtaining costs. 14 One must therefore keep firmly in mind that the protection the administrators were seeking - and which the consignors successfully thwarted - was not protection from the consignors but rather protection from the contributories. And it is into that theoretic yet-to-come dispute not involving them that the consignors have successfully stuck their forensic beaks. What the consignors have not succeeded in doing is obtaining a binding judicial determination that there is no equitable lien for that cannot be done outside a properly constituted suit. 15 Consequently, it seems to me that Dr Pemberton and Ms Asprey are not entitled to the costs they seek. Their tactical decision to thwart the administrators by objecting to the direction has paid handsome dividends for practical reasons but those practical reasons do not transform the legal nature of what happened in the directions suit into a vindication of the legal proposition for which they contended. In legal terms, they have procured nothing in which they have a legal interest. Further, the ordinary position is, as explained in Re Pan Pharmaceuticals Ltd, that they should not get their costs. The contribution of the interested parties to the hearing on 29 March 2018 did not rise to an exceptional or extraordinary circumstance to displace the ordinary position: cf Re HIH Casualty and General Insurance Ltd [2006] NSWSC 6 at [14]. 16 There will be no order as to costs.

Grocon Constructors Pty Ltd v Kimberley Securities Ltd

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