- Grocon Constructors Pty Ltd v Kimberley Securities Ltd

Supreme Court of NSW|2022-03-01|Before: Black J

Solicitors: Mills Oakley (Plaintiffs) Clayton Utz (Interested Party) Marque Lawyers Pty Ltd (Interested Party) File Number(s): 2021/296981

Judgment

By my Judgment delivered on 25 March 2022 ([2022] NSWSC 340), I determined an application by the liquidators of Spitfire Corporation Ltd (in liq) ("Spitfire Corporation") for directions as to whether certain research and development tax refunds ("R&D Refunds") were circulating assets under s 340(1)(a) of the Personal Property Securities Act 2009 (Cth) ("PPSA") and whether, under s 561 of the Corporations Act 2001 (Cth), they were property available for payment of priority debts under s 556(1)(e), (g) or (h) of the Corporations Act, so that payment of those debts must be made from the R&D Refunds in priority to the claims of Resilient Investment Group Pty Ltd ("Resilient") over those refunds under a general security deed. I also determined the question whether Spitfire Corporation rather than Aspirio Pty Ltd (in liq) ("Aspirio") was the true employer of the relevant employees, at least for the purposes of Pt 5.6 Div 6 of the Corporations Act. I observed that the Plaintiffs' costs of the proceedings should be costs in the liquidation of Spitfire Corporation. I reserved certain other questions, including the question of the costs of the Commonwealth of Australia and Resilient, as non-parties that were heard in the proceedings under r 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW) ("Corporations Rules"). I observed (at [94]) that: "… I reserve the question whether [those costs] are payable out of the proceeds of the R&D Refunds which, as the Commonwealth points out, would raise similar issues to those arising from the Liquidators' claim to a lien. I will, as Resilient requested, also reserve the question of the Commonwealth and Resilient's costs of the proceedings. I also note that the Commonwealth and Resilient were given leave to be heard in the proceedings under r 2.13 of the Supreme Court (Corporations) Rules and were not joined as parties to them, and persons heard in that capacity will ordinarily neither obtain the costs of its involvement in the proceedings or have costs ordered against it. On the other hand, it seems to me that this matter has substantially proceeded as contested litigation and there may be a case for an order that Resilient pay the Liquidators' and the Commonwealth's costs of the matter."

Whether Resilient should pay the Plaintiffs' costs of the proceedings

The Plaintiffs, Spitfire Corporation and its liquidators, sought an order that Resilient pay their costs of the proceedings on the ordinary basis and that their costs of the proceedings otherwise be payable out of the R&D Refunds received by Spitfire Corporation.
Mr Krochmalik, who appears for the Plaintiffs, points to the general position as to costs under s 98 of the Civil Procedure Act 2005 (NSW) and also recognised the principles that apply where persons are given leave to be heard (without being a party), under r 2.13 of the Corporation Rules, as summarised in Grocon Constructors Pty Ltd v Kimberley Securities Ltd [2009] NSWSC 691 at [6] ("Grocon Constructors") and Re JI Woo International Education Centre Pty Ltd [2019] NSWSC 338 at [9]. He also fairly noted that that position was not invariable can depend upon the extent to which the person's intervention was justified and the extent to which he, she or it adopts the role of an opponent to the application. In Re Boart Longyear Ltd (No 3) [2017] NSWSC 1227 at [4], I summarised the principles that generally apply in respect of an application for costs by a person who is heard in proceedings without becoming party to them, under r 2.13 of the Corporations Rules, as follows: "… In Re Pan Pharmaceuticals Ltd; Selim v McGrath [2004] NSWSC 129 ; (2004) 48 ACSR 681 at [20], Barrett J observed that the Court had power to make an order against a party to proceedings in favour of non-parties, but also noted that a person who is granted leave to be heard without becoming party under r 2.13(1) of the Supreme Court (Corporations) Rules chooses a course that involves limited costs exposure to it and can have little expectation of being awarded costs, and that such an award, if appropriate, would be 'extraordinary and exceptional' and require 'some very special factor outside the ordinary and expected course of events and engendering a justifiable expectation of compensation in the mind of the non-party'. In Pan Pharmaceuticals, Barrett J held that such special factors were not present. On the other hand, in Re HIH Casualty and General Insurance Ltd [2006] NSWSC 6, Barrett J observed that parties there heard under r 2.13 made separate submissions that were highly relevant to the task of the Court in reaching its decision and special and unusual circumstances therefore warranted a costs order in the particular circumstances, although his Honour considered that only one set of costs should be ordered in the particular circumstances. I adopted the same approach in Re Gia Firenze Investments Pty Ltd [2013] NSWSC 99."
Both Mr Krochmalik, and Mr Izzo, who appears for the Commonwealth of Australia, also refer to my judgment in Re DSHE Holdings Ltd (recs and mgrs apptd) (in liq) [2018] NSWSC 275 ("DHSE") at [11], where I ordered that the additional costs incurred by the intervening party's opposition be awarded in favour of the party seeking the orders. I there observed that: "[Two parties] submit that the usual position is that a person heard in proceedings under rule 2.13 will neither be awarded costs nor have an order for costs made against them: Re TEN Network Holdings Ltd (admin apptd) (recs & mgrs apptd) [2017] NSWSC 1359 at [15]. However, that position is not invariable, and will depend upon the extent to which that person's intervention is justified and the extent to which he or she adopts the role of an opponent to the application. For example, in Yeo v Australian Securities and Investments Commission [2018] FCA 37 at [15], Gleeson J ordered that an intervening party pay the costs of an application where he chose to take an active contradicting position in opposition to the application, and his position was 'analogous to an unsuccessful litigant who, in the ordinary course, is ordered to pay the costs of his unsuccessful opposition'."
The Plaintiffs also referred to the observation of Colvin J in Preston, in the matter of Sandalwood Properties Ltd (No 2) [2018] FCA 816 at [20]-[22] ("Sandalwood Properties"), after a detailed review of the relevant authorities, that: "Therefore, if a party's participation is adversarial in the sense that it goes beyond that which is necessary in order to present the facts and address the issues so as to enable the court to provide advice for the purposes of the administration being conducted (in this case the receivership) then the approach to costs that applies to adversarial litigation should be applied. This is all the more so where the intervener participates to agitate a claim or position that has arisen from steps taken by the intervener. On the other hand, if a party participates as a proper contradictor solely for the purpose of assisting the court in addressing the issues necessary to provide proper and appropriate judicial advice to the party seeking directions, then the approach to costs on applications concerning the administration of a trust, estate or fund should be applied. In such cases it is usual for all parties properly participating to be entitled to their costs on an indemnity basis paid out of the trust, estate or fund on the basis that they are costs of due administration. Further, having regard to the views expressed by the Court of Appeal in BE Australia WD Pty Ltd v Sutton [[2011] NSWCA 414], the proper approach does not depend upon whether the issue raised is a complex one. Costs on an application for directions that raise complex matters that are dealt with in an adversarial way should be dealt with according to the principle that generally the discretion as to costs is to be exercised in favour of the successful party."
Mr Izzo also refers to the observation of Rees J in Re Habibi Waverton Pty Ltd (in liq) (admins apptd) (2021) 154 ACSR 701 at [58]-[60] that an adverse costs order may appropriately be made against a person who appears under r 2.13 where that person's appearance substantially increased the length of the hearing.
Mr Krochmalik submits that Resilient should be ordered to pay the Plaintiffs' costs because it opposed the directions sought by the liquidators and, in doing so, put all matters in issue; Resilient advocated for a position for its own commercial benefit, rather than as a "proper contradictor" or in advocating for the position of a class of creditors; and, he submits, the complexity attaching to the resolution of the matters reflected, at least in part, Resilient's determined opposition to the position which the liquidators on balance preferred, and the Commonwealth of Australia supported. At the same time, he fairly recognises that the application raised complex issues, particularly as to whether the entitlement to receive the R&D Tax Refunds was a circulating asset, although he submits, by reference to Sandalwood Properties, that the complexity of the issues is not a reason to treat what is effectively adversarial litigation other than in accordance with the general principle that costs are to be awarded against the unsuccessful party. He points out that treatment is consistent with that which would have arisen, had the liquidators not sought directions of the Court, but sought to apply the proceeds of the R&D Tax Refunds to meet the claims of employees, leaving Resilient to challenge that decision.
Mr Izzo also submits that, first, the findings made by the Court engaged the principle that costs ordinarily follow the event; second, Resilient took the contrary position as to the directions sought from the Court to that adopted by both the liquidators and the Commonwealth, although the issues had been addressed in earlier correspondence with detailed reasoning; third, Resilient had reversed an earlier position as to how the R&D Refund should be treated, and that informed the liquidators' decision to bring the application for directions; and fourth, costs relating to supplementary submissions are referable to Resilient's submission, which I rejected, that the High Court had impliedly overruled the "true employer" cases. I give particular weight to the third and fourth of those matters.
Mr Burnett, who appears for Resilient, in turn submits that the usual position of parties heard under r 2.13 is that they neither obtain the benefit of costs nor have costs ordered against them, and refers to Re Ten Network Holdings Ltd (admins apptd) (recs and mgrs apptd) [2017] NSWSC 1359 at [15] in that regard. Resilient submits that there is no reason to depart from that position in this case. Mr Burnett also points out that the terms of r 2.13 provides that costs may be awarded where the attendance has resulted in "additional costs" for any party, which should be borne by the person granting leave. Mr Burnett also refers to the observations of Barrett J in Grocon Constructors, to which I have referred above, and which I bear in mind. Consistent with the position put by the liquidators and the Commonwealth, it seems to me that Resilient's position has involved substantial additional costs, where it was not prepared to agree the facts on which the matter could proceed, which would have substantially simplified the conduct of the hearing, and put in issue the correctness of the "true employer" line of cases, which were otherwise well established in this Court and in the Federal Court of Australia. I do not accept Resilient's submission that, as a matter of fact, Resilient's intervention cannot be said to have given rise to additional costs in this case.
Mr Burnett also refers to the background to the proceedings, including communications between the liquidators and Resilient. He submits that the basis on which the R&D Tax Refunds were a "Circulating Asset" by reason of ss 340(1)(a) and 340(5) of the PPSA was not articulated until shortly before the hearing, and the issues raised in respect of this issue were complicated, and that the liquidators had changed their position as to whether Spitfire or Aspirio was the "true employer" having initially formed the view that the latter was the true employer, and noted the High Court of Australia had handed down the decisions on which Resilient relied in early 2022. Mr Burnett submits that Resilient's intervention in the proceedings was reasonable and justified in those circumstances. Mr Burnett also submits that the liquidators' application for directions was one that would have been necessary in any event, irrespective of the participation of either Resilient or the Commonwealth. I am inclined to accept that submission, although it seems to me that the application would have proceeded in a much more straightforward way, had Resilient been prepared to agree the underlying facts in respect of the application, and had it not taken the position which it advanced in respect of the recent decisions of the High Court in respect of the employer-employee relationship.
On balance, it seems to me that I should make an order of the kind I made in DHSE, that Resilient pay the Plaintiffs' additional costs incurred by Resilient's opposition, beyond those which would have been incurred in an uncontested application for directions, which would likely have taken no more than two hours. It is to be hoped that the Plaintiffs and Resilient can reach an agreement as to the amount of those costs to avoid the additional costs of an assessment.

Whether the Plaintiffs costs should be paid out of the R&D Tax Refunds

The Plaintiffs submit that their costs incurred for the benefit of all persons having an interest in the fund must be borne by the fund and that, in an application for directions relating to the proper administration of a fund, the liquidator's costs are ordinarily payable out of the assets of that fund on an indemnity basis: Australian Securities and Investments Commission, Re GDK Financial Solutions Pty Ltd (in liq) (No 4) (2008) 169 FCR 497; [2008] FCA 858 at [8]-[10]; Re O'Keeffe Heneghan Pty Ltd (in liq) [2019] NSWSC 106 at [25].
Mr Izzo submits, and I accept, that I had not determined questions in respect of the lien claimed by the Liquidators, where I considered it was not appropriate to do so in the abstract, and that I had observed that the question whether the liquidators' costs are payable from the proceeds of the R&D Refunds would raise similar issues to those arising from the liquidators' claim to a lien. Resilient agrees with the Commonwealth's position that any order dealing with the liquidators' costs should not provide for those costs to be paid out of the R&D Tax Refunds.
I accept that that matter is not properly determined now, where the basis for its determination is not established by the judgment. To the extent that the liquidators seek an order of that character, beyond any right of indemnity which would ordinarily be available to them and the order for costs made in their favour against Resilient, that should be brought by a separate application by interlocutory process in the ordinary way, and the relevant facts will need to be put before the Court .

Whether Resilient should pay the Commonwealth's costs of the proceedings

The Commonwealth seeks an order for costs against Resilient, and I have referred to Mr Izzo's submission as to the position taken by Resilient above. The Commonwealth submits that to the extent that it earlier indicated it was not seeking its costs, under r 2.13 (T59), that submission was directed to a claim for costs against the fund, and not to the position as between the Commonwealth and Resilient inter se. That indication was not expressly put in that limited way.
Mr Burnett refers to Re Pan Pharmaceuticals Ltd; Selim v McGrath (2004) 48 ACSR 681; [2004] NSWSC 129, where Barrett J observed that a party which seeks and is granted leave under r 2.13 limits its costs exposure and has "little expectation" of being awarded costs. He submits that position has greater force where the Commonwealth, a non-party, seeks costs from Resilient, another non-party, rather than from a party to the application. Mr Burnett submits that the Commonwealth, as a non-party granted leave under r 2.13, does not fall within the class of persons who may be entitled to costs under that order, which refers to a "party". He also submits that the Commonwealth had no justifiable expectation as to costs from Resilient, and refers to its observation as to costs to which I referred above; that the Commonwealth voluntarily participated in the proceedings; and there was nothing that could be said to be some special factor outside the ordinary and expected course of events that would justify a costs order in favour of a non-party.
The Plaintiffs did not seek to be heard as to whether Resilient should pay the Commonwealth's costs of the proceedings, which they properly treated as a matter between Resilient and the Commonwealth.
Where the Commonwealth and Resilient were both non-parties and assumed a limited risk of costs, although that limited risk has come home to Resilient in part; each of them was advancing a legitimate economic interest, although those interests were opposed; and where the Commonwealth had previously indicated that it did not seek an order for costs, I am not persuaded that the circumstances warrant an order that Resilient pay the Commonwealth's costs of the proceedings.

Orders

For these reasons, I make the following orders, including as to costs:
Pursuant to s 90-15 of the Insolvency Practice (Corporations) Schedule (IPS), being Schedule 2 to the Corporations Act 2001 (Cth) (Act), the First Plaintiffs are justified in: a. treating the amount received by the Second Plaintiff (Spitfire Corporation), by way of research and development tax incentive refunds in the total amount of $1,989,849.09 while Spitfire Corporation was in liquidation (R&D Refunds) as property subject to a circulating security interest for the purposes of s 561 of the Act; and b. subject to any equitable lien of the First Plaintiffs, using the R&D Refunds to pay any debts or amounts falling within paragraphs (a) and (b) of s 561 of the Act in priority to any claim of Resilient Investment Group Pty Ltd.
Pursuant to s 90-15 of the IPS, the First Plaintiffs are justified in treating: a. Spitfire Corporation as the employer of all of the employees (within the meaning of sub-s 556(2) of the Act), with the exception of Laurence Milne (Employees), of the group of companies comprising Spitfire Corporation and the Third Plaintiff, Aspirio Pty Ltd (in liquidation) (Aspirio); and b. the Employees as creditors of Spitfire Corporation and not of Aspirio. 3 Resilient Investment Group Pty Ltd pay the Plaintiffs' additional costs of this proceeding, as agreed or assessed, beyond those which would have been incurred in an uncontested application for directions, and otherwise the Plaintiffs' costs of this proceeding be costs in the liquidation of Spitfire Corporation. 4 Reserve liberty to apply as to the question whether the Plaintiffs' costs of this proceeding be payable out of the proceeds of the R&D Refunds 5 There otherwise be no order as to costs of the application as between the Commonwealth of Australia and Resilient Investment Group Pty Ltd.
The parties be granted liberty to apply on 5 business days' notice in respect of the relief sought in prayers 3B and/or 4 of the Amended Originating Process filed on 4 November 2021 in the event of any dispute arising with respect to those issues.

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: 13 May 2022

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