Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Pty Ltd

Costs on an indemnity basis 2 On 28 August 2020 the defendants made a written offer to the plaintiff to settle the action on the basis that the action be dismissed with each party paying their own costs. The offer was a Calderbank letter and the defendants expressly foreshadowed that, if the offer was not accepted, the defendants would rely on the offer to seek costs on an indemnity basis. The offer was open for acceptance until the close of business on Tuesday, 1 September 2020. 3 The defendants say that the offer was a genuine offer of compromise. They say that their case was very strong and that the offer was giving up the defendants' right to seek their costs from the plaintiff, which at the time of the offer exceeded $500,000. 4 They point out that at the time the offer was made, most of the defendants' lay evidence had been filed. Further, prior to the offer expiring, the first tranche of the defendants' expert evidence had been filed. They say that the plaintiff was able to assess the merits of its claims in light of that evidence and that it should have been apparent that the plaintiff's case had little prospect of success. In short, they say that it would have been apparent that, on the evidence, the plaintiff would struggle to enliven my discretion to wind up the companies. But even if it was thought otherwise, they say that it would have been plain that I would not exercise my discretion to wind up the companies in circumstances where: (a) the secured creditors would be paid in full and unsecured creditors would also likely be paid in full within a short timeframe; (b) the companies would emerge from the DOCA process solvent; and (c) the overwhelming majority of creditors supported the DOCA and shareholders and investors strongly supported the recapitalisation and relisting of the Gascoyne Group on the ASX. 5 Now the defendants accept that the case was moving at an accelerated pace. But in any event they say that the time afforded to the plaintiff to consider the offer was reasonable in the circumstances. 6 The defendants say that it was unreasonable for the plaintiff not to accept the defendants' offer. 7 The defendants say that they should have their costs of the action including the costs of all directions applications, the application for security for costs and all reserved costs on the following bases: (a) all costs incurred by the defendants up to and including 1 September 2020 on a party and party basis; and (b) all costs, including fees, charges, disbursements and expenses incurred by the defendants from and including 2 September 2020 on an indemnity basis. 8 I would reject the application for indemnity costs. 9 The offeror needs to show that there was a genuine offer of compromise, and that it was unreasonable for the offeree not to accept it. In deciding whether it is unreasonable for an offer to be rejected, the following matters should ordinarily be considered: (a) the stage of the proceeding when the offer was made; (b) the time afforded to the offeree to consider the offer; (c) the extent of compromise involved; (d) the offeree's prospects of success, assessed as at the date of the offer; (e) the clarity with which the terms of the offer were expressed; and (f) whether the offer foreshadowed an application for indemnity costs in the event of refusal. 10 In my view the plaintiff's rejection of the offer was not unreasonable. 11 First, the offer contained only a modest element of a real and genuine compromise. 12 Second, the plaintiff was successful on some arguments. For example the defendants failed on their standing challenge. 13 Third, it was not unreasonable for the plaintiff to have not accepted the offer in circumstances where the offer was open for less than three business days and was made in circumstances where the defendants had over the preceding days filed voluminous affidavit material. 14 Fourth and more generally, the challenge by the plaintiff as to the adequacy of the administrators' investigations and the issues raised concerning the perceived lack of independence were reasonably arguable. 15 Accordingly, I see no reason to depart from the costs order that I previously made at the time of handing down my principal judgment.

The position of Habrok Mining Pty Ltd and Adaman Resources Pty Ltd 16 The Court's power to award costs is contained in s 43 of the Federal Court of Australia Act 1976 (Cth), although s 43 does not expressly state that the Court has power to make an order for costs against a non-party. Nevertheless, there is such power. 17 Now there are no fixed categories of cases where a non-party costs order is appropriate. Nevertheless, in Knight v FP Special Assets Limited (1992) 174 CLR 178, Mason CJ and Deane J observed (at 192 and 193): 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 part 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. 18 Of course it is to be remembered that the over-riding consideration is whether it is in the interests of justice to make such an order. But under that umbrella, it is well accepted that the Court may exercise its discretion where some of the following factors are present: (a) the unsuccessful party to the proceeding was the moving party and not the defendant; (b) the source of funds for the litigation was the non-party or its principal; (c) the conduct of the litigation was unreasonable or improper; (d) the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest; and (e) the unsuccessful party was insolvent or could otherwise be described as a person of straw. 19 I agree with the defendants that factors (a), (b), (d) and (e) to some extent were present in this case. Generally, it seems apparent that the plaintiff, which had limited means, pursued the action for the benefit of Habrok Mining Pty Ltd and Adaman Resources Pty Ltd (Adaman). 20 I would also note at the outset that Mr Raftery, a director of Adaman, Habrok Mining and the plaintiff, stated that Habrok Mining and Adaman stood behind the plaintiff and would pay the costs of the proceeding. He said under cross-examination: Can I suggest this to you, you commenced the proceedings through Habrok Dalgaranga because you did not want to expose Habrok Mining or Adaman to any liability to pay costs in the event these proceedings were not successful?---That's not correct. So Habrok Mining and Adaman stand behind Habrok Dalgaranga, do they?---They do. And they would pay costs, would they?---Yes.

Was the plaintiff a "person of straw"? 21 There is a general category of case in which an order for costs should be made against a non-party. That category consists of circumstances where the party to the litigation is an insolvent person or man of straw and where the non-party has played an active part in the conduct of the litigation to promote its own interest or to secure its own benefit. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party. 22 Now the defendants assert that these conditions exist here and that the plaintiff is an "assetless" company. But the plaintiff says that that is not the case. 23 It is said that the plaintiff holds a claim against the second defendant, GNT Resources Pty Ltd, in the amount of $616,953 pursuant to a Deed of Assignment by Orlando Drilling Pty Ltd dated 4 August 2020. The plaintiff also paid $300,000 into Court as security for the defendants' costs. Accordingly, it is said that the defendants already have the benefit of almost $1 million towards their costs which have not yet been assessed. 24 Moreover, the plaintiff says that depending upon the assessment of the defendants' reasonable costs, the application for non-party costs orders may be premature and unnecessary. It is said that the defendants' costs have not yet been assessed and that it is not in the interests of justice for an unnecessary order to be made. 25 I reject the plaintiff's argument. 26 The plaintiff was incorporated as a "special purpose vehicle" for the purpose of commencing the proceeding. The plaintiff owns no real property in Western Australia, is an entity with no operating income, and has no assets other than the debt of $616,953 which Orlando Drilling had assigned to it and the $300,000 the plaintiff paid into Court by way of security. And no doubt the Orlando Drilling debt and the $300,000 will be applied against the costs order made in favour of the defendants. 27 Further and contrastingly, both Adaman and Habrok Mining, being the entities for whose benefit the proceeding was commenced, own profitable mining projects in Western Australia. 28 On the evidence presently before me, the quantum of the defendants' likely party/party taxed costs will well exceed the total of $616,953 plus $300,000. Accordingly, making the order sought is neither premature nor unnecessary.

Did the non-parties have an "active" role in the litigation? 29 The plaintiff challenges the proposition that Adaman or Habrok Mining were relevantly involved in controlling the proceedings or that there was any connection between Adaman or Habrok Mining and the litigation to justify a non-party costs order. I should say at the outset that I disagree. 30 The plaintiff says that the question of whether a non-party had an active role in the litigation can also be phrased in terms of whether the non-party was the "real party" to the litigation in critical and important respects regarding the control of the litigation. It is then said that 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. 31 The plaintiff says that the connection and control must also be material to the issue of costs. It says that if costs would have been incurred without the non-party's involvement, then the non-party should not be made liable for those costs. In relation to the causal connection between the conduct of the non-party and costs being incurred, it was pointed out that Gobbo J remarked in Bischof v Adams [1992] 2 VR 198 at 204 and 205: The review of the authorities provides only limited guidance as to the approach to exercise of discretion in a case like the present which does not fit within prior categories or decisions. It can, however, be said in the light of the dicta in the Burns Philp Case that there is an obligation to find a connection between the non party and the proceedings. Given that there must at least be a connection between the non party and the proceedings, what form must this connection take? It is not practicable to lay down a set of parameters in advance for there may be cases where the interests of justice support an order for costs even though the connection is slender. Thus if a witness deliberately refuses to answer to a subpoena and thereby causes the case to be adjourned and so increases costs to the parties, I would have thought that it was very much arguable that he should bear these extra costs. There would seem to be no connection in the ordinary sense of that word between that witness and the proceedings, beyond the fact that he was a potential witness. It may be said, however, that there is a causal connection between the non party and the incurring of the costs, a matter that bears directly on the justice of whether he should be made to pay costs that he has caused to be incurred. Again, there may be cases where the connection is significant but not material to the issue of costs. Thus a person may benefit greatly from a particular proceeding but may not have any real part in supporting the proceeding. The most convenient course is, in my view, to look at both factors in considering the connection between the proceedings and the non party, namely, the connection between the non party and the proceedings and secondly, the causal connection between the non party and the costs. I have concluded that, without limiting myself to these two matters, I should take both factors into account in any exercise of discretion. The connection must be real and direct and it must be material to the issue of costs. The mere fact that a person may benefit from the litigation will not, without more, suffice. 32 It is said that typical involvement in the conduct of litigation, such as swearing affidavits and instructing counsel, without more, is insufficient to invoke the jurisdiction to award a non-party costs order. 33 Further, it is said that there is no evidence of, or contention that, Adaman or Habrok Mining acted unreasonably or improperly or that there has been some form of abuse of the corporate form. 34 Further, it is said that merely being a shareholder (or the sole shareholder) is not enough to justify a non-party costs order against a parent company. Further, even if the parent company advances funds to a subsidiary company to finance the pursuit of the litigation, this is also insufficient (without more) to justify a non-party costs order. 35 Further, it is said that even if the proceedings were brought for Adaman's and Habrok Mining's financial benefit, that is not enough to justify a non-party costs order. 36 Moreover, it is said that Adaman only had an indirect interest in the plaintiff succeeding in the proceedings arising from its shareholding in the plaintiff. It is said that any interest that Adaman had in the litigation beyond being a shareholder of the plaintiff was several steps removed from the relief sought in the proceeding. 37 Further, reference was made to FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340, where Basten JA, with whom Beazley JA and Giles JJA agreed, stated at [206]: … it could not be said that FPM Constructions was merely a nominal party or that Mr Yazbek was the "real party" to the proceedings. No doubt it is true, as his Honour found, that Mr Yazbek was the driving force behind FPM Constructions and was its representative for the purposes of the litigation. That does not mean, however, that the benefit of the proceedings brought by FPM Constructions for progress payments, in law, flowed to anyone other than FPM Constructions, nor that the company was other than the proper defendant in proceedings brought by the Council. Nor is the fact that Mr Yazbek was the sole director and secretary of the company inconsistent with that conclusion. Were it otherwise, the corporate veil would, in effect, be nullified at the very point at which it provides protection against personal liability for the shareholders and directors. The carefully crafted exceptions to the principle would overtake the principle itself were that the case. 38 The plaintiff says that in this context, an interest in the litigation requires something more than being a shareholder, even when proceedings are being run solely for the benefit of shareholders of a company. Rather, for this factor to be satisfied, it is said that the non-party must possess a special interest or stand to gain a personal benefit from the litigation. It is said that the requisite special interest or derivation of personal benefit from the proceedings (beyond a dividend (if any)) is absent in this case. 39 I do not accept these submissions. They have an air of unreality to them. 40 I reject the suggestion that Adaman and Habrok Mining did not play an active role in the litigation, and that Adaman only had an indirect interest in the plaintiff succeeding. 41 Clearly, this proceeding involved strategic commercial litigation instituted by an entity specifically incorporated by Habrok Mining for the purpose of advancing claims such as to provide Adaman and/or Habrok Mining with the opportunity to acquire the defendants' assets including the Dalgaranga gold mine. 42 The acquisition of the Dalgaranga gold mine was commercially advantageous to Adaman. Adaman owns a gold mine known as the "Snakewell Mine" which apparently holds materially higher-grade ore than the Dalgaranga mine, and is closer to the Dalgaranga processing plant than Adaman's existing processing plant located at Adaman's Kirkalocka mine and processing site. The Snakewell Mine's proximity to the Dalgaranga mine meant that Adaman could reduce its operating costs and realise cost synergies by acquiring the Dalgaranga mine. As Mr Raftery deposed: …If Habrok acquired GCY Group's assets, the ore from the Snakewell mine could be processed at the Dalgaranga processing mill creating efficiencies in reduced road haulage costs. Given these synergies, Habrok, a subsidiary of Adaman, would be willing to pay a competitive price for GCY Group's assets. 43 More generally, in my view the necessary connection justifying a non-party costs order is provided by some broader matters. 44 In May 2020, the plaintiff was incorporated as a "special purpose vehicle" for the sole purpose of commencing these proceedings and acquiring the Gascoyne Group's assets. 45 Further, at the commencement of the proceedings, the plaintiff was wholly owned by Habrok Mining. Moreover, from 2 September 2020, Adaman became the sole shareholder of the plaintiff. 46 There is another matter. In terms of the plaintiff's witnesses before me the following can be noted. Mr Raftery was a director of the plaintiff, Adaman, Habrok Mining, and is the Managing Director of Remagen Capital. A fund managed by Remagen Capital holds a 20% interest in Adaman. Mr Rowsthorn was a director and the Chairman of Adaman. Mr Gary Ireson was a director of Adaman and is Adaman's Corporate Development Officer. 47 There is a further matter to note. On 24 June 2020, Blackrock executed a terms sheet in favour of Adaman, which described the purpose of the funding as follows: To fund (a) the purchase of all the senior secured debt in Gascoyne Resources Limited (the "Senior Bank Debt") and (b) costs and fees payable to the Lenders. The total cost of acquiring and restructuring Gascoyne Resources Limited via the Senior Bank Debt expect be around A$90,000,000, where Remagen Capital will provide this shortfall amount of A$20,000,000. Thereafter it is the intention of the Group and the Lenders to restructure Gascoyne Resources Limited whereby (a) the owner of the assets will become the Borrower and (b) Remagen Capital will convert their A$20,000,000 loan to equity in the Parent. 48 The terms sheet defined "Group" as "the Parent and each of its subsidiaries from time to time", "Parent" as Adaman, and "Borrower" as an Adaman SPV wholly owned by Adaman. 49 Moreover as I have noted at the outset, Mr Raftery gave evidence that Habrok Mining and Adaman stood behind the plaintiff and would pay the costs of these proceedings. Further, Mr Raftery's evidence is also important in relation to the exercise of discretion. His evidence was given to bolster the financial credibility and standing of Adaman and Habrok Mining so as to persuade me of the utility of the orders that the plaintiff was seeking in the litigation. 50 Further, on 17 September 2020 and during the course of the trial, Adaman submitted a written open offer to acquire the Gascoyne Group for $140 million. That written offer was tendered by the plaintiff. 51 All of these matters establish the active role played and interest in the proceedings by the non-parties. 52 Further, as the defendants point out, the present litigation also needs to be seen in the context of earlier events. In late 2019, Adaman submitted two unsuccessful bids for the Gascoyne Group's assets during the sale process that was being conducted by the administrators in parallel with their strategy to recapitalise the Gascoyne Group. In March 2020 Adaman submitted another unsuccessful bid. On the eve of the second creditors' meetings, Habrok Mining submitted a DOCA proposal by which it would acquire the Gascoyne Group's assets which was also unsuccessful. And on 4 August 2020 the plaintiff purchased Orlando Drilling's debt. On the same date, the plaintiff commenced these proceedings. 53 I agree with the defendants that, in the circumstances, the Court's power to make the order has been enlivened and there is a powerful discretionary basis to make such an order. 54 I will make the necessary non-party costs orders.

Other matters 55 There are some other miscellaneous matters that I should address. 56 First, I have not considered it necessary to formally join Adaman and Habrok Mining as parties. 57 Second, in terms of making a lump sum costs order, I have already notified the parties that I do not propose to make such an order. But the parties are free to renew any such application before a Registrar of this Court. 58 Third, contrary to what I have previously indicated to the parties elsewhere, given the complexity of this matter and the accelerated time-table for the preparation of this matter and the running of the trial, I consider it appropriate that on a taxation of party/party costs, the defendants should be allowed the costs of four counsel, including one senior counsel. 59 Fourth, I will not make any order for the release of the security given for costs at this stage until the quantum of costs has been assessed or agreed. I certify that the preceding fifty-nine (59) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Beach.

SCHEDULE OF PARTIES VID 519 of 2020 Defendants Fourth Defendant: DALGARANGA OPERATIONS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (ACN 616 858 550) Fifth Defendant: DALGARANGA EXPLORATION PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (ACN 623 055 550) Sixth Defendant: GASCOYNE (OPS MANAGEMENT) PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (ACN 619 342 979) Seventh Defendant: EGERTON EXPLORATION PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (ACN 163 614 551) Eighth Defendant: IAN CHARLES FRANCIS, MICHAEL JOSEPH PATRICK RYAN AND KATHRYN GUINIVERE WARWICK (IN THEIR CAPACITIES AS JOINT AND SEVERAL DEED ADMINISTRATORS OF THE FIRST TO SEVENTH DEFENDANTS)