This is a costs application in respect of the discontinuance of an application by XJS World Pty Ltd ("XJS") to be joined as a substituted creditor in a winding up application in respect of the Defendant, Central West Civil Pty Ltd ("CWC").
It is necessary first to set out the history of the proceedings. By Originating Process filed on 26 June 2023, the Plaintiff, High Quality Asphalts Pty Ltd ("HQA") brought an application for the winding up of Central West Civil Pty Ltd ("CWC") on the ground of insolvency. Multiple third parties then filed notices indicating their intent to appear to support the winding up application. CWC then indicated that it would oppose the winding up application on the basis that, prior to the expiry of the 21 day period available to respond to the creditor's statutory demand on which HQA relied, it had entered into a payment agreement in relation to the debt, through a third party, and sought to have the Court exercise a discretion to dismiss the winding up application, and alternatively contended that it was solvent. On 26 July 2023, HQA was granted leave to withdraw its application.
By Interlocutory Process dated 16 August 2023, XJS applied for an order that it be substituted as the Plaintiff in the proceedings. It appears that XJS is a proprietary company operated by a husband and wife, Mr and Mrs Vance, with Mrs Vance as its director, and its substitution application relied on an unpaid debt under a lease of commercial premises previously rented by CWC. CWC opposed XJS's substitution application, relying on evidence of its director asserting the existence of oral agreements reached with Mr Vance before XJS and CWC entered the commercial lease on which XJS relied. At about the same time as CWC took that course, Mr Vance was admitted to hospital with an apparently serious health condition, which I am comfortably satisfied severely limited or excluded his ability to give, and his solicitor's ability to obtain, instructions in respect of the matter.
By a notice of discontinuance, filed with leave granted on 11 September 2023, XJS discontinued its application for substitution and, where no other creditor of CWC sought to be substituted to continue the winding up proceedings, I dismissed those proceedings. I reserved the question of costs, where CWC indicated its intent to pursue a claim for costs against XJS.
[3]
The position if r 42.19 of the Uniform Civil Procedure Rules 2005 (NSW) applies
Mr Justin Young, who made written submissions for CWC in respect of its claim for costs, recognised that the Supreme Court (Corporations) Rules 1999 do not expressly provide for discontinuance of an interlocutory process, as distinct from the discontinuance of winding up proceedings under r 5.8, and that r 12.1 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") deals with the discontinuance of proceedings, in respect of claims for relief brought in the proceedings, rather than with the discontinuance of an interlocutory process. Mr Young nonetheless submits that the costs principles applicable to the discontinuance of claims under UCPR r 42.19 should apply to the discontinuance of an interlocutory process. That submission has the potential difficulty that UCPR r 42.19(2) applies, in its terms, to the costs relating to each claim in respect of which the proceedings have been discontinued, and Mr Young's submission requires that concept to be given an extended application in respect of an interlocutory process. Nonetheless, Mr Horobin, who made submissions for XJS, assumes that the principles relating to a discontinuance of proceedings under UCPR r 42.19 applies and refers to my summary of those principles in Re Cabramatta King Tea Pty Ltd [2022] NSWSC 462 ("Cabramatta King Tea") at [5]-[10].
It is not necessary to decide whether UCPR r 42.19 applies, given the conclusion that I reach below. That rule provides that:
"Unless the Court orders otherwise or the notice referred to in rule 12.1(2) otherwise provides, the plaintiff must pay such of the defendant's costs as, at the date on which the notice of discontinuance was filed, had been incurred by the defendant in relation to such claim in respect of which the proceedings have been discontinued."
I summarised the case law dealing with the application of this rule in Cabramatta King Tea at [7]ff as follows:
In Fordyce v Fordham (2006) 67 NSWLR 497; [2006] NSWCA 274 ("Fordyce"), McColl JA (with whom Beazley JA agreed) observed that the "default order" in the similar provision in UCPR r 42.20 does not establish a presumption that costs will be ordered against the plaintiff upon the dismissal of the proceedings, and other relevant considerations included those identified in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624-625; (1997) 143 ALR 1; [1997] HCA 6 ("Lai Qin"). Santow JA there agreed with that observation and also noted that the onus is on a discontinuing party to justify such an order by reference to the normal costs outcome in such an event. An order contrary to the "default" order will involve an exercise of discretion to depart from that position contemplated by the rule, where "some sound positive ground or good reason for departing from the ordinary course" is established: Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [10], [54]; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32 ("Bitannia") at [54]. The fact that parties were justified or acted reasonably in commencing or defending the proceedings may but will not necessarily support a departure from the "default order" under that rule: Australiawide Airlines at [64].
In Metro Hotel Sydney Pty Ltd v Kol Tov Pty Ltd [2010] NSWSC 1195, where proceedings were compromised by the parties after they became otiose, following the sale of a hotel which brought the management agreement that was in issue to an end, Hamilton AJ noted that the similar provision in UCPR r 42.20 extends, on appellate authority, to dismissals by consent as well as dismissals after a hearing and to that extent intrudes upon the approach laid down in Lai Qin . His Honour there held that there should be no order as to costs as between the parties, where the occurrence of that supervening event had led to a compromise of the proceedings and there had been no unreasonable conduct on the part of the defendants.
In McNamara v San [2010] NSWSC 809 at [12], Hallen AsJ (as his Honour then was) summarised the principles applicable to the similar provision in UCPR r 42.20 as follows:
"The following principles may be regarded as relevant in determining who is to bear the burden of costs in a case where the proceedings are dismissed before a final hearing:
(a) Costs discretions are truly discretionary: see Oshlack v Richmond River Council (1998) 193 CLR 72 at 84 and there are no absolute rules;
(b) The purpose of a costs order is to compensate, or indemnify, the person in whose favour it is made, not to punish the person against whom it is made: Ohn v Walton (1995) 36 NSWLR 77 at 79 per Gleeson CJ;
(c) Rule 42.20 of the UCPR does not give rise to a presumption that costs will be ordered against the Plaintiff: Fordyce v Fordham [2006] NSWCA 274; (2006) 67 NSWLR 497; Foukkare v Angreb Pty Limited [2006] NSWCA 335 at [65]; Pentroth Pty Ltd v Kirschild Pty Ltd (2006) 96 SASR 129; Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [53]; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32. However, the rule does create a starting point by requiring "… the plaintiff must pay the defendant's costs of the proceedings …" unless that outcome is displaced by a discretionary decision ("unless the court otherwise orders");
(d) Generally, there must be some proper justification, sound positive ground, or a good reason, for departing from the ordinary position: Fordyce v Fordham at [2] per Santow JA; Australiawide at [54] per Bryson JA; circumstances in which it has been held appropriate to depart from the ordinary position include where the proceedings have been rendered unnecessary by circumstances beyond the plaintiff's control; where the plaintiff achieved practical success in the proceedings, or where costs have been significantly increased by the unreasonable conduct of the defendant.
(e) The Plaintiff should be the moving party on an application for an alternative costs order: Bitannia at [70] per Basten JA. If facts are to be relied upon to found the court making a different order, the Plaintiff will bear the onus of proving the relevant facts;
(f) Where the proceedings are dismissed prior to any hearing on the merits, "the Court cannot try a hypothetical action between the parties" to determine the question of costs: Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201; Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 at 624; Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2007] NSWSC 1120 at [35];
(g) It may be necessary to analyse the whole of the proceedings to determine the appropriate costs order: Fordyce at [67] per McColl JA. A relevant consideration is whether the Plaintiff acted reasonably in commencing the proceedings and whether the defendant acted reasonably in defending them: Australian Securities Commission v Aust-Home Investments Ltd at 201 (cited with approval in Foukkare); all the relevant circumstances, and not just the fact of dismissal, should be considered;
(h) It is also important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event, or settlement, so removes, or modifies, the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the court's discretion otherwise than by an award of costs by the successful party. It is the latter type of case that usually creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs: One.Tel Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548 at 553; cited with approval in Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 per Davies AJA (with whom Mason P and Meagher JA agreed) at [5];
(i) The distinction between the two categories referred to above is often helpful in exercising the costs discretion, notwithstanding that neither category can be precisely defined, the boundary between them is unclear and other factors may be relevant: Bitannia per Basten JA at [79]-[81]; Perre v State of New South Wales [2009] NSWLEC 51 at [49];
(j) The rule requires the court to make such order as it thinks just in the particular circumstances of the case."
That summary was cited with apparent approval by Kunc J in Spatt v Benson [2019] NSWSC 1195 at [64] and I followed it in Parlby v Blair [2013] NSWSC 100 at [11]ff, Re Myao Travel Pty Ltd [2020] NSWSC 1672 at [6]ff, Australian Unity Funds Management Ltd v NorthWest Healthcare Australia RE Ltd [2021] NSWSC 1039 ("Australian Unity") at [9]ff, and in Davis v Certain Lloyds Underwriters [2022] NSWSC 131 at [9] on which I have partly drawn for these observations as to the case law."
I also recently followed the decision of McNamara v San [2010] NSWSC 809 ("McNamara v San") in Re Harmony Homes Pty Ltd [2023] NSWSC 300 at [5]ff.
Mr Horobin accepts that, although UCPR r 42.19 (if it applies) does not create a rebuttable presumption that the discontinuing party must pay the other party's costs, "some proper justification, sound positive ground or good reason for departing from the usual position would need to be shown" in order to displace an order that XJS pay CWC's costs. He submits that the justification, sound positive ground or good reason in this case relates to the serious health issues that now affect Mr Vance, which arose about one week after XJS filed its Interlocutory Process for substitution, and the fact that XJS's solicitors had advised CWC's solicitors of those matters promptly after Mr Vance's hospitalisation.
I am comfortably satisfied that the matters to which Mr Horobin refers constitute a proper justification, sound positive ground or good reason for departing from the usual position. I accept that the occurrence of the supervening event of Mr Vance's serious illness and its adverse impact on XJS's ability to respond to the evidence led by CWC, irrespective of the truth or falsity of that evidence, has led to the discontinuance of the proceedings and there had been no unreasonable conduct on the part of XJS in that regard. I am also comfortably satisfied that, adopting the language of McNamara v San at [12], the order that would be "just in the particular circumstances of th[is] case" is that there be no order as to the costs of the Interlocutory Process, so that each party bears its own costs in that regard. I would make that order, even if UCPR r 42.19 applies to the discontinuance of an interlocutory process.
[4]
The position if r 42.19 of the Uniform Civil Procedure Rules 2005 (NSW) does not apply
I would reach the same result if UCPR r 42.19 does not apply in respect of an interlocutory process. Possibly in the alternative, CWC submits that XJS has not discontinued the interlocutory process as a result of a compromise or settlement, and the discontinuance amounts to a capitulation by XJS. I do not accept that submission, where, as I noted above, the evidence supports the inference that the application for substitution has not been pursued by reason of the serious health difficulties affecting Mr Vance and their adverse impact on XJS's ability to pursue the substitution application, irrespective of its merit. That circumstance provides no reason to think that the substitution application would not have succeeded, and indeed that a winding up application would not have succeeded, had it been pursued.
CWC also contends that the evidence supports no more than a short adjournment to assess Mr Vance's medical condition. I also do not accept that submission, where the nature of the health issues identified in respect of Mr Vance are such that there is no reason to think that an adjournment, still less a short adjournment, would avoid the difficulties which result from those issues. In the further alternative, CWC invites the Court to infer that XJS perceived its application to be hopeless, and seeks to have the Court reach a conclusion whether the alleged debts are bona fide disputed. The former inference is not properly drawn, where Mr Vance's medical condition provides a more likely explanation for the discontinuance of the proceedings. I do not propose to determine the latter question, where that would amount to determining, on the merits, the application for substitution which has now been discontinued, contrary to the principle recognised in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622. There has been no determination of the merits of the substitution application and there is no basis for any order for costs on the basis that costs follow the event.
For these reasons, I would also make an order there be no order as to the costs of the Interlocutory Process, so that each party bears its own costs in that regard, if UCPR r 42.19 does not apply to the discontinuance of an interlocutory process.
[5]
Costs of the costs application
At the directions hearing where CWC indicated its intent to press this costs application, I noted the possibility that, having regard to the nature of the evidence as to Mr Vance's health difficulties, I would potentially order indemnity costs against CWC in respect of this costs application, if the application failed. XJS now seeks an order for its costs of this costs application on that basis.
The Court has power to award costs on an indemnity basis under s 98(1)(c) of the Civil Procedure Act 2005 (NSW) and, in order to establish a claim to indemnity costs, a party must ordinarily show conduct of the other party that is unreasonable or delinquent: Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 7) (2008) 65 ACSR 324; [2008] NSWSC 199. An indemnity costs order does not punish an unsuccessful party for bringing a case that failed, but compensates the successful party for incurring costs arising from the other party's unreasonable conduct: Hamod v New South Wales (2002) 188 ALR 659; [2002] FCA 424 at [20].
I am comfortably satisfied that CWC unreasonably pressed its application for its costs of the Interlocutory Process, having regard to the available evidence of Mr Vance's medical condition and the fact that there had been no determination of the substitution application on its merits. This is a proper case in which to order that CWC pay XJS's costs of and incidental to this costs application on an indemnity basis.
[6]
Orders
Accordingly, I order that:
Subject to paragraph 2, there be no order as to the costs of the Interlocutory Process filed by XJS World Pty Ltd on 16 August 2023.
The Defendant, Central West Civil Pty Ltd, pay the costs of XJS World Pty Ltd of and incidental to the costs application brought by Central West Civil Pty Ltd on an indemnity basis, as agreed or as assessed.
[7]
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Decision last updated: 03 October 2023