In the matter of BBARC Pty Ltd [2023] NSWSC 697

Supreme Court of NSW|2023-06-09|Before: Black J

Nature of the application and submissions

The Plaintiff, Mr Stuart Crabb originally sought leave under s 237 of the Corporations Act 2001 (Cth) ("Act") to bring proceedings on behalf of BBARC Pty Ltd ("Company"). The day before the hearing of the matter, by email dated 8 June 2023, Mr Crabb's solicitors advised my Associate that: "the receivers have still not indicated their position with respect to whether they will proceed with the substantive action, our client has instructed us to discontinue the proceedings. There remains the extant issue as to costs. We have sought the parties' attitude as to discontinuance with no order as to costs. At this stage, no response has been received."
At the commencement of the hearing on 9 June 2023, at Mr Crabb's request, I granted him leave to discontinue the proceedings, reserving the question of costs for judgment in Chambers and making directions for written submissions as to costs. Mr Crabb did not make submissions in chief within the time provided by theses directions; I did not extend that time for him to do so where that could not be done by consent; and Mr Crabb did not then make, or seek to rely on, late submissions in respect of costs. The Second and Third Defendants, F H T Nominees Pty Ltd and Billericay Nominees Pty Ltd, made submissions in respect of costs within the time provided by the Court's directions;
Mr Crabb then purportedly made submissions in "reply", which were not properly characterised as such and seem largely to amount to submissions in chief as to why the usual order under UCPR r 42.19 is displaced. Mr Crabb also sought to rely on two affidavits in the substantive proceedings and an affidavit of his solicitor dated 8 June 2023, which was also not properly an affidavit in reply, and addressed details of communications between Mr Crabb's solicitors and the receivers. Rather than disregarding those submissions and those affidavits, I have had regard to them where there is no disadvantage to the Defendants in my doing so.
Mr Crabb points to the appointment of receivers and managers to the Company's assets on 6 March 2023; submits that the receivers' appointment frustrated his original motivation to commence the proceedings, where the receivers were not prepared to waive their interest in any potential recovery; and submits that the appointment of receivers was the kind of supervening event that justifies the Court's exercise of its discretion not to order any costs against him. Mr Crabb submits that the receiver's appointment, and the effect it had on the Company's interests, resulted from another party's conduct of the Company's affairs while the Company was under that party's control. The Court should not determine that question, without a hearing on the merits, in dealing with a question of costs in Chambers. Mr Crabb also submits that the receivers have "prevaricated" as to whether they would bring proceedings on behalf of the Company, which would have avoided any need for him to bring the derivative claim. For the reasons noted below, it seems to me that these matters do not displace the default position under UCPR r 42.19, where it is very likely that the proceedings would have failed in any event, even apart from the receivers' appointment.

Whether the default position as to costs under UCPR 42.19 is displaced

Rule 42.19 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") deals with the position where proceedings are discontinued under r 12.1 of the UCPR and 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 Re Cabramatta King Tea Pty Ltd [2022] NSWSC 462 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 followed that decision in Re Harmony Homes Pty Ltd [2023] NSWSC 300 at [4]ff.
The Second and Third Defendants submit, and I accept, that Mr Crabb has not established sufficient basis to displace the default position that he should pay the Second and Third Defendants' costs following the discontinuance of the proceedings. It seems to me very likely that Mr Crabb would in any event have failed to obtain leave under s 237 of the Act at a hearing on the merits, not least because he had not offered an indemnity in favour of the Company in respect of the costs to which it would be exposed by the conduct of the proceedings, or established his capacity to satisfy such an indemnity had he offered it. The Court has repeatedly recognised the importance of an indemnity in favour of a company and the applicant's ability to meet that indemnity, to whether derivative proceedings are in that company's best interests for the purposes of s 237 of the Act. I summarised the relevant principles in Re Wonga Pastoral Development Co Pty Ltd [2023] NSWSC 133 at [41] as follows: "The case law has also recognised that a relevant and significant matter in determining whether the proceedings are in a company's best interests is the adequacy of an indemnity in respect of the costs to which the company would be exposed by the conduct of proceedings and in the event of their failure: Power v Ekstein (2010) 77 ACSR 302; [2010] NSWSC 137; The App Shop Pty Ltd v Jalal Brothers Pty Ltd [2019] NSWSC 490 at [19] …; Australian International Yacht Club Ltd [[2020] NSWSC 1884] at [15]. In assessing the value of any indemnity given to a company, the Court will also have regard to the financial strength of the party giving the relevant indemnity: [Re] Fishinthenet [Investments Pty Ltd [2014] NSWSC 260] at [31]ff."
Mr Crabb's application was always likely to fail on that basis, irrespective of the later appointment of receivers and managers to the Company's property.
In his purported submissions in reply, Mr Crabb submits that there is a strong basis why the Court may not have required him to give an indemnity in favour of the Company, where the appropriate course would be for a substantive action to be brought in Mr Crabb's own name, apparently to run with proceedings brought by the Company, so that Mr Crabb would be exposed to any costs order made against him. I am not persuaded by that submission. The obvious difficulties with that submission are that it is not apparent that Mr Crabb has a personal cause of action that would support that approach; he has not brought such proceedings in his own name in the several months in which he pursued an application for leave to bring a derivative action on behalf of the Company; and, as I noted above, the Court has repeatedly recognised the importance of an indemnity in favour of a company and the applicant's ability to meet that indemnity, to whether derivative proceedings are in that company's best interests for the purposes of s 237 of the Act. Mr Crabb submits he was prepared to offer such an indemnity at the hearing but, notably, makes no submission as to his capacity to meet a claim upon that indemnity by the Company, in the event of an order for costs against it.

Claim for indemnity costs

The Second and Third Defendants seek indemnity costs from 6 March 2023 by reason of the fact that receivers and managers were appointed to the property of the Company on that date and submit the appointment of the receivers rendered these proceedings hopeless. They also submit that Mr Crabb could not satisfy the first requirement under s 237(2) of the Act that the Company would not have brought the proceedings, where no evidence was led of the receivers' decision not to bring the proceedings. It may be that the Court would have inferred that the receivers would not bring the proceedings, because they had not done so and they did not suggest that they would do so. In any event, I am not satisfied that indemnity costs should be allowed on that basis. Consequently, the Second and Third Defendants alternative submission for indemnity costs from 20 March 2023, being 14 days from the date of the appointment of receivers, on the basis that that time is consistent with the 14-day notice requirement under s 237(2) of the Act, should also not be allowed.

Application for payment out of Court

The Third Defendant also seek an order for payment to it of certain monies paid into Court on 9 December 2022, shortly after the commencement of the proceedings. That payment into Court was made pursuant to orders made by Hammerschlag CJ in Eq on 5 December 2022, by consent and without admission, and related to the proceeds of sale of a hotel property. I will not make that order, because only costs and not the question of the status of that amount was reserved for further submissions in Chambers and Mr Crabb had no notice that such an application would be made and has not had an opportunity to respond it. The parties may be able to agree consent orders to deal with that matter between themselves, and I would likely then make those orders in Chambers. If they cannot, the Third Defendant will need to bring any application for an order for payment out of Court by Interlocutory Process filed in the usual way, in which Mr Crabb will have an opportunity to be heard.

Orders

I therefore make no order and leave UCPR r 42.19 to operate in accordance with its terms.

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