Ipex ITG Pty Ltd & Ors v State of Victoria [2011] VSCA 134

1 I invite Macaulay AJA to deliver the first judgment in this matter.

2 On 22 February 2011 Sifris J dismissed the claim by the first appellant, Ipex ITG Pty Ltd, brought against the State of Victoria, the respondent. Ipex have appealed that decision.

3 In this application the State seeks leave to cross-appeal. It wishes to cross appeal in respect of the cost orders made by Sifris J - or, strictly speaking, in respect of a cost order not made by Sifris J.

4 His Honour declined to make an order for costs in favour of the State against a non-party, Mr Joel Schwalb. Such an order was within his Honour's discretion to make which means that any appeal from such a refusal requires leave.[1]

5 Furthermore, the State is out of time by one day in filing its summons seeking leave.[2] Accordingly it also seeks an extension of time pursuant to rule 64.20 of the Rules.

6 Ipex commenced two proceedings in 2002 and 2003; the first against the State (this proceeding) and the second against Melbourne Water Corporation.[3] Ipex is an information technology company and each proceeding related to separate transactions.

7 When the proceedings were commenced, the issued shares in Ipex were wholly owned by Takapana Investments Pty Ltd, the second appellant. Takapana was and is the trustee of the Schwalb Family Trust No. 1, a discretionary trust for the benefit of the members of the Schwalb family,[4] including Mr Joel Schwalb.[5] Mr Scwhalb was and is a director of Takapana.

8 Takapana sold its shares in Ipex to another company, Volante Group Ltd, in December 2003. There were terms of that sale agreement that Takapana would continue the litigation against the State and Melbourne Water in the name of Ipex; that it would indemnify Volante in respect of Ipex's involvement in that litigation; and that it would be entitled to the proceeds of the litigation (if any) recovered by Ipex.[6] Thereafter, the litigation was conducted by and for Takapana and, through it, the Schwalb family.[7] It appears that Mr Joel Schwalb is a potential beneficiary of the discretionary trust. That matter is not in dispute.

9 Ipex was placed in administration and receivership in 2008, and in liquidation in 2009. As a consequence an application was made by Takapana - which was not a party to either proceeding - for leave to continue both proceedings nunc pro tunc in the name of Ipex. Efthim AsJ gave that leave on condition that Takapana indemnify both defendants for any costs orders that may be made in their favour, and that it provide security for that indemnity.[8] Over the course of time, Takapana provided very substantial security for costs, both for Melbourne Water and for the State.[9]

10 In dismissing Ipex's claim against the State, Sifris J ordered that Takapana (as a non-party) pay the State's costs of the proceeding and that the security that Takapana had provided be released to Ipex on account of its entitlement to costs. His Honour declined to order costs against Mr Joel Schwalb.

11 His Honour gave several reasons for not being persuaded it was an appropriate case to order costs against Mr Schwalb.[10] They were, that the proceeding was not brought for the benefit of Mr Schwalb personally, but rather for Takapana; it had not been demonstrated that Takapana was unable to pay any cost order; Mr Schwalb's conduct in the litigation did not go beyond the role of a director of a litigant company, that is, Takapana, managing the litigation on behalf of the company; the real beneficiary of the fruits of the litigation was the discretionary trust of which Takapana was trustee; and that there was a general insufficiency of evidence on the foregoing matters. In summary his Honour opined that 'the proceeding was not or substantially for Mr Schwalb's benefit and he was not, in a real sense, the true plaintiff.'[11]

The fact that Mr Schwalb may have had the power (alone or with others) to direct distributions to discretionary beneficiaries (including himself) does not make him personally the exclusive substantial or part beneficiary of the fruits of the litigation.

...

If he was an excluded beneficiary with no prospect of any fruits of the litigation he would not be liable simply because as a director of Takapana he pursued the litigation with vigour and stood behind the litigation in the sense of providing instructions. I am not convinced that being a potential beneficiary (or having the ability to determine any distributions if this be the case) makes any real difference or is sufficient to underpin the critical basis of liability, namely a sufficient personal financial interest in the litigation.[12]

13 In my view these last remarks raise a sufficient doubt as to the decision made by his Honour to justify it being reconsidered on appeal.[13] I say so for the following reasons.

14 Sifris J himself expressed difficulty in deciding the issue.[14] In declining to order costs against Mr Schwalb his Honour, consciously and with respect, disagreed with the decision of Byrne J in the Melbourne Water case in which, after dismissing Ipex's claim in that case, his Honour did make a costs order against Mr Schwalb.

15 Although I accept that each judge is bound to exercise his own discretion upon the facts as they were found by him in each case, the relevant facts were almost identical. In his decision, Byrne J concluded on the same facts as set out by Sifris J above that '...[a]ll of this means that the fruits of the litigation were his or substantially within his gift'.[15] Influenced by that conclusion, amongst other things, Byrne J concluded that Mr Schwalb had such an interest in the subject of the litigation as to justify the making of the order.

16 It is apparent from the words which I emphasised, extracted from Sifris J's decision above, that, by contrast, his Honour placed little if any weight upon the fact that Mr Schwalb was a potential beneficiary of the trust, and may have enjoyed the power of distribution. Emphasis appears to have been placed by his Honour on the need to find a 'direct' interest in the outcome of the litigation,[16] such that an interest as a potential beneficiary in a discretionary trust (coupled with a power of distribution) would not qualify as a requisite interest.

17 In Knight v FP Special Assets Ltd[17] Mason and Deane JJ simply used the language of having 'an interest in the subject of the litigation'[18] when speaking of this particular indicia of circumstances which may justify the making of an order against a non-party. The passage in which that phrase appears was recently approved by French CJ, Gummow, Hayne and Crennan JJ in Jeffrey & Katauskas Pty Ltd v SST Consulting Pty Ltd & Ors.[19] No particular scope or quality of 'interest' was stipulated, leaving it open as to what nature of interest would attract the exercise of discretion.

18 In Kebaro Pty Ltd v Saunders[20] Beaumont, Sundberg and Hely JJ considered, after an extensive review of the authorities in relation to the jurisdiction to award costs against a non-party that '...in order to warrant its exercise, a sufficiently close connection, or as Gobbo J expressed it,[21] a 'real and direct and ...material' connection with the principal litigation, must be demonstrated.'[22]

19 It appears that Sifris J was particularly influenced by the need to find a 'direct' connection between the potential fruits of the litigation and Mr Schwalb's personal financial interest. He thus discounted any significance in what may be considered a second tier interest as a potential beneficiary of the discretionary trust which, in the first instance, would receive those fruits.

20 It is this aspect of his Honour's reasoning which gives rise to the doubt I have expressed concerning the decision. I am not convinced that the interest of the kind which Mr Schwalb had could not amount to a relevant interest in the subject of the litigation, even if it need betoken a 'real', 'direct' and 'material' connection.

21 As was stated by this Court in McFadzean v CFMEU,[23] an appellate court will not, in the absence of strong reasons, interfere with the exercise of discretion of the court below with respect to costs. An appellate court is not to simply substitute its own exercise of discretion for that of the primary judge.

22 But if the primary judge acts on a wrong principle, or, for example, does not take into account some material consideration, the appellate court may exercise its discretion in substitution.[24] Kitto J considered that the discretion was exercisable where a primary judge has 'failed to give weight or sufficient weight to relevant considerations'.[25]

23 The State has formulated one its proposed grounds of appeal to be that a finding that Mr Schwalb did not have a sufficient interest in the outcome of the litigation such as would support an order for costs against him was against the weight of the evidence. I consider that this ground is aptly directed to the issue I have identified.

24 There is then the question whether, if sufficient doubt exists, substantial injustice would be done if the decision was wrong but left unreversed. Here the principle issue is whether the State may be deprived of its costs if the order is left as it is, with only Takapana being liable for them. There is evidence that there is likely to be a shortfall between the security given and the ultimate cost liability.

25 Sifris J was not convinced that Takapana could not pay the costs, given that it had met all orders for security to date.

26 The simple fact that Takapana had met its obligations in the past does not shed light on its capacity to pay in the future where there is no evidence of the source of its past payments. An injustice would arise if the explanation for its past payments was that it had been put in funds by a third party, and that third party declined to do so in the future.

27 The State argues that Sifris J ought to have concluded that Mr Schwalb had met the past orders for security. I am not satisfied that conclusion can be inferred. However, it is more reasonable to infer that, as Takapana had no established assets of its own to meet the costs orders or the security orders (that being the reason

security was ordered to be paid), the subsequent payment of them was funded from somebody else. Mr Sandbach suggested we should accept that Takapana had received the proceeds of sale of the shares in 2003, however I note that is not the conclusion which Byrne J reached.[26]

28 In those circumstances I am of the view that it is probable that a substantial injustice would be done if the decision, if wrong, was left unreversed.

29 There is one final issue - the question of whether an extension of time should be granted. It is a very short delay, and I have formed the view that there is sufficient doubt to warrant the decision being reconsidered and that substantial injustice would ensue if leave was not granted and the decision was wrong.

30 The only prejudice which the respondent points to is losing the vested benefit of the order. Whilst that is a relevant consideration, in the circumstances of this case it is not sufficient to outweigh discretionary considerations in favour of granting the extension. In my view both an extension of time and leave to appeal ought be granted.

1. The respondent have leave to file and serve a notice of cross-appeal in the form of a proposed notice of cross-appeal attached to the respondent's summons filed 23 March 2011.
2. The time for the service of the notice of cross-appeal be extended to 13 May 2011.

[1] Supreme Court Act 1986 (Vic), s 17A(1)(b).

[2] Rule 64.17 of the Supreme Court (General Civil Procedure) Rules 2005 ('Rules') requires a respondent to an appeal to serve a copy of the notice of cross-appeal upon the appellant within 14 days of service of the notice of appeal upon the respondent. In the case of a respondent who needs leave to serve a notice of cross-appeal, the parties assumed the rule is to be taken to require the respondent to file and serve its summons seeking that leave within the same period as no other time is prescribed for such step. Without deciding, I proceed on the basis that, in this case, the State was one day late and requires an extension of time.

[3] Proceeding no 5249 of 2003 ('the Melbourne Water case').

[4] Admission by counsel for Ipex before Byrne J in the Melbourne Water case, recorded in the Reasons for Decision, Efthim AsJ, in proceeding 5802 of 2009 ('Reasons, Efthim AsJ'), 24.

[5] Admission by counsel for Takapana, before Efthim AsJ, referred to by Byrne J in the Reasons for Decision in the Melbourne Water case ('Reasons, Byrne J'), [50].

[7] Admission by counsel for Ipex, before Byrne J in the Melbourne Water case, recorded in the Reasons, 23-24 (Efthim AsJ).

[8] Order of Efthim AsJ, 14 August 2009.

[9] To date, Takapana has provided security for costs in the following amounts:

• $366,485 in respect of the trial of this proceeding, and $57,758.82 for defending the appeal;

• $1,948,800.00 for the Melbourne Water case, and $50,000.00 for defending the appeal of that proceeding.

[12] Ibid [13] and [15], underlining added.

[13] Niemann v Electronic Industries Ltd [1978] VR 432.

[16] Reasons, [16], especially fn 4 (Sifris J).

[17] [1992] HCA 28; (1992) 174 CLR 178.

[19] [2009] HCA 43; (2009) 239 CLR 75, 94 [31].

[20] [2003] FCAFC 5.

[21] Bischof v Adams [1992] VicRp 61; (1992) 2 VR 198.

[23] [2007] VSCA 289; (2007) 20 VR 250 [150]-[151].

[24] House v The King [1936] HCA 40; [1936] 55 CLR 499, 505.

[25] Australian Coal & Shale Employees' Federation v Commonwealth [1953] HCA 25; [1953] 94 CLR 621, 627.