What happened
The appellant, Henry Joseph Kazar, was appointed liquidator of Frontier Architects Pty Ltd in August 2007 and of Techno Build Developments Pty Ltd in September 2007. Both companies had been under his administration shortly before. At all material times the companies were controlled by Mr Amrollah (Roland) Aghili. On 4 December 2009 the liquidator commenced two separate proceedings in the Federal Court. In proceeding ACD 51 of 2009 he sued Mr Rouhollah Kargarian and Mrs Rouhiyeh (Ruby) Kargarian (Mrs Kargarian being Mr Aghili's sister) in his capacity as liquidator of Frontier Architects. He sought approximately $1.49 million (or alternatively $1.08 million) plus interest on the basis that certain loan and property transactions between Frontier Architects and the Kargarians were unfair preferences, uncommercial transactions and insolvent transactions within the meaning of ss 588FA, 588FB, 588FC, 588FE(3), 588FE(5) and 588FF of the Corporations Act 2001 (Cth).
In proceeding ACD 52 of 2009 the liquidator sued only Mrs Kargarian in his capacity as liquidator of Techno Build. He claimed $402,252.25 plus interest on the basis that Techno Build had constructed a residence on land owned by Mrs Kargarian at 4 McRitchie Circuit, Nicholls, in the Australian Capital Territory during 2004 and 2005 for which she had not paid. The liquidator contended that this constituted an unreasonable director-related transaction within s 588FDA and was therefore a voidable transaction under s 588FE(6A). In the alternative he advanced a restitutionary quantum meruit claim, although the primary judge later expressed doubt whether the liquidator rather than the company itself was the proper plaintiff for that cause of action.
The two proceedings travelled together through the interlocutory stages and were fixed for hearing together. The hearing occupied four days in September 2010, with evidence in each proceeding treated as evidence in the other. In the principal judgment delivered on 10 December 2010 the primary judge dismissed the Frontier Architects proceeding entirely but found that Mrs Kargarian was liable to pay $150,000 in the Techno Build proceeding. That figure represented his Honour's assessment of the value of the building work ($350,000) less a $200,000 part-payment made by Mrs Kargarian in September 2004. His Honour also observed that Techno Build itself would probably have had a restitutionary claim for the same amount.
On 20 December 2010 the primary judge made final orders. In the Techno Build proceeding he ordered Mrs Kargarian to pay the $150,000 judgment sum, pre-judgment interest under s 51A of the Federal Court of Australia Act 1976 (Cth) from 4 December 2009 (the date the proceeding was commenced), and post-judgment interest. In both proceedings he ordered that the liquidator pay 75 per cent of the defendants' costs of the joint hearing, such costs to be taxed if not agreed. The primary judge's costs and interest reasons were published on 24 December 2010. His Honour noted that the Frontier Architects proceeding had occupied approximately three-quarters of the hearing time and the Techno Build proceeding approximately one-quarter. He considered that a single discounted costs order would simplify taxation.
The liquidator appealed both costs orders and the limitation of pre-judgment interest to the filing date. He sought, in substance, separate costs orders following the event in each proceeding (with an apportionment only for the joint hearing itself) and interest from either 10 March 2005 (when Techno Build had demanded payment) or 20 September 2007 (the date of his appointment as liquidator). The Full Court (Greenwood, Rares and Foster JJ) heard the appeals on 1 August 2011 and delivered judgment on 4 November 2011. Leave was granted to amend the notice of appeal in the Techno Build matter to raise the 20 September 2007 alternative date. The Full Court allowed the Frontier Architects appeal in full on costs, allowed the Techno Build appeal in part on costs, but dismissed the appeal on pre-judgment interest. No orders were made as to the costs of the appeals.
Why the court decided this way
The Full Court held that the primary judge's costs discretion had miscarried in the House v The King sense because his Honour failed to take into account several material considerations. Foster J (with whom Greenwood and Rares JJ agreed subject to additional observations on the breadth of the s 43 discretion) identified three critical matters that were overlooked. First, each proceeding had been prepared separately with no real overlap between the facts to be litigated; the transactions in the Frontier Architects proceeding were entirely different from the building work transaction in the Techno Build proceeding. Second, the defendant parties were different: both Mr and Mrs Kargarian were defendants in the Frontier Architects matter, whereas only Mrs Kargarian was a defendant in the Techno Build matter. Third, although the liquidator was nominally the same plaintiff, he sued in entirely different capacities for the benefit of different groups of creditors and contributories in each liquidation. These distinctions meant that the burden of any costs order in the Frontier Architects proceeding would fall on one group of stakeholders while the benefit of any costs order or judgment in the Techno Build proceeding would enure for an entirely different group.
The primary judge had instead made a single global costs order discounted by 25 per cent across both proceedings. While acknowledging that s 43 permitted global orders and apportionment, the Full Court held that such an order did not give sufficient recognition to the separate character of the litigation or to the relative contributions each proceeding had made to the pre-trial costs. A global discounted order also failed to reflect the compensatory purpose of costs orders. The Court emphasised that costs are not awarded by way of punishment but to indemnify the successful party against outlays that, in light of the merits as ultimately determined, might otherwise have been avoided. Because there was no disentitling conduct by either successful party, orthodox orders that costs follow the event in each proceeding were required. For the assistance of the taxing officer the Full Court noted the primary judge's view that three-quarters of the hearing time had been occupied by the Frontier Architects proceeding and one-quarter by the Techno Build proceeding, but emphasised that the ultimate allocation remained a matter for the taxing officer.
On pre-judgment interest the Full Court reached the same ultimate result as the primary judge but for materially different reasons. The primary judge had limited interest to the filing date on the basis that an earlier order would be unfair given the liquidator's delay after his appointment. The Full Court held that this reasoning was erroneous because mere delay will rarely disentitle a liquidator from interest under s 51A, particularly where time is required for investigation. However, the Court held that the Ferrier and Knight principle applied. That principle, approved in Capital Finance Australia Ltd v Tolcher, is that in a liquidator's statutory recovery action the cause of action arises on the liquidator's appointment but, in the ordinary course, interest runs only from the date the liquidator makes demand in that capacity or from the commencement of proceedings. No such demand in the liquidator's statutory capacity had been made before filing. Prior demands made by the company itself in 2005 and the administrator's letter of 21 August 2007 did not anchor the distinct statutory cause of action under ss 588FDA and 588FE(6A). The letter of 21 August 2007 was sent only one month before liquidation and was not a demand by the liquidator. Accordingly, interest properly ran from 4 December 2009, the date the proceeding was filed and the first liquidator-capacity demand occurred. The appeal on interest therefore failed.
Greenwood and Rares JJ added observations on the historical and principled basis of the costs discretion, emphasising that it has avoided "arterial hardening" and must respond to the myriad circumstances of litigation. They agreed that the primary judge's discretion had miscarried for the reasons given by Foster J.
Before and after state of the law
Before this decision the applicable principles were those stated in Oshlack v Richmond River Council and Foots v Southern Cross Mine Management Pty Ltd. The s 43 discretion is broad, unconfined and not constrained by any absolute rule that costs must follow the event. Nevertheless it must be exercised judicially according to relevant considerations and settled principle. The successful party will generally obtain costs in the absence of disentitling conduct, but the discretion is not at large and extraneous considerations must not influence its exercise. House v The King supplied the standard for appellate intervention in discretionary costs decisions. In the insolvency context, Ferrier and Knight and Capital Finance Australia Ltd v Tolcher had established that for liquidator claims to recover voidable preferences or uncommercial transactions interest under s 51A ordinarily runs from the date of the liquidator's demand rather than from the date of winding up or earlier events. Spedley Securities Ltd (in liq) v Western United Ltd (in liq) (No 2) had been cited with approval for the proposition that interest will not usually be allowed for any period prior to a demand by the liquidator.
This Full Court decision did not change those principles. It applied them to the specific context of two separate liquidator proceedings heard together. The decision reinforces that the separateness of proceedings, the different capacities in which a liquidator sues, the different defendants, and the different groups of creditors who stand to benefit or bear burden remain material considerations that must be taken into account. After the decision it is clear that a global discounted costs order will not be an acceptable substitute for orthodox follow-the-event orders where those distinctions are present and there is no real overlap in the factual or legal issues. The decision also confirms that the Ferrier principle applies equally to claims under s 588FDA for unreasonable director-related transactions. The statutory cause of action available only to the liquidator is conceptually distinct from any restitutionary claim the company itself might have had, with the result that prior corporate demands do not fix the commencement date for interest.
The decision illustrates the continued vitality of the Chancery practice described in Daniell's treatise: the discretion is guided by broad settled principle rather than caprice, and the circumstances of the particular case and the situation or conduct of the parties are taken into account. Section 37M of the Federal Court of Australia Act (overriding purpose of civil practice and procedure provisions) was referred to by the respondents but did not displace the requirement for a judicial exercise of the costs discretion that properly accounts for the separate character of the two proceedings.
Key passages with plain-English translation
Paragraph [45] (Foster J): "Section 43 confers a broad discretion on the Court to award costs. Costs do not automatically follow the event (Foots v Southern Cross Mine Management Pty Limited (2007) 234 CLR 52 at [26] (p 63) and at [34] (p 65) per Gleeson CJ, Gummow, Hayne and Crennan JJ; Oshlack v Richmond River Council (1998) 193 CLR 72 at [63] (p 95) per McHugh J). This is reinforced by the terms of s 43(3). The amplitude of the Court's discretion to order costs is illustrated, but not constrained, by the specific instances listed in s 43(3)."
Plain-English translation: The costs power is deliberately wide. There is no rigid rule that the winner always gets costs, and the examples in s 43(3) show what the Court can do but do not limit it. The power must still be used in a principled way.
Paragraph [58]: "The primary judge's failure to take into account these considerations constituted error on his part. That being so, the discretion falls to be re-exercised by this Court."
Plain-English translation: The trial judge left out important facts about how separate the two cases really were. That mistake means the appeal court must make its own decision about costs.
Paragraph [62]: "An order that costs should follow the event should generally be made unless there is some disentitling conduct on the part of the successful party or unless there is some other circumstance associated with the litigation justifying a departure from that usual order. There is no disentitling conduct on the part of the successful party in the present cases nor is there any other reason not to make an order for costs in favour of the successful party in each case."
Plain-English translation: Normally the winner gets costs unless they have done something that disqualifies them. Nothing like that happened here, so each winner should get their costs in their own case.
Paragraph [70] (adopting Ferrier and Knight): "We also accept that in the ordinary course interest should be allowed only from the date of demand by the Liquidators."
Plain-English translation: In the usual liquidator recovery case, interest starts when the liquidator actually asks for the money back, not from the date of appointment or earlier events.
Paragraph [93]: "But the letter dated 21 August 2007 was not a demand made by the appellant in his capacity as liquidator of Techno Build nor did it anchor his entitlement to the money referred to in the letter in the statutory cause of action which he ultimately litigated in the Techno Build proceeding."
Plain-English translation: The administrator's letter may have been a demand at the time, but it was not a demand by the liquidator using the specific statutory power that was ultimately sued upon. Therefore it does not fix the start date for interest on the judgment eventually obtained under that statutory power.
What fact patterns trigger this precedent
This precedent is triggered whenever a liquidator (or administrator) commences more than one proceeding that is heard together with another, the plaintiff sues in different capacities for the benefit of different stakeholder groups, the defendants are not identical, and the underlying transactions and causes of action are distinct. In such cases a court exercising the s 43 discretion must treat the separateness of the proceedings as a material consideration and will ordinarily make separate costs orders that follow the event in each proceeding rather than a single global discounted order. The precedent applies with particular force where, as here, one proceeding concerns alleged unfair preferences and uncommercial transactions under ss 588FA–588FF while the other concerns an unreasonable director-related transaction under s 588FDA, because the statutory regimes, though related, give rise to conceptually distinct causes of action.
The decision is also engaged where a party seeks pre-judgment interest under s 51A on a liquidator's statutory recovery. The fact pattern of a prior corporate demand or an administrator's letter shortly before liquidation will not ordinarily justify interest from a date earlier than the liquidator's first demand in his or her liquidator capacity or the date of filing. Only exceptional circumstances, such as concealment or culpable misconduct by the defendant, are likely to displace the ordinary rule derived from Ferrier and Knight.
The presence of a joint hearing with evidence cross-admitted does not, of itself, justify collapsing the costs analysis into a single global order. The taxing officer may be assisted by a judicial note of the approximate hearing time occupied by each proceeding, but that note does not bind the ultimate costs assessment.
How later courts have treated it
The judgment itself carefully applied and explained the existing authorities rather than announcing new doctrine. It treated Oshlack and Foots as establishing that the costs discretion is broad yet guided by principle and that costs generally follow the event in the absence of disentitling conduct. It treated House v The King as supplying the appellate standard and applied it to find error in the failure to consider material features of separateness. Ferrier and Knight was applied (not distinguished) to the s 588FDA context, confirming that the same interest principle governs both preference and unreasonable director-related transaction claims. The Court cited Capital Finance Australia Ltd v Tolcher with approval for the proposition that there is no relevant distinction, for interest purposes, between the two types of claim.
The judgment's treatment of the Chancery practice described in Daniell was by way of explanation rather than extension: the similarity between historical Chancery discretion and modern practice under s 43 was noted to reinforce the need for a principled yet flexible approach. The decision's emphasis on the compensatory (rather than punitive) character of costs orders, drawn from Oshlack and Foots, was used to justify returning to orthodox follow-the-event orders once the material considerations had been properly weighed. No departure from established principle was countenanced; instead the Court insisted that those principles had not been correctly applied by the primary judge to the particular facts.
Still-open questions
The judgment leaves open precisely how a taxing officer should weigh a judicial note that three-quarters of hearing time was occupied by one proceeding and one-quarter by the other. While the note must be taken into account, the Court expressly stated that the taxing officer cannot be compelled to give it decisive effect. The interplay between that note and the separate preparation costs incurred before the hearing therefore remains a matter for case-by-case assessment.
It is not finally settled what degree of overlap in evidence or legal argument would justify a global costs order rather than separate orders. The present case involved "no real overlap" in the facts to be litigated; a different conclusion might be reached where the same witnesses or identical legal issues dominate both proceedings.
On interest, the Court did not exhaustively define the "exceptional circumstances" that might justify an award from the date of liquidation or an earlier corporate demand. The judgment notes that concealment or culpable misconduct by the transferee would qualify, but does not address every possible scenario that might arise in unreasonable director-related transaction cases where the underlying transaction may have had some inherent equity (as the primary judge appeared to find in relation to the restitutionary claim).
Finally, the decision leaves for future consideration the precise interaction between s 37M of the Federal Court of Australia Act (overriding purpose) and the judicial obligation to exercise the costs discretion by reference to all material circumstances. The respondents argued that a global order better served efficiency, but the Court held that efficiency could not override the requirement for a judicial exercise that properly accounts for the separate character of the proceedings. The boundaries of that proposition in more complex multi-party insolvency litigation remain to be tested.
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