KF Capital v Davison

Applicable costs principles

1. As no final orders have been made, the principal proceedings are stayed and no general order for the costs of the proceedings has been made, the plaintiffs' application falls to be determined by reference to the principles established in Re Minister for Immigration and Ethnic Affairs, ex parte Lai Qin (1997) 186 CLR 622; [1997] HCA 6 at 624 - 625. In that oft-cited passage, McHugh J pointed out that a court's statutory power to order costs is normally exercised after a hearing on the merits and is conditioned by the general rule that, "a successful party is … entitled to a costs order". Absent an outcome after a contest, "a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order". Generally these considerations mean that where there is no hearing either because the parties have resolved their dispute without recourse to a hearing or otherwise, the court will make no order for costs. But this is a general approach encapsulated by McHugh J in the following statement (at 625): "If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases." (Footnotes omitted.)
2. However, his Honour expressed the principle by which exceptions to this general rule will be recognised in these terms (at 624): "In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action." (My emphasis.)
3. Concerning exceptions to the general rule, albeit, perhaps, at the risk of over-simplifying matters, reference, in my opinion, may usefully be made to the judgment of Burchett J in ONE.TEL Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548; [2000] FCA 270. His Honour said (at [6]): "… it is 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 to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs". See also Chapman v Luminis Pty Ltd [2003] FCAFC 162 at [7]; Muhibbah Engineering (M) BHD & Anor v Trust Company Limited & Anor [2009] NSWCA 205 at [54] - [55], Sackville AJA (albeit in dissent).
4. As I have tried to indicate one should not treat Burchett J's competing examples as though they established a kind of fixed dichotomy. The categories of exception are not fixed or closed and his Honour's examples do not necessarily suggest a clear division or separation of categories. In Nichols v NFS Agribusiness Pty Ltd [2018] NSWCA 84 Payne JA (Basten and Meagher JJA agreeing) said (at [30]): "If both parties to a proceeding which has been settled without a hearing on the merits have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the costs discretion will usually mean that the court will make no order as to the costs of the proceedings." (My emphasis.)
5. Finally it is important to emphasise that in deciding whether to exercise the cost discretion in this category of case otherwise than by making no order as to costs, as McHugh said in ex parte Lai Qin, "[t]he court cannot try a hypothetical action between the parties". This principle was expressed by Basten JA in Nichols in the following terms (at [8]): "… although it is possible to make an order for costs against one party if it can be shown that it has invited the litigation by its unreasonable behaviour, or has unreasonably pursued the litigation, such an order should only be made where that judgment is manifest by reference to known circumstances, not in dispute between the parties. If the question cannot be answered without reviewing large swathes of evidence and resolving, on a tentative basis, disputed questions of fact, the task should not be embarked upon". (See also, Payne JA at [31] - [32]).
6. So far as this last matter is concerned, notwithstanding reading an affidavit of his instructing solicitor sworn on 21 August 2020 with an exhibit contained in two thick volumes running to some hundreds of pages, Mr Hogan-Doran took me to only limited material which could not be said to be other than "known circumstances, not in dispute between the parties". I have refrained from reading and considering the great bulk of the material provided to the Court.
7. Finally concerning matters of principle, Mr Hogan-Doran took me to Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52; [2007] HCA 56 where the plurality held (at [67]): "Had the costs order … been made and taxed before the appellant's bankruptcy ensued, it would have been a provable debt. Even if the order had not been taxed before bankruptcy, it would nonetheless have been provable as a debt incurred "by reason of an obligation incurred before the date of the bankruptcy"; namely the antecedent making of the costs order. However, the order was made only after bankruptcy had already intervened, and the appellant's liability to meet that order did not arise from an obligation incurred before bankruptcy. Thus, it was not a provable debt, and the stay contained in s 58(3) of the Bankruptcy Act was not engaged. His Honour was therefore entitled to make the costs order against Mr Foots." The quote in the middle of the paragraph is from s 82(1) Bankruptcy Act.

Submissions of the parties

1. To make good the plaintiffs' claim for the costs order, Mr Hogan-Doran argued that this case fell into the category where by proceeding on a debtors petition for bankruptcy Mr Davison should be viewed as having effectively surrendered or capitulated from which circumstance it could be seen that the plaintiffs "would "almost certainly" have succeeded": Nichols (Payne JA at [33]). This capitulation, Senior Counsel argued, "is manifest by reference to known circumstances, not in dispute between the parties": Nichols at [8] (Basten JA).
2. Mr Davison, who had not filed any evidence or written submissions in opposition to the plaintiffs' application, may be taken as having argued that the general rule should be applied and no adverse order for costs should be made. In answer to questions that I asked him to elucidate his response to the specific argument advanced by Mr Hogan-Doran he adopted language which I had used when explaining to him the issue that he needed to address, that he had "run up the white flag". But he said he had done so on advice that he had no other realistic option. As I have said he opposed the order sought.

Known circumstances relied upon by the plaintiffs

1. In his Statement of Affairs filed in support of his petition for bankruptcy, Mr Davison disclosed the first plaintiff as an unsecured creditor to which he owed the sum of $1,673,770 (Affidavit, Mark Christopher Wilson, 21 August 2021, Exhibit MCW2, Vol 2, Tab 45). In the proof of debt lodged with Mr Davison's trustee under cover of the plaintiffs' solicitors' letter of 28 March 2019 (Exhibit MCW2, Tab 46) the first plaintiff applied to have its debt including interest, but exclusive of what I have referred to as the limited recoupment, in an amount claimed of $1,930,588.27. On behalf of the second plaintiff, a claim was made "for equitable compensation re diversion of monies" including interest in the sum of $322,050.78. Mr Hogan-Doran accepted that recovery on behalf of the second plaintiff would operate to reduce the claim of the first plaintiff.
2. By email dated 23 April 2019 the original trustee confirmed that the first plaintiff's debt was admitted in full for voting and dividend purposes (Exhibit MCW2, Tab 48). By email dated 6 May 2019 the original trustee confirmed that the second plaintiff's debt was admitted in full, subject to the trustee's rights (pursuant to s 102(5)) Bankruptcy Act (Exhibit MCW2, Tab 49). Both debts are included in the initial information and report to creditors by new trustees appointed to replace the original trustee by a resolution of creditors on 8 May 2019. The report is dated 13 September 2019 (Exhibit MCW2, Tab 50).

Decision on costs order

1. As I have said, it is not argued by Mr Hogan-Doran that Mr Davison's conduct of the proceedings either before, or to the extent permissible, after his bankruptcy was so unreasonable as to justify me exercising my discretion to make a costs order against him. The ground on which the order is sought is that Mr Davison's conduct of presenting a debtors petition invoking the debt due to the first plaintiff amounted to a capitulation in the sense discussed in the authorities I have referred to above. I accept this argument. The presentation of the petition initiated the process by which the original trustee admitted the first plaintiff's claim as a provable debt for both voting and dividend purposes which had the effect of engaging s 58(3) Bankruptcy Act prohibiting the enforcement of any legal remedy as claimed in the proceeding in respect of that provable debt and staying the pending proceedings extending to the taking of any fresh step in the proceedings. Thus the presentation of the debtor's petition had an indirect, but definite effect upon the proceedings.
2. Although one might have characterised the plaintiffs' application for a costs order as a fresh step in proceedings in respect of a provable debt, and accordingly requiring the prior leave of the Federal Court of Australia or the Federal Circuit Court of Australia, this would be directly contrary to the decision of the High Court in Foots at [67], which I have set out above. The ratio decidendi of the plurality judgment is that as an order for costs involves the exercise by a court of an entirely discretionary power, such an order made after the date of the bankruptcy is not a provable debt within s 82 Bankruptcy Act. Accordingly s 58(3)(b) is not engaged and the plaintiffs do not require leave of a court of bankruptcy to bring the application.
3. It should be borne in mind that in his Statement of Affairs Mr Davison only invoked the "debt" due to the first plaintiff. His action in respect of that matter was definite and unequivocal and in my judgment amounts to capitulation in respect of the first plaintiff's claim of such a nature as to engage the costs discretion and I will make an order that he pay the first plaintiff's costs.
4. The position in respect of the second plaintiff is not so clear. Its debt was admitted as a provable debt on its own application, rather than by the deliberate choice of Mr Davison. In a sense the second plaintiff's claim is but a subset of the first plaintiff's larger claim. It has been accepted that Mr Davison cannot be liable for the sum of the amount of their separate claims. Nonetheless, his presentation of his debtor's petition had the same indirect but definite effect upon the proceedings for the second plaintiff's claim, at least when its claim was admitted as a provable debt, even if subject to the trustee's power conferred by s 102(3) Bankruptcy Act to reject or reduce the amount of the debt if subsequently determined to be wrongly admitted.
5. Although different proofs may have been required to make good the claim of each plaintiff against Mr Davison, in effect they are running together and the costs incurred in respect of each are likely to be substantially the same. In my view the costs would not be readily separable. In any event the unchallenged evidence is that the first plaintiff has paid all of the costs incurred by or on behalf of both plaintiffs.
6. I am of the view that the discretion to make a costs order in favour of the second plaintiff too has been successfully engaged and I will make such an order.

The claim for a lump sum order

1. The power of the Court to award costs is conferred by s 98 Civil Procedure Act 2005. Section 98(4)(c) empowers the Court to make "an order to the effect that the party to whom costs are to be paid is entitled to … a specified gross sum instead of assessed costs". Applications for costs on a specified gross sum basis appear to be growing in frequency and a body of jurisprudence has developed explaining how this aspect of the costs discretion may be exercised judicially. It is unnecessary to consider all of this jurisprudence for the purpose of the present case largely because, if there is to be an adverse costs order, Mr Davison does not object to this power being exercised.
2. Mr Hogan-Doran submitted that the applicable principles were relevantly summarised by Ball J in Tzaneros Investments Pty Ltd v Walker Group Constructions Pty Ltd (No 4) [2018] NSWSC 431. His Honour summarised the principles at [19] - [21] in the following terms: "… Factors which are relevant to the exercise of the Court's discretion include the parties' relative responsibility for the costs incurred, the degree of disproportionality between the issues litigated and the costs claimed, the proceedings' complexity in relation to their cost, and the unsuccessful party's capacity to satisfy any costs liability: see Hamod v State of New South Wales [2011] NSWCA 375 at [816] per Beazley JA (with whom Giles and Whealy JJA agreed). In some cases, the protracted nature of the proceedings may provide a compelling reason to exercise the discretion to order the payment of gross sum costs. The Court may make a gross sum costs order where past experience of the parties' delaying conduct indicates a risk that a costs assessment would result in further, unnecessary delay: Coshott v Parker (No 3) [2015] NSWSC 1195 at [71]-[73] per Hall J quoting Bobb v Wombat Securities Pty Ltd (No 2) [2013] NSWSC 863 at [8] per Beech-Jones J; Harvey v Barton (No 4) [2015] NSWSC 809 at [42]-[44] per Slattery J. However, the Court will not make a gross sum costs order unless it can be satisfied that it has sufficient information before it to be satisfied that "it can do so fairly between the parties, and that includes sufficient confidence in arriving at an appropriate sum on the materials available": Harrison v Schipp [2002] NSWCA 213 at [22] per Giles JA. The calculation of that sum must be "logical, fair and reasonable" after an informed assessment of the available information: Beach Petroleum NL & Claremont Petroleum NL v Johnson (1995) 57 FCR 119; (1995) 135 ALR 160 at 164-5 per von Doussa J. The Court is entitled to take a "broader brush" approach than would be applied on assessment, but in doing so "it must be confident that the material before it enables it to make a sufficiently reliable calculation or estimate of an appropriate costs sum. And a decision as to what is an appropriate sum will depend to a large extent on reaching some kind of view on what the outcome of an assessment might be": Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2011] NSWSC 11 at [21] per Barrett J".
3. According to Mr Wilson's affidavit and the supporting documentation in Exhibit MCW2, as at the date of the report to creditors of 13 September 2019, the new trustees for Mr Davison's bankruptcy had not identified any divisible property owned by Mr Davison. Searches established that as at 22 October 2018 Mr Davison did not own any real property in his own name. The proprietary company which is trustee of Mr Davison's family trust was placed into liquidation on 5 April 2019 pursuant to a member's voluntary winding up. It had been the registered proprietor of Mr Davison's Queensland home. Mr Davison is in employment, but given his bankruptcy, I infer that he is unlikely to be in a position to pay the costs of a formal assessment and indeed, unless his financial circumstances turn around suddenly and remarkably, he is unlikely to be able to pay the costs of the proceedings. These are factors which suggest the order sought should be made.
4. As I have said, the applications before me are not propounded on the basis of past unreasonable conduct on the part of Mr Davison and accordingly further unnecessary delay is not an issue. While there is no independent appraisal of the costs claimed, Mr Wilson has provided sufficient information to satisfy me that an order can be made on the materials available, and which permit calculation on a "logical, fair and reasonable" basis. I am satisfied that this is an appropriate case.
5. It should be borne in mind that on 23 May 2019 Registrar Bradford made orders by consent that Mr Davison pay the first plaintiff's costs of, and incidental to the contempt motion on the indemnity basis.
6. Mr Wilson has provided as part of Exhibit MCW2 copies of all invoices issued to the first plaintiff for work done between 12 October 2017 and 20 July 2020. He swears that the first plaintiff has paid each invoice and all counsels' fees. Details of work done, the subject of the invoices, and the memoranda of counsels' fees have been collated and entered into a spread sheet at Exhibit MCW2 Tab 56. The work done has been apportioned amongst the five defendants. The greater part of the fees has been apportioned between Mr Davison and the fourth defendant. It is of course, difficult for me to scrutinise the apportionment for the purpose of the evaluation of its reasonableness, but it does not seem unreasonable to regard the greater part of the work as having been directed to Mr Davison and the fourth defendant, the trust company to which it was alleged funds had been diverted.
7. The "charge-out rates" of each of the persons identified in [77] of Mr Wilson's affidavit as having performed work on the file are not unreasonable. And Mr Wilson says that over a certain period, the first plaintiff was given a percentage discount in the rates. That discount is reflected in the amount now claimed.
8. The order sought by the first plaintiff discounts the solicitor and client costs of the contempt proceedings by 20 percent. The general costs of the proceedings are discounted by 50 percent on the solicitor and client basis. I would have thought that these discounts err on the side of a degree of generosity in favour of Mr Davison. Moreover, some $40,000 in sundry general disbursements which it is not possible to sensibly apportion have been "unallocated". I understand this to mean that no recoupment from Mr Davidson for any part of those charges is sought.
9. On the summary sheet appearing behind Tab 56 in Exhibit MCW2 total costs on a solicitor and client basis including the sundry disbursements I have referred to are in the sum of $627,284. Of this amount $265,738 is apportioned to Mr Davison. This is about 42 percent of the total. Bearing in mind that the costs of the motion for contempt are assessable on an indemnity basis and that Mr Davison was the principal in the timber venture for which the loan funds were advanced, giving him control over their disbursement, this apportionment of 42 percent is certainly not unreasonable.
10. The total costs in respect of the contempt proceedings are $35,528 of which $28,422 is claimed. This reduces the total solicitor and client costs to a figure of around $230,000 of which the 50 percent claimed is $115,105. The total lump sum claimed is $143,527.
11. I am satisfied that the approach suggested is fair, logical and reasonable and I propose to round the amount of the order to $140,000.

Orders

1. My orders are: 1. The first defendant to pay the first plaintiff's costs of its proceedings against him; 2. The first defendant to pay the second plaintiff's costs of its proceedings against him; 3. The plaintiffs' costs of the proceedings against the first defendant including the indemnity costs order made on 23 May 2019 are payable in a gross sum of $140,000 under s 98(4)(c) of the Civil Procedure Act 2005 (NSW); 4. The sum specified in Order 3 is payable to the first plaintiff whose receipt whereof discharges the liability of the first defendant under orders 1 and 2.

Amendments 13 November 2020 - Representation: Solicitors for First and Second Plaintiffs added. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 November 2020