Links Golf Tasmania Pty Ltd v Sattler [2012] FCA 1271 | Case summary

Wood's and Hetrel's solicitor/client costs 4 The background to the commencement of the s 237 proceeding may be seen in paras 432-434 of my reasons in the main proceeding given on 26 June 2012. The s 237 proceeding was commenced on 24 December 2009, and came before Finkelstein J on 16 March 2010. On that occasion, his Honour made an order under s 237 of the Corporations Act that Wood and Hetrel have leave to bring proceedings against Sattler and Sattler Nominees to pursue causes of action in the form or to the effect of those pleaded in the Statement of Claim filed in an earlier discontinued proceeding in the name of LGT. In their application filed on 24 December 2009, Wood and Hetrel sought an order that LGT indemnify them in respect of the costs of the proceeding which it was proposed that LGT would bring against Sattler and Sattler Nominees. That aspect of the application was not dealt with by Finkelstein J on 16 March 2010, but his Honour gave directions for the filing and service of written submissions on the subject. Having received those submissions, Finkelstein J gave judgment on 8 June 2010: Wood v Links Golf Tasmania Pty Ltd [2010] FCA 570. 5 In that judgment, Finkelstein J made the following order: 1. Links Golf Tasmania Pty Ltd (LGT) pay the joint plaintiffs' reasonable costs of bringing proceedings on behalf of LGT against Richard Sattler and RG Sattler Nominees Pty Ltd pursuant to leave granted by the Court on 16 March 2010. His Honour's order was made under s 242(a) of the Corporations Act, to the terms of which I shall refer below. His Honour noted that the costs order sought by Wood and Hetrel was consented to by LGT. But it was opposed by Sattler and Sattler Nominees. His Honour said ([2010] FCA 570 at [6]): In substance, the case against a costs order being made, despite the consent of LGT, is based on the following propositions: (1) more should be known about the merits of the action than is currently known; (2) an independent board of LGT had initially made a decision not to bring the claim against Sattler and his company; (3) if the action fails, LGT will suffer an adverse costs order; (4) if the action succeeds, Sattler or his company will pay the costs; (5) the costs may be run up unnecessarily; (6) LGT has limited resources; (7) Messrs Wood and Hetrel are not impecunious and could themselves fund the action; (8) the action is really about a dispute between, on the one hand, Messrs Wood and Hetrel and, on the other, Sattler and LGT and the action is but a vehicle to resolve that dispute. 6 Having referred to what was, apparently, the "current practice" in relation to costs orders of the kind sought by Wood and Hetrel, Finkelstein J continued ([2010] FCA 570 at [8]): To be quite frank, it is by no means clear why this general approach, if this is the general approach, has been adopted. First of all, the discretion conferred by s 242 is unconfined. Second, the Explanatory Memorandum states (p 26 at [6.19]): "The Court's discretion regarding the allocation of costs is aimed at providing an additional safeguard in respect of use of company funds. In particular, the Court would be able to protect a bona fide shareholder against liability for costs [by] indemnifying them out of company funds while at the same time allowing the Court a further means of discouraging unmeritorious or doubtful action." It might therefore be true, as K L Fletcher writes, that s 242 is "deliberately drafted in a manner that denies the successful applicant the assurance that court recognition will result in the company becoming liable for the reasonable costs of litigating on its behalf": K L Fletcher, CLERP and Minority Shareholder Rights (2001) 13 AJCL 290, 299. But Parliament seems to have had in mind that in appropriate circumstances the company should meet the costs. The only question is: what are those circumstances? 7 His Honour noted that the purpose of permitting an action in the name of the company was to prevent conduct which would involve some element of harm, and that, in most cases, the alleged wrongdoer would be in control of the company. In the circumstances, his Honour could think of "no good reason why the company should not bear the costs". In this respect, his Honour followed the judgment of Marks J in Farrow v Registrar of Building Societies [1991] 2 VR 589, 595, where it was said that, if the action were "bona fide to protect the [company] and the [company] will receive the benefit of success, there is no good reason why the expenses should be met out of the private resources of [the] shareholders". But Finkelstein J added ([2010] FCA 570 at [11]): If a costs order is made and at any later time it turns out the claim is unmeritorious, the costs order can be recalled. That is what happened in Farrow v Registrar of Building Societies. At the time the costs order was made, the plaintiff appeared to have a good claim, although, as Marks J said, he was not able to fully assess the strength of the claim. During the trial, however, things took a turn for the worse. Ultimately the plaintiff was forced to discontinue the suit. As a result, the judge was asked to, and he did, revoke the costs order. 8 His Honour said that, prima facie, the claim seemed to be one which was worthwhile pursuing, and, if successful, would be "of considerable benefit to the company and its members". His Honour was not persuaded "by the contention that the costs will be unreasonably run up". If there were "an attempt to inflate the costs", his Honour said that that could be "controlled by the court". 9 The main proceeding, which had been commenced in the name of LGT on 26 March 2010, moved through its interlocutory stages under the costs regime put in place by Finkelstein J on 8 June 2010. By March 2011, the costs which LGT had been obliged to pay pursuant to the order of 8 June 2010 had reached such proportions that the directors of LGT considered that the continuation of that order could constitute a threat to the solvency of their company. By application dated 15 March 2011 in the s 237 proceeding, LGT applied for a variation of the order of 8 June 2010, such that Wood and Hetrel would be liable to pay LGT's solicitors in the main proceeding the costs of $573,265 rendered by those solicitors and all fees thereafter rendered by those solicitors in that proceeding, and to indemnify LGT in respect of any order as to costs that might be made against LGT in that proceeding. 10 In the result, and with the consent of LGT but not of Sattler and Sattler Nominees, on 24 March 2011 Gordon J ordered that the order of 8 June 2010 be varied by making it subject to a new Order 2A in the following terms: 2A (a) on 1 April 2011, LGT pay $150,000 to the joint plaintiffs; (b) on 30 April 2011, LGT pay $75,000 to the joint plaintiffs; and (c) at the end of each month thereafter commencing on 31 May 2011, LGT pay $75,000 to the joint plaintiffs, in respect of the joint plaintiffs' costs of the proceedings referred to in paragraph 1 above provided that, if the directors of LGT believe, on reasonable grounds, that any such amount payable will then or in the future reduce the cash reserves of LGT to below $300,000, then, to the extent that the payment will have that effect, it need not be made. Additionally, her Honour made the following orders: 2. Any party may apply to the Court for any further or other variation of the order made on 8 June 2010 in this proceeding by giving 14 days' written notice to the other parties after the hearing and determination of proceeding VID 204/2010. 3. The costs of the defendant's interlocutory process dated 15 March 2011, up to and including the costs of today, be costs in the cause in proceeding VID 204/2010. 11 The main proceeding then went to trial. The trial occupied some 47 days, the last of which was 23 September 2011. Over that period and subsequently, LGT has made payments to the solicitors instructed by Wood and Hetrel according to the arrangements put in place by Gordon J on 24 March 2011. 12 It was a significant part of the case of LGT, Sattler and Sattler Nominees that the solicitor/client costs incurred on behalf of LGT had blown out beyond anything originally in contemplation. On 18 June 2010, the solicitors engaged to represent LGT in the main proceeding estimated that, down to the commencement of the trial, the professional fees would be in the range of $250,000-$350,000, and that out-of-pocket expenses would be in the range of $15,000-$25,000. They estimated that the fees for the trial would be about $20,000 per day. By early January 2011, LGT had received bills from their solicitors totalling almost $350,000, and its company secretary, Gary Dixon ("Dixon"), requested an estimate of costs from that point forward. By email dated 11 February 2011, the solicitors estimated that their fees to the commencement of the trial would be in the range of $150,000-$205,000, and that the fees for the trial, based on an estimate of 9 to 14 days, would be in the range of $180,000-$280,000. 13 At a directions hearing in the main proceeding on 25 February 2011, that proceeding was set down for the period 4-21 April 2011 (14 days), with 27 April and 28 April 2011 (possibly) being available if required. 14 On 4 March 2011, Dixon asked LGT's solicitors to revisit the costs estimate which they had given, based upon his understanding that the trial of the main proceeding may extend beyond 14 days. On 7 March 2011, the solicitors responded that they would provide a further estimate if the trial did run beyond 14 days. They added that the length of the trial would "ultimately depend on the number of witnesses that are to be cross-examined", and that no notices for cross-examination had yet been served. In response to further inquiries made on behalf of the directors of LGT, on 23 March 2011 the solicitors for LGT in the main proceeding estimated that, if the trial occupied the days for which it had been set down, "the fee estimate that [they had] previously provided … may be exceeded by approximately $150,000 to $200,000". By Dixon's calculations, and taking into account the costs of the trial, LGT was then exposed to legal costs in the range of $480,000-$685,000. 15 It was in this environment that the s 237 proceeding came before Gordon J on 24 March 2011. The application made by LGT on that occasion was based upon the estimates to which I have referred, but the resolution of the issues which then lay between the parties was a pragmatic one, relating as it did to cash flow rather than involving any attempt to grapple with what might, ultimately, be LGT's exposure to solicitor/client costs in the main proceeding. 16 By 28 June 2011, the solicitors for LGT in the main proceeding had rendered fees in the sum of $2,389,962.75. They then estimated that further fees of $425,000-$750,000 would be rendered to the completion of that proceeding. As at the swearing of Dixon's affidavit on 13 July 2012, the total solicitor/client costs rendered to LGT in the main proceeding had been just in excess of $3.3m. Of that, $751,130.30 had been paid pursuant to the order of 8 June 2010, as varied. 17 As was the situation before Finkelstein J, the application now before the court involves the exercise of the jurisdiction given by s 242 of the Corporations Act, which provides: The Court may at any time make any orders it considers appropriate about the costs of the following persons in relation to proceedings brought or intervened in with leave under section 237 or an application for leave under that section: (a) the person who applied for or was granted leave; (b) the company; (c) any other party to the proceedings or application. An order under this section may require indemnification for costs. The question now before the court arises under para (a) of this provision, because it relates to the costs of those who were given leave under s 237. It was common ground that the relevant jurisdiction could be exercised from time to time, and that an order previously made under s 242(a) could be varied on a later occasion if thought appropriate. 18 Unsurprisingly, LGT submits that the estimates by reference to which it consented to the order of 8 June 2010, and to the variation of 24 March 2011, were, as things turned out, conservative to a considerable degree. I think there is force in that submission, at least to the extent that the mere fact of LGT's consent should not now be held against it in its attempts to shield itself from the full impact of that order. With respect to LGT's liability for Wood's and Hetrel's solicitor/client costs, it could hardly be gainsaid that there are now changed circumstances. In my view, LGT deserves some credit for having consented to the making of the original order on 8 June 2010, particularly in the light of Finkelstein J having given leave under s 237. That the directors should have perceived, in his Honour's order, an indication that LGT might well have a case that could be run to a successful conclusion - a conclusion that would benefit the company - made it a responsible course for them then to agree that LGT would pay the solicitor/client costs, given the general dimensions of the costs that were then estimated. Likewise, in March 2011, the directors took what I would accept was the responsible course of accepting an outcome that would protect the cash position of the company. As Dixon pointed out in his affidavit, however, LGT's maximum exposure was then in the vicinity of $685,000. That figure has proved to be short of the mark by a factor of about 4.8. 19 There could be no suggestion that the Sattler interests were especially responsible for the trial running beyond its original estimate of 14 days to what ultimately became 47 days. They made their contribution, of course, and I do not suggest that the cross-examination of LGT's witnesses was not detailed and extensive. But it was always going to be thus: the affidavits on which LGT relied contained many passages which Wood and Hetrel, and those advising them, must have known would be controversial. I make that observation particularly with respect to the affidavits of Greg Ramsay, the main one of which ran to 364 paragraphs. The opening of counsel for LGT ran into the fourth day of the trial. At the hearing of the present applications, when senior counsel for Wood and Hetrel (erstwhile senior counsel for LGT at trial in the main proceeding) was reminded of the original estimate of 14 days, he replied "I've never said 14 days to anybody". If that comment bespoke a perception on the part of counsel, from the outset, that the trial would take in excess - possibly well in excess - of 14 days, I would have to say that that would have been a reasonable perception in all the circumstances. The difficulty is that the 14-day estimate came from counsel's instructing solicitors, and was contained in their correspondence to Dixon. 20 The observations which I have made above are in no sense intended to be critical of anyone. No submission was made on the present occasion that those representing LGT in the main proceeding had inflated their costs or not fairly presented to Dixon and the directors their genuine estimate of the solicitor/client costs that would be incurred by LGT over the course of that proceeding. But, as I said previously, the course of events, and the quite extraordinary departure of the costs actually incurred from those originally estimated, makes it not only desirable but almost inevitable that I should not now hold it against LGT that it consented to the order of 8 June 2010 and to its subsequent variation. 21 From that starting-point, I turn to consider the application for Wood and Hetrel to meet the solicitor/client costs of LGT in the main proceeding. Here it must be remembered that, at the basic contractual level, those costs were to the account of Wood and Hetrel. LGT did not engage the solicitors or counsel chosen by them. The obligation which LGT presently bears to pay those costs arises only because of the order made on 8 June 2010. That was an order made in the discretion of the court, and by reference to circumstances then existing. It was not suggested that the court did not have the power further to vary that order, or to require Wood and Hetrel to reimburse LGT what it has already paid under that order. It was submitted on behalf of Wood and Hetrel, however, that there would need to be a good reason, such as changed circumstances, to justify such a course. I accept that submission. I cannot approach LGT's present application as though the slate were clean. Wood and Hetrel sought and secured the order of 8 June 2010, and they are entitled to the benefit of it unless there is some good reason why it should be varied. Likewise, it needs hardly to be said that to impose a requirement that they reimburse LGT for the very costs which they avoided by obtaining the order would be tantamount to revoking or varying the order, and again should not be done without good reason. 22 I do not think that the mere fact that LGT substantially failed in the main case would amount to a good reason to set aside the regime put in place by Finkelstein J. We are not here concerned with party/party costs, but with the costs which any party must incur in the conduct of his or her own case. The question was not, on 8 June 2010, whether the case would succeed, but whether it was a case that could responsibly be brought in the interests of LGT. Finkelstein J thought that it was, and he did so without making any attempt to predict the outcome. The circumstance that the case did not succeed does not, in my view, of itself provide a justification for reversing, in effect, the costs regime which his Honour put in place. 23 But there were respects in which Finkelstein J expressed qualifications to the general principle which informed the making of his order on 8 June 2010. The first related to the unreasonable inflation of costs, and the second related to a possible later realisation that some or all of the case was unmeritorious. Considered separately from aspects of the case that fell into the latter category, it was not suggested that the solicitors for LGT in the main case had unreasonably inflated their costs. The "unmeritorious" aspect of his Honour's reasons was, however, more contentious. It was submitted on behalf of LGT and Sattler Nominees that the larger part of the case which was conducted on behalf of LGT was unmeritorious because it was unsuccessful. For the reasons given above, however, I would not accept that submission. 24 I was referred to a great many cases in which the circumstances warranting an order of the kind made on 8 June 2010 were discussed. Sometimes the question arises, as it did in the present case, before the event; at other times, the question arises when the case has been run and won or lost. I was not, however, referred to any authority on the approach which the court should take to an application, made after the event and in the light of the outcome of the case, to depart from a regime which had been put in place at the start of the case. Farrow was perhaps a case of that kind, but there were, it seems, no reasons published for the court there revoking the order which had previously been made. It was, however, common ground that I might exercise the discretion which LGT invokes on the present occasion by reference to the question whether LGT's case in the main proceeding is now seen to have been "unmeritorious". As I have said, the real problem relates not to that word as a label but to the extent and nature of the presumptive weakness in the relevant party's case to which it refers. 25 In the submission of Wood and Hetrel, a case ought not, after the event, be regarded as unmeritorious unless it was clearly frivolous or conspicuously weak, in effect to the point of being threadbare. I do not, however, think that this captures the sense of the notion to which Finkelstein J referred. Here it must be remembered that the question is not, as between parties to litigation, whether the case of one of them had no reasonable prospect of success and might have been dismissed under s 31A of the Federal Court of Australia Act 1976 (Cth); or subjected to some corresponding summary fate. Rather, the question is whether two individuals who had been entrusted with the conduct of a case on behalf of a company - a case which the directors of the company themselves declined to bring - and who were given access to the company's exchequer for those purposes, should have reached a point where they took the view that the company's best interests were no longer being served by the litigation, in whole or in part. If they should have come to that view, but chose to press on regardless, I can see no reason why the company should be required to continue funding the exercise. 26 In considering questions of the kind to which I have just referred, one must, of course, take care not to assess the appropriateness of a course adopted by the individuals through what has sometimes been called the retrospectoscope. The questions must be assessed by reference to circumstances existing from time to time, and as they would reasonably have appeared to the individuals. Further, one ought not to be too precious about that assessment: recognising the pressures and dynamics of ongoing litigation, a robust approach is called for - one which allows for a reasonably generous sphere within which the individuals might determine litigation to be in the interests of their company. Subject to those riders, however, I consider that there may be a point, short of that at which the case appeared to be frivolous or hopeless, where continued litigation ought not to be regarded as reasonably in the interests of the company concerned. 27 In the present case, I am not persuaded that such a point was ever reached in relation to the whole of LGT's claims against Sattler and Sattler Nominees. That is to say, there was no point at which Wood and Hetrel ought to have discontinued. However, there were some claims which they advanced, on behalf of LGT, in the main case and which ought not, in my view, have been regarded as in the interests of LGT in the sense of providing a sufficient justification for the expenditure of LGT's money on them. The inappropriateness of the claims to which I refer was not something which became apparent only because of the way in which Sattler and Sattler Nominees conducted their case in court; nor was it something that became apparent only in the course of the trial as such. Rather, it was, in each case, something which ought reasonably to have been apparent to Wood and Hetrel, and to those advising them, either from the outset or at least from an early stage. 28 I shall commence with a claim that was introduced by amendment on 25 February 2011, and remained part of LGT's case until the 45th day of the trial, but was then abandoned. That was the claim that Sattler held the proceeds of an infrastructure grant made to him by the State government as constructive trustee for LGT. No explanation was offered for the dropping of that claim, and no attempt was made on the present occasion to justify its inclusion in the first place. The proceeding against Sattler was effectively discontinued to the extent that it related to that claim. 29 Counsel for Sattler and Sattler Nominees pressed me to take the same view of LGT's claim for a finding that Sattler held his interest in the second golf course at Lost Farm as constructive trustee for LGT. It is true that that claim too was abandoned at the eleventh hour, but the abandonment related only to the remedy which equity would grant if the view were taken that Sattler had established that golf course in breach of his fiduciary duty to LGT. The claim that there had been such a breach of duty was maintained, but now an account of profits only was sought. I do not suggest that this late change in the configuration of LGT's case was not one of substance, but I am not persuaded that it was such as to compromise the right of Wood and Hetrel to maintain the advantages which they derived from the order of 8 June 2010. 30 I turn next to LGT's claim that Sattler Nominees should account for the value of the services which it received from LGT in relation to the accommodation which Sattler Nominees operated at Barnbougle Dunes (subject to an allowance for the 10% commission actually paid for those services). Although I accepted that there was a theoretical basis for that claim, the discretionary considerations by reference to which I rejected it ought to have been all too clear to Wood and Hetrel, well-advised as I am sure they were, when the main proceeding was commenced. Indeed, the legal advice on the strength of which the main proceeding was commenced has now been tendered in an open exhibit. In that advice, which was given to Wood and Hetrel whilst still directors of LGT in June 2009 (but never tabled at a Board meeting), LGT was advised, amongst other things, that, due to its acceptance of the accommodation commission arrangements over a long period of time, it would be difficult, if not impossible, to succeed in equity against Sattler in relation to those arrangements. I must say that this claim had all the appearance of something added to the proceeding for no better reason than to have it cover the full spread of irritations that had been felt by Wood and Hetrel against Sattler, even those which had been allowed to lie dormant for several years. It is hard to see how the view could have been taken that LGT's limited funds were well-spent on prosecuting this claim. 31 The two loans - one from the State government and one from Mike Keiser ("Keiser") - which were made to Sattler, but which, on the case which Wood and Hetrel advanced on behalf of LGT, were the entitlement in equity of LGT are also, in my view, problematic. I am bound to say that the evidence really provided no basis for the allegation that Sattler held the proceeds of the loan from Keiser as constructive trustee for LGT. That allegation was introduced by amendment on 25 February 2011, and again has the appearance of having been tacked on to the existing claims for the sake of mounting a thoroughly comprehensive case against Sattler. But, as I hope my reasons of 26 June 2012 demonstrated, the facts which related to this loan ought never to have been perceived as bespeaking a breach of fiduciary duty. The transaction was only ever between Keiser and Sattler, and Wood knew it. 32 There is, however, a more important consideration which relates to both of the loans with which I am presently concerned. It will be recalled that, in each case, Sattler used the moneys represented by the loans to increase his equity in LGT. LGT's case that Sattler account for the benefit of the loans inevitably involved the consequence that, somehow, things would be re-configured such that LGT became the borrower in place of Sattler. In their case at trial, counsel for LGT never fully came to grips with the complications that this would entail. More importantly for present purposes, how LGT might have benefitted from such a re-configuration was never explained and, for my own part, I cannot see it. 33 What was quite clear in the case being conducted on behalf of LGT, however, was that an end result being sought was the rectification of the share register of the company: see para 610 of my reasons of 26 June 2012. That is to say, a position in which Sattler had assumed the burdens of debtor and, with the funds thus obtained, made an investment of equity into LGT was sought to be converted into one in which the same funds were not treated as equity, but LGT would, in the result, somehow become the debtor. Quite apart from the fact that no-one involved with LGT at the time wanted it to be burdened with debt, how the company would have benefitted from such a conversion is not apparent, and was not explained by counsel for Wood and Hetrel. 34 Counsel did make the point that rectification of the register was legitimately an outcome which a company might seek in court, when it became apparent that some shares had been registered in the wrong name, including possibly in breach of trust. I accept that. I also accept the jurisprudential sequence of propositions to which I referred in para 610 of my reasons. But those propositions were truly lawyers' ones, and spoke loudest at a very theoretical level. To have been driven by them in their conduct of the case for LGT in the main proceeding was, for Wood and Hetrel, to take a position highly abstracted from the practical interests of their company. Indeed, had the claim for rectification succeeded, those gentlemen, and the other non-Sattler shareholders, would have increased their proportions of equity in LGT, while that of Sattler Nominees would have been driven below 50%. The potential benefit for the individuals was, therefore, patent. However, the potential benefit for LGT itself was obscure, and it remains so even after the conclusion of the case. 35 I should say that the foregoing observations should not be taken as implying that Bump 'n' Run Pty Ltd and Delores Investments Pty Ltd, as the shareholders reflecting the interests of Wood and Hetrel, might not quite conventionally have sought the setting aside of the share allotments arising from Sattler's contributions of the proceeds of these two loans. But those companies would then have been responsible for their own solicitor/client costs. Neither do those observations have in them any element of hindsight. In substance, they were voiced - more strongly than I have above - by senior counsel for Sattler and Sattler Nominees on the occasion of LGT's application to amend on 25 February 2011. Wood and Hetrel could have been in no doubt as to the reservations which were held as to these claims, nor as to the absence of practical benefit for LGT which the claims had the potential to deliver. Notwithstanding the very clear terms in which the problems which the claims confronted were laid out, in a real as distinct from a theoretical sense, Wood and Hetrel chose to prosecute them to the end. It does not seem to me to be right that LGT should be obliged to pay their solicitor/client costs of having done so. 36 I would be disposed to assess the contribution of the aspects of the case to which I have referred above to LGT's solicitor/client costs in the main proceeding at 40%. I will make an order intended to bring about the result that LGT's contribution to those costs be cut back to 60%. To allow for the possibility that one or more of the interested parties might not accept this fairly robust approach, and might request a more tightly-calculated outcome, I shall reserve liberty to apply for a limited period.

SATTLER'S AND SATTLER NOMINEES' PARTY/PARTY COSTS 37 On 16 July 2012, I determined, without making an order at that stage, that for LGT to pay 85% of the costs of Sattler and Sattler Nominees in the main proceeding would be a fair and just reflection of the extent to which those parties achieved success in that proceeding. The questions which now arise are whether that 85% should be paid, in whole or in part, by Wood and Hetrel, and if so, whether that liability should be joint and several with, or in substitution for, LGT's own liability to pay those costs. Here I am exercising jurisdiction under s 242(c) of the Corporations Act. 38 There is much authority, including recent binding authority, that the court has jurisdiction to order that a person who was not a party to a proceeding pay the costs of a person who was a party. Thus it was accepted by Wood and Hetrel that I had the jurisdiction to make the orders sought by LGT, Sattler and Sattler Nominees. In the light of s 242, that was, with respect, a wise concession. However, counsel for Wood and Hetrel submitted that a costs order against a non-party should be made only in exceptional circumstances. That was the observation of the Full Court in Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) [2012] FCAFC 50 at [90], relying on the reasons of Lander J, with whom Doyle CJ agreed, in the Full Court of the Supreme Court of South Australia in Vestris v Cashman (1998) 72 SASR 449 at 467: The circumstances in which it is just to order costs against a person who was not a party to the litigation will be both rare and exceptional: Aiden Shipping Ltd v Interbulk Ltd [[1986] AC 965 at 980] per Lord Goff of Chieveley. If the order for costs which is sought against a non-party is in lieu of, in substitution for or complementary to an order for costs against a party, the circumstances for making such an order will not arise unless there is some connection or association between the party to the litigation and the non-party against whom the order for costs is sought. The connection must be of a kind that makes it just to make an order for costs in that the connection must be material to the question of costs: see Bischof v Adams [1992] 2 VR 198 at 205. Whilst the circumstances to make an order for costs against a non-party will be both rare and exceptional such an order can be made without the moving party having to demonstrate any improper conduct of any kind on the part of the non-party. An order for costs against a non-party is not dependant upon any improper conduct on the part of any party. Of course in some cases improper conduct on the part of the non-party will be a relevant factor in the exercise of the discretion. Because of its significance in the derivation of the "exceptional circumstances" test, it is useful to look briefly at Aiden Shipping. 39 In that case, the question was whether s 51(1) of the Supreme Court Act 1981 (UK), which read as follows, Subject to the provisions of this or any other Act and to rules of court, the costs of and incidental to all proceedings in the civil division of the Court of Appeal and in the High Court, including the administration of estates and trusts, shall be in the discretion of the court, and the court shall have full power to determine by whom and to what extent the costs are to be paid, permitted the making of an award of costs against a non-party (in that case shipowners in relation to a proceeding between charterers and sub-charterers). Reversing the Court of Appeal, the House of Lords held that it did. The question of the circumstances in which such a power should be exercised did not arise (indeed, the judgment of the Court of Appeal, allowing an appeal from the Divisional Judge on the ground that there was no relevant jurisdiction, was made with "unconcealed regret": [1986] AC at 974). At the page referred to by Lander J in Vestris v Cashman, [1986] AC at 980, Lord Goff said: In the vast majority of cases, it would no doubt be unjust to make an award of costs against a person who is not a party to the relevant proceedings. But, as the facts of the present case show, that is not always so. In the present case, the two originating motions were heard together without any formal order being made; but in such a case, and also in a case where a formal order has been made, one reason why that course of action is taken may be to achieve a saving of costs. If two separate sets of proceedings are heard together, because they have common features, it may be a matter of pure chance whether the expense of presenting an argument or evidence relevant to the common feature falls within one or other of the two sets of proceedings. Sometimes, indeed, it may be very difficult to attribute costs to one set of proceedings rather than the other. It is surely consistent with the interests of justice that, in such a case, the court's jurisdiction to make a global order for costs relating to both sets of proceedings should not be fettered by the imposition of an implied limitation upon that jurisdiction. With respect, I cannot find where on that page, or elsewhere in his Lordship's speech, it is said that "the circumstances in which it is just to order costs against a person who was not a party to the litigation will be both rare and exceptional". 40 In Dunghutti, the Full Court said ([2012] FCAFC 50 at [88]-[89]): The Court has power to make an order for costs against a non-party where the non-party is connected with the unsuccessful party to the proceeding, and has caused that party to start, continue or prosecute the proceeding in circumstances where the non-party's conduct makes it just and equitable that the non-party be visited with an order for costs in favour of the successful party either in addition to such an order against the unsuccessful party or in substitution for such an order. As Gobbo J said in Bischof v Adams, a statement which the Full Court has approved, the categories of cases are not closed. We think that the only precondition to the exercise of power would have to be that the non-party has a sufficient connection with the unsuccessful party and the litigation to warrant the Court exercising its jurisdiction. Their Honours rejected the criterion that the party to the proceeding who would, in the normal course, pay the costs had to be impecunious: [2012] FCAFC 50 at [87]. 41 The jurisdiction which the court exercised in Dunghutti was that for which s 43 of the Federal Court of Australia Act 1976 (Cth) provides, namely, the - … jurisdiction to award costs in all proceedings before the Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which this or any other Act provides that costs shall not be awarded. The question with which their Honours were concerned was whether this general head of jurisdiction was sufficient to award costs, and if so, whether costs should be awarded, against the directors of a corporation who had caused the corporation to engage in litigation which, as the Full Court accepted, was "without merit and ought not to have been prosecuted" ([2012 FCAFC 50 at [48]). It was held that the jurisdiction was sufficient, but that costs should not be awarded against the directors, substantially because they had acted consistently with oral legal advice which, it was inferred, had been tendered to them. The Full Court did not say so in terms (and the case could not be regarded as authority for the proposition), but the impression one gets from reading their Honours' reasons is that costs might well have been ordered against the directors had they persisted in the litigation without the protection of legal advice. 42 The present case is different from Dunghutti, and other cases in the same line, in at least two respects. First, the jurisdiction which I am required to exercise is that arising under s 242 of the Corporations Act, which contemplates the making of special costs orders in the particular circumstances obtaining when a s 237 order has been made. Put another way, to the extent that "exceptional circumstances" are required, they are to be identified in the making of such an order. It could hardly be gainsaid that the grant of an entitlement to sue in the name of a company to persons other than the company's Board, and where the Board itself is taking no proceedings, is an exceptional circumstance. In what appears to have been the only reported instance of the exercise of the power under s 242 to require someone other than the losing party as such to pay the successful party's costs, Reale v Reale [2006] NSWSC 1099, Austin J demonstrated no reluctance "to deal the companies out of the costs equation" ([2006] NSWSC at [50]) because he considered that to be the appropriate course in the particular circumstances which came before him (which involved closely-held companies within a family). Indeed, in the view I take, the power to make an order under s 242 having arisen by reason of the existence of an order under s 237, the only remaining question is whether the court considers it appropriate to make such an order, and if so in what terms. Appropriateness is the test under the section, and clearly that leaves the court with a wide discretion. 43 The second point of departure from Dunghutti to be seen in the facts of the present case is that Wood and Hetrel were not directors of LGT. It was argued on their behalf that, they having been given leave under s 237, their position was indistinguishable from that of directors, in that they had the authority to conduct proceedings on behalf of the company, and to make all the responsible decisions along the way which that involved. I do not agree. Directors are answerable to a general meeting of their company, and can be removed at any time if the shareholders so decide because, for instance, the view is taken that the directors are spending the company's money, or running up a contingent liability for costs, unwisely, imprudently or, for that matter, to an extent with which the shareholders are not comfortable. It is undoubted that directors must act in the interests of their company, as an entity separate from its members, but there may be cases in which directors perceive themselves to be so acting but in which the proprietors of the company, whose funds are at stake, do not share that perception. However, individuals with leave to use the company's name pursuant to an order under s 237 are not subject to that discipline. Neither, of course, are they subject to a duty to act in the best interests of the company generally. Indeed, so long as they conduct the litigation as such responsibly and in accordance with the advice which they receive from time to time, it seems that they are quite free of the normal restraints to which ordinary litigants are subject, such as the need (and, in the case of a company director, the duty) to consider whether the continuation of the litigation is in the company's wider best interests. Normally, of course, such a consideration would include the potential liability to an adverse costs order that might be made in the event of an outcome which is wholly or partly unsuccessful. 44 It will be seen that the two points of difference from Dunghutti to which I have referred come together when it is realized that, at least in the majority of cases, an order will have been made under s 237 because the directors declined to litigate. That is to say, s 242 contemplates the very situation in which the individuals controlling the litigation are not the directors of the company concerned. The statute also (and therefore) contemplates that orders which lie outside the range of the conventional may well have to be made to do justice as between all the interests involved in a derivative proceeding commenced pursuant to an order under s 237. As I say, the statutory test is appropriateness. 45 What, then, are the considerations which bear upon the question whether it would be appropriate to make the order now sought by Sattler, Sattler Nominees, and LGT, or some order along those lines? First, this was not a case in which the company whose name was used pursuant to the s 237 order was no more than a vehicle for what were in reality the commercial interests of a single individual, family, consortium etc. LGT was and is a real trading company of some substance. Although Sattler Nominees was the majority shareholder, the interests of the other shareholders were substantial, albeit to varying degrees. In the most traditional of senses, LGT was the corporate expression of investments made by a number of individuals and entities to pursue a common enterprise in which they all had faith, and in relation to which they all took risks. 46 Secondly, and relatedly, I accept the submission made on behalf of Wood and Hetrel that the proceeding was genuinely brought by them in the interests of LGT rather than in their own interests. I was pressed by the other parties to view the proceedings of the Board on 7 April 2009 (see paras 421-426 of my reasons of 26 June 2012), the seeking of legal advice and the withholding of that advice, when received, from Sattler as bespeaking a personal agenda on the part of Wood and Hetrel, one in which they, rather than LGT, were the protagonists in the evolving dispute with Sattler. However, the concerns which Wood and Hetrel always had related to their emerging perception - confirmed, to an extent, when they received the legal advice - that Sattler had defaulted on his obligations as director and fiduciary. Wood and Hetrel were, I consider, genuinely aggrieved that the company to which they had committed both money and time was being sidelined by its own director and CEO. This was, therefore, far from a case in which individuals given leave under s 237 were merely seeking to use their company to agitate personal grievances. 47 For those two reasons, this is not a case in which I might follow the example of Austin J and deal LGT out of the costs equation. 48 Thirdly, however, I must take as my starting point the principle that the purpose of a costs order inter partes after the conclusion of litigation is to relieve one party of the burden, or part of the burden, of the costs of conducting a case in which his or her position has been upheld. To the extent that the nominal beneficiary of such an order holds shares in the company required to pay the costs, the achievement of that purpose will necessarily, albeit indirectly, be compromised. On the facts of the present case, Sattler (and here I should be understood as referring indiscriminately to him and to Sattler Nominees), the beneficiary of the 85% costs order which I propose to make, owns about 57% of LGT. For LGT to be ordered to pay those costs would, as to 57%, be for Sattler himself to pay them. He would, therefore, and to that extent, not be getting his costs at all. It scarcely needs to be said that Sattler would, with some justification, regard this as an unjust disposition of the costs issues which arise on the conclusion of a case in which he has been substantially successful. 49 Fourthly, I consider that it is appropriate to take into account the matters discussed at paras 32-35 above, particularly my observation that the non-Sattler shareholders in LGT were the ones who most obviously stood to gain from LGT's rectification claim in the main proceeding. I adhere to what I said in the final sentence of para 46 above, but there were respects in which, from the outset, it ought to have been tolerably clear to them that LGT would derive no practical benefit from the success of that claim, while they and the other shareholders would. 50 Fifthly, it is relevant to consider the terms of the legal advice which Wood and Hetrel received. Counsel for Sattler, Sattler Nominees and LGT now submit that, in certain respects at least, Wood and Hetrel ought not, consistently with that advice, have made all the claims which they caused LGT to make in that proceeding. I have referred to one aspect of that advice - that relating to the accommodation commission arrangement - above. Additionally, Wood and Hetrel were advised - (a) that Sattler's taking up of the $900,000 loan from the State government without informing LGT that the terms of the loan differed favourably from those which had been offered to LGT itself was a breach of his fiduciary duty, and that it was arguable that Sattler held the shares acquired with the proceeds of the loan (ie the shares in LGT itself) on trust for LGT; (b) that there was a good argument that the same conclusion should be reached in respect of the $500,000 loan from Keiser; (c) that the (then intended) construction of a wellness centre on Lost Farm was a breach of Sattler's fiduciary duty to LGT, and would ground an application for an injunction to restrain Sattler from building the centre there; but it would not be open to LGT to "sit back", to allow Sattler to build the centre, and then to claim the profits generated by it. 51 With respect to Lost Farm, LGT was advised as follows: On balance it is our view that the fact of establishing the Lost Farm is not, per se, a diversion of a business opportunity of Links as there is no sufficient temporal cause or connection to Sattler's fiduciary duties. The opportunity to establish the Lost Farm did not become available to Sattler by reason of his position as a director of Links, although it may be said to exist by reason of the existence of the Barnbougle course. The situation may well have been different if Sattler was not also the owner of this land so that Links would have had an opportunity to negotiate with an independent third party. Notwithstanding the comments made above, it would not be an inappropriate claim to make. The final observation does seem, as counsel for the Sattler interests submitted, to be somewhat optimistic in the light of the remainder of this paragraph. However that may be, LGT was also advised that, because of a conflict of interest, Sattler could not remain as director and CEO of LGT "while constructing or proposing to construct a competing course". 52 It was also said in the advice that, in a number of respects, Sattler had used the resources, information and staff of LGT in the development of Lost Farm, and that that too was a breach of his fiduciary duty (and of ss 182 and 183 of the Corporations Act). LGT was advised that there was "an argument" that, when Sattler obtained the $4.5m loan from the State government, he appropriated LGT's opportunity to obtain similar funding itself in that it was a condition of the loan that no further financial assistance would be provided for any Barnbougle project. The advice continued: The appropriate remedy for the breaches identified above is that Sattler would be required to account to Links for any profits that he derives by reason of the breaches. This is unlikely to be all profits derived by him or his personal interests in the operation of the Lost Farm as it appears that this will ultimately be constructed with the benefit of other resources. We also note that it is not apparent to us whether the infrastructure grant that he applied for was given to him. There is, however, in our view a good argument that a large percentage of the gross profits derived by Sattler from running the Lost Farm, for a period of time, would be required to be held on account for Links. In this regard we note that Sattler's application for an infrastructure grant suggested that, if provided, course construction would be brought forward by a number of years. Although the infrastructure grant (see para 4 of my reasons of 26 June 2012) was mentioned in passing in this passage, LGT was, it seems (at least in this document) furnished with no advice that Sattler should be sued in relation to it. 53 Wood and Hetrel, who were both cross-examined on the present applications, insisted that they had received advice in addition to, and more recently than, that of 9 April 2009. However, no such advice was tendered or, to the extent that it might have been oral, the subject of evidence otherwise. Indeed, counsel for Wood and Hetrel made it clear that a claim for privilege was maintained in relation to the advice which was tendered to them from time to time, whatever it may have been. Whether LGT, through the agency of its Board, was entitled to be privy to that advice is a nice question, given the position of Wood and Hetrel as entitled to represent LGT for the prosecution of the main proceeding. However it should be answered, the fact is that the Board, despite its requests, was not given access to such advice as Wood and Hetrel may have been receiving as to their prospects in the case. And the position remains that the only advice to which the court has been exposed is that of 9 April 2009. 54 That advice provided no reasonable basis for proceeding against Sattler in relation to the infrastructure grant or the accommodation commission. Further, the assertion, maintained on behalf of LGT to the end, that the development of Lost Farm as a golf course was an opportunity that came to Sattler as a result of his fiduciary positions in LGT was not a reflection of the advice which LGT received in June 2009. The suggestion, contained in the advice, that "it would not be an inappropriate claim to make" was, with respect, a reference to a consideration of convenience that a litigant taking his or her own risks might place on the scales. In my respectful view, however, litigants proceeding by leave given under s 237 should take a more conservative approach, in the knowledge that, if a particular claim proves unsuccessful, the nominal plaintiff (the company concerned) will be the one at risk of suffering an adverse costs order. 55 Having regard to the considerations to which I have referred, I think that justice would be done if Wood and Hetrel contributed one half of the costs which LGT will be obliged to pay to Sattler and Sattler Nominees as a result of the substantial measure of success which the latter achieved in the main proceeding. 56 That leaves the question whether that liability of Wood and Hetrel should be in substitution for, or jointly and severally with, the liability of LGT itself. That is to say, should I relieve LGT of liability to pay the half of the costs that will be the responsibility of Wood and Hetrel? Sattler and Sattler Nominees submit not, for four reasons. LGT has joined issue at that level, and it is by reference to the force of the parties' argument around those four reasons that I should resolve the present question. 57 The first reason is that the liability of LGT for 85% of the costs of Sattler and Sattler Nominees was determined on 16 July 2012, on which occasion LGT was represented. No suggestion was then made that LGT should be relieved of that liability, and it is now too late for LGT to raise the subject. That submission is wrong in point of fact. By interlocutory application made on 12 July 2012 in the s 237 proceeding, LGT sought an order requiring Wood and Hetrel to pay any costs which it might be ordered to pay to Sattler and Sattler Nominees in the main proceeding. That application was listed for directions on 16 July 2012. Although not formally given leave to intervene in the main proceeding, counsel for LGT in the s 237 proceeding made submissions, without objection, which were referable to the architecture of any costs order which I would make in favour of Sattler and Sattler Nominees in the main proceeding. They submitted that I should not make any such order until I had considered their interlocutory application. In the result, I did not make any costs order on 16 July 2012. I take the view that LGT squarely placed on the table, on that day, the position for which it now contends. Thus I do not accept Sattler and Sattler Nominees' first reason why LGT should be jointly and severally liable for costs with Wood and Hetrel. 58 The second reason relates to LGT's submission that exposure to a costs liability in favour of Sattler and Sattler Nominees would pose a serious threat to its solvency, and most probably result in its being placed into administration. It was said on behalf of Sattler and Sattler Nominees that this submission was contrary to principle, in that impecuniosity was not a basis for avoiding an adverse costs order. LGT's response to this was to submit that the principle referred to was inapplicable under s 242 of the Corporations Act, which was "primarily concerned to protect the company's financial resources". The only authority for that latter proposition, however, given by LGT was a submission made by Sattler and Sattler Nominees themselves in the costs contest with Wood and Hetrel. I do not accept that the primary purpose of s 242 is to protect the financial resources of the company concerned. It provides for the exercise of a discretion which admits of weight being given to the interests of all of the parties, and non-parties, involved in the proceeding commenced pursuant to a s 237 order. LGT's submission amounts to a request that the court should turn its back on the conventional entitlement of a successful party to his or her costs. It should be recalled that Sattler and Sattler Nominees were the defendants to the main proceeding: it was not they who proposed that LGT's name should be used by Wood and Hetrel. For them, this was litigation which they were required to defend, and they did so with substantial success. I am not persuaded that the present circumstances should be the occasion for a departure from the general principle that impecuniosity is not a legitimate answer to a claim for costs on the conventional basis. 59 The third reason is that LGT's proposal to be excused from liability for party/party costs to the extent that such liability is imposed on Wood and Hetrel would be "contrary to practice". Here Sattler and Sattler Nominees referred to a number of decided cases in which, when an obligation to pay costs had been imposed on a non-party, that obligation stood alongside, rather than in substitution for, the conventional obligation of the unsuccessful party to pay the successful party's costs. In response, LGT submitted that Sattler and Sattler Nominees had overlooked the jurisprudence under s 242. It referred to a number of decisions under that section in relation to closely-held companies in which the costs obligations had been imposed upon "the true protagonists", namely, in the context of the present case, Sattler and Sattler Nominees of the one part and Wood and Hetrel of the other. The difficulty with this submission on the part of LGT, however, is that I would not so identify the "true protagonists" in the present case. I refer to what I said at paras 45-46 above. Wood and Hetrel were protagonists only to the extent that they sought to protect the interests of their company. LGT was, in my view, the "true protagonist" as against Sattler and Sattler Nominees. In my reasons above, I have held that, as to one half, Wood and Hetrel should share LGT's liability for costs, but that did not involve the proposition that they, rather than LGT, were the "true protagonists". But that does not mean that I accept the force of Sattler's and Sattler Nominees' third reason. Indeed, I do not. I am not persuaded that there is any entrenched "practice" on the subject, to the extent that a departure from it without good reason would amount to error. The cases to which Sattler and Sattler Nominees referred were no more than instances of costs orders in particular terms, each explicable by reference to the facts of the individual case and the judgment of the court. The discretion for which s 242(c) of the Corporations Act provides is not confined by some established "practice". 60 The fourth reason was that LGT was not entirely absolved of responsibility for the litigation, since it originally consented to the making of an order under s 237 pursuant to which the main proceeding was commenced. Further, it was LGT, not merely Wood and Hetrel, which, in some respects at least, stood to gain from the success of that proceeding. LGT's response to this was to point to the inconsistency between the submission of Sattler and Sattler Nominees and what they had said in the s 237 proceeding in support of LGT's application to have Wood and Hetrel bear the whole of their own solicitor/client costs, namely, that LGT's attitude on the making of the s 237 order was not a relevant consideration. As I view the matter, LGT's then attitude was a relevant consideration, and I have taken it into account in my treatment of the solicitor/client costs question above. I also think that the matters that govern the disposition of that question are not on all fours with the matters that should govern the disposition of the question with which I am presently grappling. That having been said, I am not persuaded that the fourth reason of Sattler and Sattler Nominees should be accepted as a reason not to make an order of the kind that LGT now seeks. That the directors should then have raised no opposition to Wood and Hetrel using LGT's name to proceed against Sattler and Sattler Nominees should not, in my view, inhibit LGT from now submitting, in the light of the outcome of the case, that, in the court's discretion, the moving parties, rather than LGT itself, should pay the costs of the successful parties. 61 As appears from the foregoing, only with respect to the second reason am I disposed to see some force in the arguments advanced on behalf of Sattler and Sattler Nominees. But that does not mean that they, having been substantially successful in the main proceeding, should be denied their conventional entitlement to one half of their costs from the unsuccessful party; or, to put it another way, whether they should be out of pocket for that half of their costs if it should eventuate that Wood and Hetrel are unable to pay. I am not persuaded that they should. The conclusion I have reached is that Wood and Hetrel should contribute one half of the costs of Sattler and Sattler Nominees, but not in a way that would strip the latter of their conventional entitlement as against LGT. 62 That leaves the question of how my costs order against Wood and Hetrel should be expressed. For me to adopt the primary course for which Sattler and Sattler Nominees contended - ie to make Wood and Hetrel jointly and severally liable, with LGT, for the costs - would expose LGT to a claim for contribution at the instance of Wood and Hetrel in an action against them by Sattler and Sattler Nominees. If successful (and I cannot see how it would not be), such a claim would leave Wood and Hetrel paying one quarter of the costs, and LGT paying three quarters. That is not what I intend. The better course is to follow the alternative course suggested by counsel for LGT, namely, to require Wood and Hetrel to indemnify LGT for one half of the costs which it will be obliged to pay to Sattler and Sattler Nominees. That is the course which I propose to follow.

Links Golf Tasmania Pty Ltd v Sattler

At a glance

Court

Decision date

Before

Source

Judgment (29 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (5)

Cited By (1)