Maher v Honeysett and Maher Electrical Contractors Pty Ltd

LEGISLATION CITED : Corporations Act 2001 (Cth), Part 2F.1, s 237

CASES CITED : FWV Stanke Holdings Pty Ltd v O'Meara [2007] SASC 413 Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859

David Maher - Plaintiff PARTIES : Honeysett and Maher Electrical Contractors Pty Ltd - First Defendant Mark William Honeysett - Second Defendant

COUNSEL : Mr A J Fernon - Plaintiff Ms S A Sirtes - Defendants

SOLICITORS : Low Doherty & Stratford - Plaintiff Morton & Harris RMB Lawyers - Defendants

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

6055/04 DAVID MAHER v HONEYSETT AND MAHER ELECTRICAL CONTRACTORS PTY LTD & ANOR JUDGMENT 1 By cross-claim in these proceedings, Honeysett & Maher Electrical Contractors Pty Ltd ("HME") sued the plaintiff, Mr Maher, for breach of the duties owed by him to it as a director of the company. The cross-claim was successful and it was ordered that Mr Maher render equitable compensation to HME. It was also ordered that Mr Maher pay the costs of both Mr Honeysett and HME. 2 The cross-claim brought by HME against Mr Maher was by way of derivative proceeding under Part 2F.1 of the Corporations Act 2001 (Cth). HME was actuated, in that respect, by Mr Honeysett. He and Mr Maher are equal shareholders in, and the only directors of, HME. Mr Honeysett sued on behalf of HME pursuant to leave granted under s 237 of the Corporations Act. 3 In the light of the outcome of the cross-claim, a question has arisen in relation to the following order made on 25 August 2005 in conjunction with the order granting Mr Honeysett leave under s 237 (see Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859): "Upon the second defendant Mark William Honeysett undertaking to the Court that he will pay and bear and indemnify Honeysett & Maher Electrical Contractors Pty Ltd ACN 064143684 against all costs, charges and expenses of and incidental to the bringing and continuation of the proceedings brought by him pursuant to Order 1 below, except insofar as the Court may in future otherwise direct or allow, I make the following orders -

1. Grant leave pursuant to Corporations Law s 237, nunc pro tunc to 21 February 2005, to the second defendant Mark William Honeysett to bring proceedings on behalf of Honeysett & Maher Electrical Contractors Pty Ltd ACN 064143 684 in the form of the cross-claim filed on 22 February 2005.

2. Order that the motion filed on 7 June 2005 be otherwise dismissed.
3. Order that the costs of the motion be the Cross-claimants' costs in the proceedings on the cross claim brought pursuant to Order 1." 4 The question concerns the undertaking given by Mr Honeysett, as a condition of his being allowed to bring the cross-claim for HME, that he indemnify HME against all costs, charges and expenses of and incidental to the bringing and continuation of the proceedings. 5 The costs awarded to HME and Mr Honeysett and against Mr Maher have been assessed in the sum of $205,366.55. The actual outlay for costs, however, was $246,874.78. Mr Honeysett has paid or is liable to pay that sum to his lawyers. Even after such recovery as he is able to obtain from Mr Maher under the costs order, Mr Honeysett will be out of pocket. Assuming that he makes recovery in full from Mr Maher, he will be out of pocket to the extent of $45,972.23. 6 In the absence of a further order of the court, the burden of this shortfall will continue to be borne by Mr Honeysett; and this will be so even though the cross-claim brought by him on behalf of HME resulted in the recovery of equitable compensation by HME. 7 Ordinarily, one would be inclined to think that, if the grantee of leave to sue on behalf of the company succeeds in bringing about a monetary award in favour of the company, any residual cost to the grantee of producing that result should be met by the company. The problem in this case is that the monetary award was small. It was only $28,500. 8 The situation is thus one in which, if no further order is made, Mr Honeysett, having spent or become liable for $246,874.78 by way of costs for the benefit of HME, will bear $45,972.23 of the costs burden (even if full recovery is made under the costs order against Mr Maher) and HME - a company owned equally by Mr Honeysett and Mr Maher - will enjoy the equitable compensation of $28,500,500 without having spent any money of its own to achieve that benefit. 9 Orders of the kind made in this case on 25 August 2005 have become commonplace when leave is granted under s 237 permitting a shareholder to sue on behalf of a company. The rationale for making such orders at that point was described by White J (with whom Doyle CJ and Anderson J agreed) in FWV Stanke Holdings Pty Ltd v O'Meara [2007] SASC 413. In that case, the order made at first instance on the grant of leave under s 237 was simply that Mrs O'Meara, the person granted leave to bring proceedings on behalf of the company (FWV), should be reimbursed for costs from the proceeds of any costs orders made in favour of FWV. White J's observations (at [126] to [132]) about submissions made on appeal about that aspect are instructive for present purposes:

"[126] Mrs O'Meara submitted that this order is unfair because, if FWV is successful in the contribution proceedings, she will be required personally to fund the difference between the party/party costs recovered and the actual costs incurred. Mrs O'Meara submitted that the judge should instead have made an order entitling her to a full costs indemnity in the event that FWV's contribution proceedings succeed.

[127] In my opinion, the judge was correct to reject at this stage Mrs O'Meara's claim to a full costs indemnity. It would have been inappropriate for the judge to have ordered, in advance of Mrs O'Meara's actual conduct of FWV's proceedings, that she should have such an indemnity.

[128] Mrs O'Meara submitted, in the alternative, that the possibility of an order for a full costs indemnity should have been left open. It was submitted that, depending on the outcome of the contribution proceedings by FWV and the manner of Mrs O'Meara's conduct of them, such an order may be appropriate. Such a possibility should not be foreclosed at this early stage. This was the course adopted by Barrett J in Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 211 ALR 457 at 469.

[129] The judge did not provide any separate reasons for the form of the order concerning Mrs O'Meara's entitlement to reimbursement of the costs. The judge's orders did include a grant of liberty to both Mrs O'Meara and FWV to apply, but no party on appeal suggested that that liberty could be exercised in due course to seek an order for indemnity costs.

[130] . . . I am satisfied that the judge's decision involved error. While it is understandable that the judge desired that the orders provide certainty to the parties, I respectfully consider that it is not possible to make an appropriate judgment at this stage about Mrs O'Meara's entitlement to reimbursement of costs. The outcome of Mrs O'Meara's intervention and the manner of her pursuit of proceedings for FWV cannot presently be known. One result may be that the contribution proceedings, pursued with economy and efficiency, will produce a substantial financial benefit for FWV. In that event, it may be unjust for Mrs O'Meara not to recover a full costs indemnity. Otherwise she personally will have expended the monies to produce a benefit shared by all shareholders of FWV. In that circumstance it would be appropriate that John and the estates should, through their shareholdings in FWV, contribute to the costs incurred by Mrs O'Meara.

[131] The converse is that FWV may succeed, but only modestly, after extensive expenditure of costs resulting from the manner of conduct of the proceedings by Mrs O'Meara. Different considerations could then apply. There may of course be a variety of other outcomes between these two extremes.

[132] In these circumstances, an order of the kind proposed by Barrett J in Carpenter is appropriate, ie, permitting Mrs O'Meara to apply to the Court for an indemnity in respect of her costs once the outcome of the contribution proceedings, and the costs incurred in obtaining that outcome, are known. This will enable an appropriate assessment to be made when all the circumstances are known." 10 Although, as I have said, orders of the kind thus described are commonly made when leave is granted under s 237, counsel have not been able to refer me to any case in which it has been necessary for the court to consider the possibility of full or partial dispensation from an order or undertaking of the kind to which Mr Honeysett was subjected as a condition of the grant of s 237 leave (see paragraph [4] above). 11 In the present case, the outcome of the derivative action was as described by White J at paragraph [131] quoted above. There has been extensive expenditure on costs resulting from the conduct of the proceedings by Mr Honeysett for the benefit of HME, but HME's success has been only modest. The task of the court is therefore to make "an appropriate assessment" now that "all the circumstances are known". 12 The circumstances now known in this case are, in essence, that Mr Honeysett has achieved for HME an award of equitable compensation against Mr Maher in the sum of $28,500, but has done so in such a way that HME must pay its lawyers $45,972.23 which, as things stand, cannot be recovered by HME otherwise than from Mr Honeysett himself pursuant to the undertaking given by him as a condition of being allowed to sue on behalf of HME. In those circumstances, one of at least three assessments might be considered appropriate regarding the ultimate financial burden: (a) that Mr Honeysett continue to be subject to an obligation to protect HME against the liability of $45,972.23; (b) that Mr Honeysett be released from that obligation so that HME itself must pay the $45,972.23; and (c) that Mr Honeysett be released to the extent of $28,500, so that HME neither enjoys the benefit of the $28,500 recovered nor makes any payment from its resources as they would have been had the litigation never arisen, while Mr Honeysett remains liable for the balance of $45,972.23. 13 Counsel on both sides stressed that HME should be regarded as the embodiment of the interests of its two shareholders. Any financial burden imposed on HME affects Mr Honeysett and Mr Maher equally and any financial benefit accruing to it is enjoyed by Mr Honeysett and Mr Maher equally. In the particular circumstances of this case - where there are equal shareholdings and the company has ceased operations and is about to be subjected to voluntary winding up - I accept that this is an appropriate view of matters. It might not, of course, be appropriate in other cases. 14 When the situation is viewed through the eyes of HME itself, compensation of $28,500 has become recoverable at a net cost of $45,972.23, but HME has protection for that $45,972.23 from Mr Honeysett. If HME had been able to set itself in motion to bring the proceedings and had done so, the outcome would have been the same, save that the protection would not have been available and the $28,500 recovery would have come at a cost of $45,972.23 for which HME itself was liable. The litigation would thus be seen, with the benefit of hindsight, to have been an unprofitable exercise for HME. 15 In the circumstances as they actually happened, therefore, Mr Honeysett committed HME to an unprofitable undertaking - and he did so, it must be remembered, on the footing of his promise to protect the company against the very eventuality that caused the unprofitable outcome. 16 If course (a) at paragraph [12] above were adopted, Mr Maher would enjoy, through his 50% interest in HME, a benefit of $14,250 by reason of HME's receipt of the $28,500 equitable compensation from him. Mr Honeysett, on the other hand, would derive a benefit of $14,250 at a cost of $45,972.23. I do not consider that an equitable outcome. 17 If course (b) were adopted, HME would expend the whole of the $28,500 compensation plus $17,472.23 of its separate funds to meet the costs of $45,972.23. Mr Maher, having paid compensation of $28,500, would then suffer the burden of an additional $8,736.116 by way of costs; and this would be in circumstances where the costs concerned were not recoverable from him in the litigation. I do not consider this an equitable outcome. 18 An equitable adjustment, in my view, is one that leaves HME with neither profit nor loss, that is, possibility (c) above. It is not equitable that Mr Maher, through HME, should enjoy a $14,250 benefit when Mr Honeysett's equivalent benefit is offset by the burden of $45,972.23 costs that he cannot recover. Mr Honeysett's costs burden should be reduced by $28,500, by means of a requirement that HME reimburse him to that extent. The position will then be that HME has expended on the derivative action as much as it has recovered, so that its net recovery is zero; that HME will otherwise continue to be indemnified by Mr Honeysett for the $17,472.23 balance of the costs as part of the price Mr Honeysett had to pay for being permitted to expose HME to not only the possibility of success but also the financial uncertainties that litigation entails; and that Mr Maher will not benefit from the equitable compensation paid by him to HME.

19 The order of the court is as follows: Order that Mark William Honeysett be relieved of the undertaking given by him to the court on 25 August 2005 to the extent that he is not required to pay, bear or indemnify Honeysett & Maher Electrical Contractors Pty Ltd against $28,500 of the costs charges and expenses the subject of that undertaking. **********

26/05/2009 - Cross-reference incorrect - Paragraph(s) 16, line 1

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.