Newlinx Pty Ltd & Anor v Domain Gray Pty Ltd & Ors [2018] QSC 256

A C Barlow for the first, second and third defendants/applicants

L M Copley for the respondents Nathan Franklin and Daniel Simic

Edwards Kirby Lawyers for the first and second plaintiffs

Hunter Solicitors for the first, second and third defendants/applicants

Edwards Kirby Lawyers for the respondents Nathan Franklin and Daniel Simic

[1] On 16 September 2016, Peter Lyons J ordered summary judgment for the first, second and third defendants ("the defendants") against the plaintiffs in the claim and counterclaim, dismissed the plaintiffs' claim against the fourth defendant, dismissed the fourth defendant's counterclaim against the second plaintiff, and ordered that the plaintiffs pay the defendants' costs of the application and the action to be assessed on the standard basis.

[2] This matter arises out of an application by the defendants that the three respondents, who were not parties to the substantive proceeding in this court, pay the costs the subject of the order made by Peter Lyons J.

[3] The three respondents are:

1. Gavin Moss, the liquidator of the second plaintiff, Bargara Property Developments Pty Ltd (in liquidation) ("Bargara PD");
2. Nathan David Franklin, a current director and shareholder of the first plaintiff, Newlinx Pty Ltd ("Newlinx"); and
3. Daniel Matthew Simic, a director and shareholder of Newlinx until 25 August 2016.

[4] In December 2006, the defendants contracted to buy two units being developed at Bargara by the second plaintiff, Bargara PD. The defendants did not complete the contract and the properties were sold to other purchasers at a much reduced value, reflecting a loss of $950,000.00.

[5] On 10 April 2012, Mr Moss and Nick Combis were appointed as liquidators of Bargara PD at a meeting of the members. Prior to being placed into liquidation, Bargara PD was a developer that was developing a block of units situated at Bargara, a small seaside town near Bundaberg.

[6] On 5 July 2013, Domain Gray Pty Ltd ("Domain Gray") commenced proceeding number M1412/13 in the Magistrates Court of Queensland against Bargara PD and Plastiras Lawyers ("the Magistrates Court proceeding", also referred to as "the first proceeding"). This proceeding involved an application by Domain Gray for declarations that the contracts for the sale of land had been terminated pursuant to the Property Agents and Motor Dealers Act 2000 (Qld) ("PAMDA") and that Domain Gray were entitled to the return of the contract deposit held by Plastiras Lawyers.

[7] In or around July 2013, the liquidators engaged a solicitor, Mr Edwards, to act on behalf of Bargara PD in relation to the Magistrates Court proceeding.

[8] On 10 November 2014, Newlinx took an assignment of a damages claim by Bargara PD against the defendants. Following that assignment, on 13 November 2014, Newlinx filed proceedings in the Supreme Court of New South Wales seeking damages against Domain Gray ("the New South Wales proceeding", also referred to as "the second proceeding").

[9] On 11 February 2015, the Magistrates Court proceeding was transferred from the Magistrates Court to the District Court of Queensland. The New South Wales proceeding was then transferred to this Court and consolidated with the Magistrates Court proceeding by order of Philip McMurdo J (as his Honour then was) on 3 November 2015.

[10] On 16 September 2016, Peter Lyons J ordered summary judgment for the defendants.

[11] On 5 October 2017, the defendants applied for an order that the respondents pay the costs the subject of the order of Peter Lyons J. The hearing of this application was then adjourned to 19 July 2018.

[12] Rule 681(1) of the Uniform Civil Procedure Rules 1999 (Qld) provides that costs of a proceeding, including an application in a proceeding, are in the discretion of the Court, but follow the event unless the Court orders otherwise.

[13] Costs orders may, in appropriate circumstances, be made against non-parties.[1] The making of a costs order against a non-party is, however, "an exceptional course for a court to take."[2]

[14] In Knight v FP Special Assets Ltd, Mason CJ and Deane J held:

"Obviously, the prima facie general principle is that an order for costs is only made against a party to the litigation ... there are, however, a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party. Thus, for example, there are several long-established categories of case in which equity recognized that it may be appropriate for such an order to be made.

For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made."[3]

[15] In this court, Mackenzie J held in Commissioner of Stamp Duties v Westleigh Management Services Pty Ltd:

"The principle underlying awarding costs against a non-party is that where the non-party is the real party to the litigation costs may be awarded. The notion is that the non-party is effectively a litigant standing behind the actual party. Abuse of process in the broad sense by a non-party is another category where an order may be appropriate, although because there is a wide discretionary element in awarding costs it is probably unhelpful to try to create closed categories of cases where the power may be exercised against the third party."[4]

[16] The application against Mr Moss is on the basis that he was the liquidator of Bargara PD and that at all material times he was "interested in the outcome of the litigation, pursuant to a Deed of Assignment between the first and second plaintiffs, executed on 10 November 2014."[5]

[17] Mr Moss has deposed to his involvement in the proceedings, including relevantly:

"(f) I am not a party to this [consolidated] proceeding and was not a party to the first or second proceedings either;

(g) I did not fund any of the proceedings. The Company's funding in respect of the proceedings was limited to the sum of $2,000 to secure an appearance by counsel;

(h) I did not control or provide instructions or guidance in relation to the second proceeding described above;

(i) in the course of the proceedings, to the extent that the Company was a party to the proceedings, and in my capacity as liquidator of the Company, I:

(i) was guided by my responsibilities as liquidator of the Company and followed legal advice provided by a solicitor and by counsel;

(iv) did not stand to benefit from the proceedings, other than potentially through the application of funds (if any) realised by the Company to the liquidators' remuneration in accordance with the statutory priority under section 556 of the Corporations Act 2001 and following the approval of the Company's creditors;

(j) the Company is insolvent and has no remaining assets;

(k) in performing their duties in the liquidation of the Company, the liquidators have experienced a shortfall of over $110,000 in respect of their remuneration and disbursements, notwithstanding the approval of their remuneration by the Company's creditors;

(i) am incurring liabilities for the legal fees associated with my defence of the Non-Party Costs Order Application; and

(ii) stand to suffer significant financial detriment if the orders sought by the Non-Party Costs Order Application are made against me,

in circumstances where the Company's insolvent estate has no assets from which I, in my capacity as liquidator, might otherwise be indemnified in the usual way;

(m) the Applicants did not notify me of their intention to seek a non-party costs order against me at any stage in the proceedings prior to service of their Non- Party Costs Order Application; and

(n) the Applicants did not make any timely application for security for costs against the Company or the first plaintiff in the proceedings."[6]

[18] Mr Moss has also deposed that "[he] did not provide any instructions, guidance or funding for the [New South Wales proceeding], and nor did the Company."[7]

[19] Mr Moss has deposed to the legal advice which Bargara PD received during this time, including:

1. By an email dated 11 July 2013, Mr Edwards informed him that "Bargara has strong prospects of defending this claim;"[8]
2. By an email dated 3 February 2015, Mr Edwards informed him that Mr Copley of counsel had advised Mr Edwards that the claim was "relatively strong";[9]
3. By an email dated 25 February 2015, Mr Edwards informed him that:

"I am advised by Mr Copley that Mr Russell called him yesterday and he is coming in to meet him on 4 March 2015 (next week) and provide a statement. My view is that this is a good sign, as he could have been entirely unco-operative, but is prepared to assist. Assuming he confirms in evidence that the provisions with PAMDA were complied with, this coupled with the signed acknowledgements put us in a very strong position."

"So hopefully when Mr Copley meets with Brian Russell next week, the evidence will all stack up. Even if they still will not settle, we will proceed with the case and we will be in a relatively strong position."[10]

1. However, by an email dated 27 September 2016, Mr Edwards informed him that:

"The above case and all of the evidence was always focussed on the director not complying with these obligations when he met with the purchasers to sign the contracts. Domain Gray served affidavits years ago focusing on this point. We then obtained an affidavit from the director disputing this issue. The summary judgment application related to the notification being required after the signing of the contract, which was only brought up this year (the proceedings have been on foot for many years) when they filed their Defence and Cross Claim. Basically what they allege is that Bargara's lawyers didn't comply with their obligations and provide the correct notification. In preparing to oppose the summary judgment application myself and our barrister carefully reviewed the evidence and realised that our case had an issue. The 2 letters sent from the former lawyers back in 2007 were non compliant with PAMDA. I have attached copies of those letters dated 4 January 2007 which brings to the purchasers solicitors attention 2 of the 3 documents, being the disclosure statement and the warning statement, but does not reference the information sheet, which is a breach of the PAMDA provisions."[11]

[20] Mr Moss deposes that neither he nor Bargara PD were informed of the above issue with the case prior to the hearing of the summary judgment application.[12]

[21] Bargara PD did become insolvent but Bargara PD was not the "moving party"[13] to the litigation, having previously assigned its damages claim to Newlinx. Furthermore, given the above evidence deposed to in Mr Moss's affidavit, it is not accurate to say either that Mr Moss "has played an active part in the conduct of the litigation" or that Mr Moss "ha[d] an interest in the subject of the litigation."

[22] On balance, the interests of justice do not favour Mr Moss being ordered to pay the costs of the matter, particularly given the exceptional nature of such an order.

[23] The application against Mr Moss is dismissed.

[24] The application against Mr Franklin and Mr Simic is on the basis that as current or former directors and shareholders of Newlinx they had control of Newlinx at the relevant times and that they stood to gain if Newlinx was successful.[14]

[25] In Arawak Holdings Pty Ltd v King Tide Company,[15] Morrison JA held:

"In both Rushton (Qld) Pty Ltd v Rushton (NSW) and in Gdanski v Palms Court Management Pty Ltd it was held that the mere fact that a person is a director or shareholder of an unsuccessful litigant corporation, without more, was not to justify a costs order against them. As was said in Rushton, the simple act of control of a corporate litigant by a director is an unremarkable occurrence. Further, as was said in Gdanski, where the conduct of the director does not extend beyond what would have been expected of him in his capacity as director and shareholder, or solicitor, that does not justify a non-party costs order. A significant factor in Gdanski was that Mr Gdanski did not have any personal interest in the outcome of the litigation of any kind."[16]

[26] In Arawak Holdings Pty Ltd v King Tide Company, a costs order was made against Mr Hartnett, the director of King Tide, personally as the trial judge found that he fell within the category described in Knight v FP Special Assets Ltd:

"That is, he played an active part in the conduct of the litigation, he was the sole director of King Tide, he was a director of the firm of solicitors that acted for King Tide for much of the litigation, he was the author of much of the correspondence by King Tide, he had an interest in the subject of the litigation as a beneficiary under the relevant trust, and had admitted he was the sole person "behind" King Tide."[17]

[27] Counsel for Mr Franklin and Mr Simic also relied on the cases of Vestris v Cashman[18] and Yates v Boland[19] for the proposition that a relevant factor is whether Mr Franklin and Mr Simic were given prior notice of the claim for non-party costs.

[28] In Yates v Boland, it was noted that:

"The necessity to warn a non-party of an intention to claim costs is not a principle applicable in every case in which costs are sought against a non-party. Rather it may be a material consideration depending on the situation disclosed in the case under consideration."[20]

[29] Here, the applicants were on notice of the financial position of Bargara PD and Newlinx from the beginning as Bargara PD was in liquidation and an ASIC search of Newlinx revealed that Newlinx had paid up capital of only $100.[21] However, the applicants did not put any of the parties on notice of their intention to claim costs against the non-parties at any time (and did not ask that security for their costs be provided until 8 August 2016) five weeks before judgment was sought and entered.

[30] Another relevant feature is whether a party was advancing allegations of fraud or misconduct which it knew to be untrue or did not have evidence to support.[22] Here, there is no suggestion that such allegations were made in this case.

[31] Similarly, it was argued by counsel for Mr Franklin and Mr Simic that Mr Simic had no personal interest in the outcome of the litigation after 25 August 2016 as he was longer a director or shareholder of Newlinx.[23]

[32] In Gdanski v Palm Courts Management Pty Ltd, the party against which the non-party costs order was sought was Mr Gdanski, the relevant company's solicitor, a director and (through an associated entity) a shareholder of the company.[24] At trial, the trial judge ordered that Mr Gdanski pay the company's costs but this was overturned on appeal. The Victorian Court of Appeal noted that "Mr Gdanski's active role in the litigation was entirely consistent with his fiduciary duties as respectively, director of and solicitor to the company."[25]

[33] The Court held:

"Mr Gdanski did have an interest in the company's success in the litigation, both as shareholder and because he had an interest in entities which were secured creditors of the company. But there was nothing in the circumstances of the case to suggest that any of those interests was sufficient to bring him within the Knight category."[26]

[34] Here, Mr Franklin and Mr Simic had similar interests to Mr Gdanski as at relevant times, both were directors and shareholders of the company. However, unlike Mr Gdanski, they did not also act as solicitors to the company (and therefore earn the associated professional fees, as Mr Gdanski did) nor did they have interests in entities which were secured creditors to the company. They therefore both took a less active role in the litigation and had less of an interest in the litigation. The interests of justice therefore do not support their being ordered to pay costs.

[35] The applications for non-party costs against Mr Franklin and Mr Simic are dismissed.

[36] I order that:

1. The first, second and third defendants/applicants pay the costs of and incidental to the application of the respondent Gavin Moss on the standard basis until 20 March 2018 and thereafter on the indemnity basis.
2. The first, second and third defendants/applicants pay the costs of and incidental to the application of the respondents Nathan Franklin and Daniel Simic on the standard basis.

[1] Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 190; Commissioner of Stamp Duties v Westleigh Management Services Pty Ltd [2001] QSC 176 at [18]- [19] per Mackenzie J.

[2] Gdanski v Palms Court Management Pty Ltd [2017] VSCA 348 at [1].

[3] Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 192-193 (Mason CJ and Deane J) (internal citations omitted).

[4] Commissioner of Stamp Duties v Westleigh Management Services Pty Ltd [2001] QSC 176 at [20].

[5] Application filed 5 October 2017 (CFI #33).

[6] Affidavit of Gavin Moss filed 1 June 2018 at [8] (CFI #50).

[7] Affidavit of Gavin Moss filed 1 June 2018 at [37] (CFI #50).

[8] Affidavit of Gavin Moss filed 1 June 2018 at [19] (CFI #50).

[9] Affidavit of Gavin Moss filed 1 June 2018 at [38] (CFI #50).

[10] Affidavit of Gavin Moss filed 1 June 2018 at [40] (CFI #50).

[11] Affidavit of Gavin Moss filed 1 June 2018 at [60] (CFI #50).

[12] Affidavit of Gavin Moss filed 1 June 2018 at [61] (CFI #50).

[13] FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 at [210].

[14] Outline of Submissions of the Applicants filed 11 July 2018 at [24] (CFI #55).

[15] [2018] QCA 148.

[16] [2018] QCA 148 at [32] (Morrison JA (internal citations omitted). A special leave application was filed against this judgment but it was refused: King Tide Company Pty Ltd (ACN 602 611 423) v Arawak Holdings Pty Ltd (ACN 157 865 195) [2018] HCATrans 188.

[17] Arawak Holdings Pty Ltd v King Tide Company [2018] QCA 148 at [28].

[18] [1998] SASC 6852.

[19] [2000] FCA 1895.

[20] [2000] FCA 1895 at [34].

[21] Outline of Submissions for Nathan Franklin and Daniel Simic filed 18 July 2018 at [20] (CFI #57).

[22] Naomi Marble and Granite Pty Ltd v FAI General Insurance [1998] QSC 18; [1999] 1 Qd R 518; The Beach Retreat Pty Ltd v Mooloolaba Marina Ltd [2009] Qd R 356.

[23] Outline of Submissions for Nathan Franklin and Daniel Simic filed 18 July 2018 at [26] (CFI #57).

[24] Gdanski v Palms Court Management Pty Ltd [2017] VSCA 348 at [2].

[25] [2017] VSCA 348 at [6].

[26] [2017] VSCA 348 at [7].