Niardone v Clubb

] NSWSC 460 Re Wollongong Coal Ltd [2015] NSWSC 1680 Snedden v Republic of Croatia (No 2) [2009] FCAFC 132 Spacorp Australia Pty Ltd v Fitzgerald [2001] VSC 61 Stewart v Atco Controls Pty Ltd (in liq) (No 2) [2014] HCA 31; (2014) 252 CLR 331 Trustee for The MTGI Trust v Johnston (No 2) [2016] FCAFC 190

COLVIN J: 1 In early 2020, MCL 105 Pty Ltd (MCL) entered into an agreement to provide finance to The Agency Group Australia Limited (The Agency). The concluded agreement was recorded in a document described by the parties, somewhat awkwardly, as the Letter of Offer (Offer). In the result, finance was not provided by MCL to The Agency. A dispute arose as to whether The Agency was bound to pay certain fees to MCL under the terms of the Offer and, if so, the extent of those fees. MCL alleged that The Agency was obliged to pay fees in an amount of about $400,000 plus interest. 2 The Agency is a public company. At the time of entry into the Offer with MCL it was seeking to refinance its borrowings in circumstances where its major debt financier had indicated that it was not willing to renew its provision of finance to the company. When the terms of the Offer were agreed, Mr Mitchell Atkins was a director of The Agency and had been for some time. He and his wife were the parties behind MCL which company formed part of what was described as the Magnolia Capital Group. Therefore, Mr Atkins (and therefore MCL) had a detailed knowledge of the financial circumstances of The Agency. Mr Atkins ceased being a director in May 2020. Later in 2021, The Agency secured new financing arrangements assisted by parties other than MCL and Mr Atkins. 3 Between May 2020 and January 2021, correspondence ensued between the solicitors for the parties. Very early on in that extended exchange of correspondence, solicitors acting for The Agency wrote to solicitors acting for MCL maintaining that the only fee payable was the fee described in the Offer as the Due Diligence Fee (being an amount of $10,000) and that The Agency would not pay that fee until MCL confirmed that no other fees were payable. The solicitors for The Agency also pressed for the registration of relevant statements on the register maintained under the Personal Properties Securities Act 2009 (Cth) (PPS Register) to ensure that the security interest claimed by MCL under the terms of the Offer was brought to an end. 4 By 17 November 2020, the position of The Agency was expressed in the following terms: In the circumstances, MCL is not entitled to maintain the Registrations given that no amount is payable by any of the grantors to MCL and therefore no 'security interest' exists. Further, our clients consider that MCL had no reasonable grounds to believe that it held a security interest at the time each of the Registrations was lodged. It was also unreasonable and excessive to lodge 'all present and after-acquired property' registrations against 27 different entities to secure (at most) $10,000. Alternatively, given the content of this letter, MCL can no longer have reasonable grounds to believe that it holds a security interest. MCL is required, pursuant to s151(3) of the Act, to lodge a financing change statement within 5 business days after the day on which there stopped being reasonable grounds. 5 The reference to the figure of $10,000 was to the amount of the Due Diligence Fee. It can be seen that the position of The Agency by that point was that no fees were due but that 'at most' the Due Diligence Fee of $10,000 was payable. 6 Solicitors for MCL thereafter rejected the demand to correct the PPS Register on the basis that the position of The Agency amounted to concessions that the Offer gave rise to a valid and enforceable security interest and that there was an indebtedness 'for an amount which at a minimum includes the Due Diligence Fee'. It was then noted that MCL maintained that the debt owed by The Agency for fees was much higher and demanded the amount set out in an invoice dated 25 November 2020 which was for $354,471.99. 7 By letter dated 18 January 2021, solicitors for MCL noted that payment had not been made of the amount claimed in the invoice and demanded payment of $379,030.24 (which amount reflected the amounts in the invoice dated 25 November 2020 and additional legal costs and interest) by 5.00 pm that day. The letter then stated: A failure to make payment of the amount set out above by 5:00pm AEST today will cause our client to deem its security interest enforceable and may leave our client with no option but to immediately commence such enforcement against your client including seeking payment of the full amount owed to our client, including damages, without further notice. 8 Later that same day, MCL appointed administrators to The Agency. Notice to that effect was given to The Agency on 19 January 2021. The directors of The Agency sought urgent relief in this Court restraining the administrators from continuing to act. Relief was sought on the basis that the directors had a strong case to the effect that no fees were payable to MCL. The directors deposed to the ability of the company to meet its debts as and when they fell due and a willingness on their part to pay the disputed amount into court pending resolution of the claim by The Agency that the administrators should not have been appointed. 9 On 20 January 2021, orders restraining the administration were made by consent on terms that The Agency pay the sum of $400,000 into Court. However, the making of an order ending the administration was opposed by MCL. In the result, orders were made ending the administration (after an opportunity was given for any other creditors to make submissions): see Niardone v Clubb [2021] FCA 14. No other creditors sought to support the continuation of the administration. 10 In my reasons for making an order that the administration will end, I said at [39]-[45]: Here the reason advanced for making the order that the administration will end is different to that considered by Beech J in Flynn v Theobald. It is to the effect that the appointment of administrators was made on the basis of a security interest which, by reason of the orders made, is now accepted to be a disputed matter. Further, an amount that exceeds the extent of the claimed security interest is to be paid into Court and the dispute is to be resolved expeditiously. In those circumstances, it is difficult to see how the continuation of the administration (albeit the subject of the restraint imposed by the consent orders) will advance the purpose of Part 5.3A. On all the evidence, the issue that has led to the administration is the disputed security interest. The evidence as to the circumstances surrounding that dispute do not indicate any concern as to solvency on the part of The Agency. Whatever difficulties may have been faced by The Agency in securing a refinancing those difficulties no longer pertain because, on the evidence, refinancing has been secured. The claim made by MCL has been long in its gestation and follows a considerable period in which the parties have been engaged in a dispute as to whether any upfront fees are payable. The conduct of MCL to date is consistent with the existence of a genuine dispute as to whether the upfront fees are payable rather than a concern about the solvency of The Agency. Until very recently, an associate of MCL has itself sought to obtain control of The Agency by way of takeover, a course that suggests that it considers The Agency to be in control of a business with value. The present case may be distinguished from an instance where the appointment has been based upon a view about insolvency or ongoing factual matters that indicate a concern about insolvency. When the urgent application was advanced, MCL made no claim that The Agency was insolvent despite The Agency relying upon its alleged ability to pay its debts as and when they fell due as a matter bearing upon the balance of convenience as to whether the urgent relief should be granted. Therefore, in this case the basis upon which the purported appointment of the administrators was made falls away if the $400,000 is paid into Court pursuant to the consent orders. As the dispute as to the security interest is the only evident basis for the appointment, the making of the orders by consent in the particular circumstances are a reason for making the orders as to the end of the administration. 11 At the time of making the orders concerning the administration, the costs of the application brought by the directors for injunctive relief were reserved. As to the costs of the administrators, it may be noted that the orders made to bring the administration to an end preserved the entitlement of the administrators to seek remuneration. Orders were made on 29 January 2021 to the effect that the remuneration of the administrators and legal costs incurred by the administrators be paid from the assets of The Agency. 12 MCL brought a cross-claim in the proceedings that had been commenced by the directors. By the cross-claim it sought judgment against The Agency in the sum of $393,124.43 and interest under the terms of the Offer or pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth). It also sought payment out of the amount of $400,000 to meet that claim and costs on an indemnity basis. 13 For the purposes of the hearing of the cross-claim, each of the parties were directed to include in their closing submissions the amount of costs that they would claim if successful. MCL submitted that as to the cross-claim it should be awarded $215,690.78 (subject to submissions to be made based on settlement offers). The amount was said to represent 50% of solicitor's costs, all of counsel's costs and disbursements incurred of $10,655.70. The Agency submitted that as to the cross-claim it should be awarded $147,900. The amount was said to represent 75% of solicitor's costs, all of counsel's costs and disbursements of $2,900. 14 The parties also provided amounts for costs claims in respect of the earlier injunction proceedings. As to the costs of the injunction, the submissions made in closing sought the following amounts for legal costs; $27,300 by The Agency (as the party seeking injunctive relief) and $20,668 by MCL (as the party opposing). However, The Agency also sought the administrator's costs which it had been required to bear which were then said to be $43,400. The Agency also sought other disbursements of $2,300. The disbursements sought by MCL were $335.36. 15 Thereafter, the cross-claim was determined and The Agency was found to be liable for the amount of the Due Diligence Fee only, being $10,000. The parties were given an opportunity to make submissions concerning the terms of final orders.

Position of the parties as to final orders 16 The parties were agreed that judgment should be entered for MCL on the cross-claim in the amount of $11,000 (which would allow for GST) and for interest fixed in the amount of $1,500. 17 It was also agreed that upon payment of those amounts by The Agency, MCL should be required to lodge relevant statements removing the registrations on the PPS Register. They could not agree upon how promptly that should be done. I will order that it be done within two business days of payment. 18 As to costs, MCL contends that there should be an order that The Agency pay the costs of the injunction proceedings and the cross-claim fixed in the amount of $241,694.18. The Agency contends that MCL should be ordered to pay the costs of the proceedings fixed in the sum of $224,225. 19 The position of MCL is based upon the following contentions: (1) there was a provision in the Offer to the effect that The Agency would be liable for all recovery costs on an indemnity basis; (2) the amount claimed was less than full-indemnity and reflected the amount indicated in its written closing submissions plus an additional provision of $5,000 for counsel's costs associated with submissions to deal with final orders; (3) even if the costs provision in the Offer did not apply, MCL had been successful because it had been determined that it had a relevant security interest which vindicated its conduct in appointing the administrators; (4) it was not appropriate to look to the commercial issues which might lie behind the proceedings and the issue in the proceedings had been the validity of MCL's security interest being the issue determined by the cross-claim; (5) despite The Agency accepting that it had a liability to pay the Due Diligence Fee, the fee had not been paid and that vindicated the position taken by MCL; (6) there had been no unreasonableness or inappropriate conduct by MCL in the matters of construction and allegations of fact and law that it advanced on the cross-claim; and (7) alternatively, if there was to be an allocation based upon the issues on which MCL had been successful then the allocation should not result in a reduction below 50% of the amount claimed. 20 Particular reliance was placed by MCL upon the reasoning of Goldberg J in Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 at [52]-[55]. 21 The position of The Agency is based upon the following contentions: (1) MCL had appointed administrators in circumstances where it appeared to have no genuine reason to doubt the solvency of The Agency and where it did not seek to justify the continuation of the administration on the basis of alleged insolvency; (2) the minimal liability which had been found to exist did not justify the action taken by MCL in appointing the administrators in circumstances where the debt the subject of its claimed security was plainly disputed; (3) MCL's conduct that resulted in the injunction proceedings was unreasonable and unjustified and it should have the costs, alternatively there should be no order as to the costs of the injunction application because it was substantially resolved by consent; (4) MCL had made offers prior to the final hearing of the cross-claim to resolve the proceedings and these were for amounts that substantially exceeded the amount on which MCL had succeeded; (5) MCL had been unreasonable in the conduct of the proceedings in resisting orders for discovery on the basis that it had the capacity to provide the finance it had agreed to provide, seeking suppression orders as to that issue and ultimately accepting late in the proceedings that it did not have the available capital to provide the finance it had agreed to provide; (6) MCL had been unreasonable in the conduct of the proceedings in filing voluminous evidence on issues where MCL failed or that were irrelevant, issuing subpoenas that were set aside and issuing a notice to produce that the Court ordered did not need to be complied with; (7) MCL had secured a pyrrhic victory obtaining a judgment for less than 3% of the amount it claimed despite rejecting offers far in excess of that amount; and (8) in any event, MCL lost on some issues which should be reflected in any costs order. 22 The Agency proposes that it be awarded the costs of the injunction application. It proposes that there be no order as to the costs of the proceedings up until 24 February 2021 when it says that it made a formal offer to settle the proceedings on terms much more favourable to MCL than the outcome. It then proposes an award of costs on an indemnity basis thereafter. It says that such an approach will result in an award of costs in its favour in respect of the proceedings as a whole fixed in the sum of $224,255. 23 By way of reply, MCL takes issue with the claim that there has been unreasonable conduct by MCL in relation to offers to compromise made by The Agency and otherwise. 24 As to the amount paid into Court, the parties agree that there should be an order allowing for payment out. However, MCL claims that it should first be able to resort to the amount in order to satisfy an order for costs in its favour. 25 Therefore, the contentious issues concern whether the provision in the Offer concerning costs applies and if so what amount of costs are payable and, otherwise, according to general principle who should pay costs and in what amount (particularly whether there should be indemnity costs ordered).

The relevant principles as to costs 29 The relevant principles to be applied in determining appropriate cost orders are well established. 30 The award of costs is discretionary: s 43 of the Federal Court Act. The discretion is unconfined, but must be exercised judicially, that is according to relevant considerations and taking account of the contextual features and facts of the litigation: Kazar (Liquidator) v Kargarian; In the matter of Frontier Architects Pty Ltd (In Liq) [2011] FCAFC 136; (2011) 197 FCR 113 at [4]. Settled principle guides the exercise of the discretion which is to be exercised judicially: Norbis v Norbis (1986) 161 CLR 513 at 519; and Oshlack v Richmond River Council (1998) 193 CLR 72 at [65] (McHugh J, Brennan CJ agreeing), [134] (Kirby J). Generally, the discretion is exercised in favour of the successful party: Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52 at [25]; and Firebird Global Master Fund II Ltd v Republic of Nauru (No 2) [2015] HCA 53 at [6]. The exercise of the discretion involves the making of a broad evaluative judgment and factors other than success may have a significant claim on the exercise of the discretion: Gray v Richards (No 2) [2014] HCA 47 at [2]. 31 Success is to be adjudged by reference to what was in issue in the proceedings not some view as to the commercial significance that may be attributed to the outcome by one or other of the parties. Court proceedings seek to vindicate legal rights. In some instances, a measure of vindication will not be adjudged to be success for the purposes of determining the appropriate order as to costs. As was noted recently by Abraham J in Nassif v Seven Network (Operations) Ltd (No 2) [2021] FCA 1390 at [10]: If the primary purpose of bringing proceedings is to recover substantial damages (as opposed to, for example, vindicating a legal right), an award of nominal damages will ordinarily not entitle an applicant to the costs of the proceedings: Motium Pty Ltd v Arrow Electronics Australia Pty Limited [2011] WASCA 65 at [10]; Rockcote Enterprises Pty Ltd v FS Architects Pty Ltd; Carelli v FS Architects Pty Ltd [2008] NSWCA 39 at [100]; Thiess Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd [2001] WASCA 166 at [9]. 32 For present purposes it may be observed that there are at least three distinct categories of case where the successful party might be deprived of an order for costs or may be ordered to pay the costs of the other party. They were described in the following way in Queensland North Australia Pty Ltd v Takeovers Panel (No 2) [2015] FCAFC 128; (2015) 236 FCR 370 at [11]: One such category is where the applicant has been only partially successful in that it has not obtained all of the relief sought. The second category is where a party has succeeded in obtaining the relief sought, but has not succeeded on all bases (factual or legal) upon which it sought such relief. Of course, it is possible that a particular outcome will fall into both categories. A third category involves consideration of the successful party's conduct of the case. 33 If one or more of those categories applies to the successful party then a different costs order may be made but it is not done to punish the party: Les Laboratoires Servier v Apotex Pty Ltd [2016] FCAFC 27; (2016) 247 FCR 61 at [303]-[305]; and Snedden v Republic of Croatia (No 2) [2009] FCAFC 132 at [3]-[4]. 34 Generally speaking, Courts are circumspect about allocating costs on the basis of issues. The authorities were referred to by White J in Hockey v Fairfax Media Publications Pty Limited (No 2) [2015] FCA 750; (2015) 237 FCR 127 at [84]-[91]. Such allocations are more likely where there are discrete issues and they correspond with aspects of the dispute where it might be said that one party has had a measure of overall success. 35 The principles to be applied in deciding whether to order costs on an indemnity basis because a formal offer has not been accepted are also well known: Stewart v Atco Controls Pty Ltd (in liq) (No 2) [2014] HCA 31; (2014) 252 CLR 331 at [4]; Trustee for The MTGI Trust v Johnston (No 2) [2016] FCAFC 190 at [21]-[22]; and Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112 at [7]. As was emphasised in Clifton (Liquidator) v Kerry J Investment Pty Ltd t/as Clenergy (No 2) [2020] FCAFC 112; (2020) 277 FCR 382 at [30]-[31], the making of a special costs order is reserved for those instances where the party liable for costs has engaged in conduct in the proceedings that is deserving of criticism and that conduct has resulted in greater expense for the innocent party. Those circumstances may include the unreasonable rejection of an offer to compromise the proceedings.

[2009] WASCA 85

[2010] VSCA 195

[2011] WASCA 65

[2001] VSC 61

[2001] WASCA 166

(2020) 277 FCR 382

(2007) 234 CLR 52

(2010) 28 VR 635

(2015) 237 FCR 127

(2011) 197 FCR 113

(2016) 247 FCR 61

(1986) 161 CLR 513