Nichols v NFS Agribusiness Pty Ltd [2020] NSWSC 1886 | Case summary

Nichols v NFS Agribusiness Pty Ltd [2020] NSWSC 1886 | Case summary | Zoe

EX TEMPORE Judgment

HIS HONOUR: The disputants before me are the plaintiff Mr Dario Bettoni and the second defendant Mr Marco Domenico Carelli. They are the sole directors and shareholders of the first defendant, Sunnyside Bettoni Pty Ltd, a company which operates (or perhaps formerly operated) as an agricultural business involving at least among other things the raising of lambs in Forbes in regional New South Wales. Mr Bettoni is a 25% shareholder and Mr Carelli is a 75% shareholder. Neither holds his shares beneficially; nothing is said to turn upon that. Mr Bettoni is a resident of Bergamo, Italy. Mr Carelli is the participant in the company directly involved in the agricultural business.
The two men have fallen out. The last two years have seen extensive acrimonious correspondence between their solicitors, leading in the first instance to a request for substantial quantities of company information. In the absence of a substantively positive response, Mr Bettoni commenced proceedings in this Court by originating process filed 13 February 2020. The process seeks two substantive orders, namely, orders pursuant to s 247A of the Corporations Act 2001 (Cth) for inspection of the company's books and orders pursuant to s 290(2) and 1303 of the Corporations Act compelling an inspection of the books and other final records of the company. The only other substantive order sought in the originating process is costs.
The litigation has had what I regard as an especially inauspicious procedural history in the Corporations List. This is the thirteenth hearing in proceedings commenced in February 2020. So far as I can see it is the only hearing in which there has been any contest. The previous hearings have all been consensual. I shall return to this below, but I mention it now because it serves to indicate the nature of the dispute today which is confined to one matter only, namely, the costs of the proceedings.
Most of the directions hearings have involved timetabling directions or extensions of time. Insofar as there has been substantive progress, three presently relevant steps have occurred.
On the first return date, on 24 February 2020, Mr Carelli consented to orders requiring the production within fourteen days of an extensive schedule of documents which had been requested under cover of a letter dated 7 November 2019. The schedule sought some fifteen categories of documents over a period of some four or five years, including financial statements, tax returns, bank statements, BAS management accounts, various summary accounts in the company's ledgers, credit card statements, lists of creditors and all correspondence with the company's accountant.
Secondly, on 26 March 2020, Mr Carelli again subjected himself to orders by consent requiring production pursuant to a five page letter from the plaintiff's solicitors dated 26 March 2020. The letter complained of deficiencies in the production pursuant to the first order and expanded the category of documents sought to include, most relevantly for today's purposes, "a copy of all invoices for sales and expenses incurred for the financial year ended 30 June 2016 to date" [sic].
Thirdly, on 23 July 2020, once again by consent, Mr Carelli subjected himself to an obligation to file and serve an affidavit by 31 July 2020 explaining with reference to categories of documents set out in the schedule to the orders whether production had occurred, what books and records were in his possession, what had been lost and so on. In purported compliance with that order, Mr Carelli made a short affidavit on 30 July 2020 which the plaintiff has tendered in support of his application today. Mr Carelli in that affidavit sought to explain that he had provided documents as required. Part of his explanation was that on 13 May 2020 he had made available to the plaintiff two boxes of receipts and invoices relating to the company.
That was not the end of the plaintiff's invocation of court processes in support of his application. There has been a series of subpoenas issued to various agricultural entities and perhaps others with whom the company had dealings. Those subpoenas required production of the same documents which had been required for production under the February and March orders of this Court. When I asked what the legitimate forensic purpose of those subpoenas was, I was told that the plaintiff was investigating the possibility of a prosecution for contempt, and that in any event there had been no objection to the subpoenas.
A great volume of material has been exhibited to an affidavit of an employed solicitor in the firm retained by the plaintiff, together with a detailed explanation of what had been produced by Mr Carelli and what, by reference to the subpoenaed documents, is contended should have been produced but has not been produced. In all, some 494 pages of material were sought to be tendered, without objection, in support of the plaintiff's application for costs of the proceedings. I made it plain that only documents to which I was taken would be regarded as in evidence before me; I shall return to this at the end.
There was no dispute between the parties as to the applicable principles to the exercise of a discretion as to costs. The starting point was what was said by McHugh J in Re Minister for Immigration and Ethnic Affairs, Ex Parte Lai Qin (1997) 186 CLR 622 at 624; [1997] HCA 6 as follows: "In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order. In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action."
It was ultimately accepted, and accords with what most recently was said by the Court in Price v Price [2020] NSWCA 312 at [44], that it was necessary to show Mr Carelli had acted "so unreasonably" that he should be ordered to pay the plaintiff's costs. It was not put that this was a case where there had been "capitulation". Rather at the forefront of the plaintiff's submissions were two matters said to give rise to the requisite level of unreasonableness: 1. first, that Mr Carelli had unreasonably delayed in the production of documents pursuant to orders to which he had consented, giving rise to the need for further applications to the Court and endeavours on behalf of the plaintiff to confirm the completeness of the production; and 2. secondly, that Mr Carelli had failed to provide full production of the documents in circumstances where there was a measure of deliberate as opposed to inadvertent conduct by him.
In framing the second proposition in the general "tentative" way that I have, I am conscious (as was the plaintiff) of the need for precision and sensitivity in light of the authorities in this respect. One cannot try the hypothetical charge for contempt which the plaintiff was contemplating and which was not in fact proceeded with, under the guise of an application for costs. Nor can one try the anticipated proceedings in the future for breach of directors' duties under the guise of the present application for costs. Notwithstanding the immense legal resources that have been thrown into it, this application remains an interlocutory application, governed by relatively settled principles as to what will be determined and what forensic efforts will be permitted.
Section 60 of the Civil Procedure Act 2005 (NSW) applies with particular force. Throughout the entirety of the proceedings in this Court when substantive orders for the production of documents were sought, it was necessary in accordance with s 60 to implement the Court's practice and procedure with the object of resolving the issues between the parties so that the cost was proportionate to the importance and complexity of the subject matter in dispute. The only issue before the Court today is one as to costs. It is, with all respect to the litigants and those advising them, to my mind alarming that this issue which should be subordinate to the substantive issues appears to have taken on a life of its own and consumed a great deal of costs. What has occurred today, under guise of an application to depart from the usual exercise of the costs discretion in cases such as the present, resembles the hearing that might have taken place had Mr Bettoni prosecuted Mr Carelli for contempt. This recalls the consideration mentioned by Basten JA at the outset of his reasons in Nichols v NFS Agribusiness Pty Ltd (2018) 97 NSWLR 681; [2018] NSWCA 84: "There is a tendency for litigation to feed on itself. There are appeals for which the only commercial explanation can be a hope to recover the costs of the litigation". This is not an appeal, but there remains something quite wrong about the resources which have been deployed in support of the only contentious aspect of the entire litigation. In particular, the raft of subpoenas which have issued following the last substantive orders being made and being complied with seem now to have been deployed for the purpose of altering what would otherwise have been the exercise of the discretion as to costs, while at the same time that endeavour must have significantly increased the plaintiff's costs.
Two paragraphs in the Court of Appeal's judgment in Nichols are particularly salutary in relation to today's application. The first is what Basten JA said at [8]: "although it is possible to make an order for costs against one party if it can be shown that it has invited the litigation by its unreasonable behaviour, or has unreasonably pursued the litigation, such an order should only be made where that judgment is manifest by reference to known circumstances, not in dispute between the parties. If the question cannot be answered without reviewing large swathes of evidence and resolving, on a tentative basis, disputed questions of fact, the task should not be embarked upon."
To substantially the same effect, in the reasons of Payne JA, with whom Meagher JA agreed at [47], there is the following: "Any finding of potentially serious misconduct, such as that Mr Nichols made an untrue statement, could only have been made after permitting cross-examination of all the witnesses, in particular Mr Casey and Mr Nichols. That exercise, permitting the cross-examination of witnesses to determine costs issues in a case determined other than on the merits, is antithetical to the principles explained in Lai Qin and adopted repeatedly by this Court since. Such a course would also be contrary to the principles in Pt 6 Div 1 of the Civil Procedure Act 2005 (NSW) which encourages the settlement of litigious disputes."
With those principles in mind, Mr Di Francesco who appeared for the plaintiff with commendable precision insisted that he did not invite me to make any finding of potentially serious misconduct by Mr Carelli. He said that it was sufficient, on the civil standard of proof, to be satisfied that the non-production of documents was other than inadvertent. From time to time during the submissions there were variations on that theme, but its essence was to rely upon what had been provided as opposed to what was available by reference to the subpoenaed material, make submissions as to the potential motivation for Mr Carelli's limited production, and invite me to draw a conclusion that the conduct was so unreasonable as to warrant the favourable costs order.
In permitting the evidence underlying this approach to be adduced, I was conscious that the matter had been set down by the Corporations List judge with an estimate of either half a day or a half day plus. Although that falls short of an endorsement of the amount of time claimed by the parties to be required, it no doubt led them to expect that this application should be heard and determined in a more leisurely manner than other judges may have considered was warranted. In my view, if a plaintiff cannot in 15 minutes explain why the Court should depart from the default position in a case such as this, then there is much to be said for not permitting the plaintiff more time to seek to do so. Perhaps I should not have entertained the course which I did, notwithstanding the absence of any real opposition from Mr Carelli. In fact, I fear that the approach I adopted contravenes what Basten JA indicated in the paragraphs from Nichols set out above. Be that as it may, and conscious as I was that the amount of material supplied by the plaintiff could occupy a number of days' hearing, I invited the plaintiff to cherry-pick two especially favoured topics which might best demonstrate both the failure on the part of Mr Carelli to comply with the cost orders for production and the adverse inferences I would be invited to draw.
The first of those matters concerns the purchase and sale of five lots of sheep and lambs between 5 January 2019 and 10 July 2019. It will be recalled that in March Mr Carelli consented to orders requiring the production of all invoices for sales and expenses in a four or five year period. The documents produced by Mr Carelli included some transaction records in 2017 and 2018 from Forbes Livestock & Agency Co which recorded payments for invoices for purchases or sales of livestock and some waybills apparently executed by Mr Carelli on the occasion of each sale. However, it was submitted that an undated statement apparently brought into existence around about June 2020 which had been obtained on subpoena disclosed five transactions in respect of which there were individual invoices or transaction documents which should have been produced by Mr Carelli. It is not said that the position has not been explained at all. The first three sales, being sales of 110, 173, and 233 sheep and lambs through February, April and May 2019, are recorded in the Forbes Livestock & Agency Co as sale prices (net of commission, I believe, although this is unclear) of $14,975.10, $29,309.38 and $43,384.53. In answer to a lengthy letter of 20 October 2020 from the plaintiff's solicitors making extremely serious allegations of breaches of directors' duties, misappropriation and diversion of company assets and the like, Mr Carelli's solicitors on 27 October 2020 explained this: "Sale of Livestock In relation to the sale of the company's livestock in an amount of $61,489.91 we confirm that the sale of this livestock was placed into our client's personal account in reduction of the moneys owed to our client by the company, see page 9 of the 2019 Annual Report under the heading Shareholder's Loan. The loan account has been correspondingly adjusted".
It was not suggested that the statement in that letter by reference to the annual report is other than correct (the sales exceed $61,489.91, but there were other transactions too). The annual report, prepared by the company's accountant, was provided in draft in June 2020. The fourth transaction, which is the purchase of some 270 prime sheep and sheep and lambs in April 2019 in the amount of $34,595 is likewise at least approximately reflected in a line item in the 2019 financial statement. The fifth item, which was a sale on 2 July 2019 falls outside the reporting period. It was not suggested that the company's bank statements had not been produced (although there was a complaint from the bar table which I understood to mean that one side contended production had been incomplete).
However, it is not entirely clear on the evidence provided by the plaintiff that in fact the primary documents underlying those purchases and sales of sheep were not made available to the plaintiff or his lawyers at some stage earlier in the year. I referred above to the two boxes made available to which Mr Carelli deposed. One of the documents, a way bill which appears to have been signed by Mr Carelli on the day of the auction, does not have the appearance of a document which the vendor would necessarily be given a copy of, or (if a copy in triplicate was received) was one a vendor would ordinarily keep. I can understand a purchaser wishing to keep such a document, which contains statements about the absence of exposure to stock diseases, but not so much a vendor who will never see the animals again. But that is merely my speculation, which accords with that proffered by Mr Carelli's counsel; there was no evidence about this.
That said, the force of the plaintiff's submission was that Mr Carelli had in fact produced some such documents, for 2017 and 2018, and so had been minded to keep those. Emphasis was given to the fact that for the 2019 sales, where the proceeds of sale had gone directly into Mr Carelli's own bank account - on his account, in discharge of the company's outstanding indebtedness to him - no production had been given, with the suggested inference that the non-production was not inadvertent but instead reflected a consciousness of the way in which the proceeds of sale had been treated.
On the other hand, there was no account on the part of Mr Carelli, who was far better placed than anyone to explain whether and if so how he made those particular documents available, or what is the explanation for their not having been made available if that be the case. I am merely left to infer what the position is, one way or the other.
The second matter was addressed much more concisely by the plaintiff. It concerned the purchase and sale of various farm equipment. Once again, there had been some production of documents issued by Forbes Machinery Centre Pty Ltd by Mr Carelli. That production included a document recording the purchase of a, "New, K-Line 3 MTR Linkage Speed Tiller" with a particular model and serial number in December 2016 at a price of $26,500.
A subpoena issued by the plaintiff's solicitors to Forbes Machinery Centre led to the production of two invoices (pages 309 and 312 of the exhibit) both dated 21 March 2018 and with the same invoice number "120218A". There was no explanation of this, but likewise there was no opposition to the inference that one superseded the other.
The first 21 March 2018 invoice was addressed to Sunnyside Bettoni, and recorded the purchase of a "New K-Line 4 MTR Universal Speed Tiller" at a discount because of a trade-in of the 3 MTR Linkage Speed Tiller with the same model and serial number referred to above. However, that invoice, in the form produced on subpoena (I will infer) had some items struck through and a handwritten note, "See N 2012".
The second 21 March 2018 invoice, this time with a paid stamp on it, concerned the acquisition of the same K-Line 4 metre Universal Speed Tiller, but this time sold not to Sunnyside Bettoni but to "Marco Domeneco [sic] Carelli & Elena Marei Carelli", but once again including a discount for the trade-in of that same 3 metre Linkage Speed Tiller.
The plaintiff made two submissions in relation to these documents. The first is that the one in the name of Sunnyside Bettoni should have been produced. That may be a contestable proposition. There is nothing in the evidence that suggested that a document which, on the face of things, produced by Forbes Machinery Centre, and regarded by it as superseded, had even been supplied to Sunnyside Bettoni. Nor was there anything to suggest that it had been retained by Mr Carelli. The second submission was that the document recording the sale to Mr and Ms Carelli should have been produced, not because of the sale of the Four Metre Universal Speed Tiller, but because it recorded the trade-in of what on its face had been Sunnyside Bettoni's 3 metre Linkage Speed Tiller producing a result that it fell within the obligation in the March orders to produce "all invoices for sales and expenses incurred for the financial year 30 June 2016 to date". It was said that this was a sale of agricultural machinery although in form it was a trade-in reflecting a discounted price on the acquisition of further machinery.
Mr Atkin, who appeared for Mr Carelli, as I understood it accepted that this second invoice of 21 March 2018 from Forbes Machinery Centre, and the various primary documents relating to the purchase and sales of sheep in 2019, fell within the orders and should have been produced, but maintained that it still had not been shown that Mr Carelli had been acting sufficiently unreasonably to enliven an adverse costs order.
Mr Atkin made at one stage a further point which was that at least some of the documents required for production by the consent orders fell outside the "books" required to be produced under s 247A. Nothing turns on that point in my opinion. First, Mr Carelli consented to the orders and was required to comply with them. Secondly, as Mr Di Francesco pointed out, there is a broader definition of the things required to be produced under s 290(2) of the Corporations Act.
Mr Atkin's better point, if I may say so, was that the orders subjected Mr Carelli, albeit that he consented to them, to the production of an enormous amount (it might be inferred) of documents over a period of four or five years, and, following the making of the March orders, extending right down to primary invoices. As far as I can see there is no direct evidence of the quantity of material that was in fact provided. Nor is there any evidence, so far as I can see, of the quantity of documentary records held by Mr Carelli or the company's accountant, but I would readily infer that it is voluminous.
The two examples identified by Mr Bettoni may be examples of serious breach of duties by a director to his company. That is something which may be an issue in the proceedings which Mr Bettoni seemingly has been preparing, for some time, to commence, which I mention below. But this is exactly what should not be determined on an application for costs in proceedings whose purpose was to obtain orders for the production of company documents. I am not trying hypothetical proceedings for breach of duty. I am merely being asked to exercise a costs discretion in separate proceedings in which the orders sought were made, consensually, and on any view a substantial volume of production has in fact occurred.
Towards the conclusion of the hearing, and indeed after Mr Di Francesco had at first advised that he had completed his submissions and was in the course of answering a final question from me, it emerged that plans are well underway for further proceedings to be brought by Mr Bettoni against the company, Mr Carelli, Ms Carelli and perhaps another entity that the pair trade under if indeed there is such an entity (it is said that this is not presently known). Mr Di Francesco identified that these future proceedings were well advanced, and that originally they had hoped to have been filed this week but that had not occurred and that it was hoped that they would be filed early next week. They included orders for the appointment of external administration of the company and one way or another its winding up, including on the just and equitable ground. Candidly and entirely properly, he accepted that the matters of concern identified in his instructing solicitor's affidavit, two of which were highlighted during the oral hearing today and which I have summarised above, would also be advanced in those proceedings.
This seems to me to be as clear a case as may be imagined where there should be restraint in the factual findings made. I reiterate that this is an application for costs. It is an interlocutory application. I have this morning refused the plaintiff's application to cross-examine Mr Carelli who gave direct evidence of the production performed by him, in accordance with the ordinary practice in such cases. I do not accept the submission advanced on behalf of Mr Bettoni that the prohibition against making findings of potentially serious misconduct by Mr Carelli may be circumvented by a muted finding to the effect that his behaviour is sufficiently unreasonable to engage a favourable exercise of the costs discretion, falling short of a finding as is sought in the proceedings which are hoped to be commenced next week. I think it would be most unfair to Mr Carelli to take that course. It collides with the principles reproduced above.
I put to one side the spectre invoked by Mr Bettoni of establishing a breach of duty by Mr Carelli; that is an issue for another day. Has Mr Bettoni shown that in these proceedings calling for the production of documents Mr Carelli has behaved so unreasonably, notwithstanding his consent to the relief sought, that he should pay Mr Bettoni's costs? There is force in Mr Bettoni's submission that there has been a measure of delay in Mr Carelli's response. As much is candidly conceded by Mr Atkin; indeed no other submission is available. The fact that a vast quantity of documents have been sought is a partial explanation to this; it may be doubted whether when consent was forthcoming to the orders that were sought there had been a full appreciation of what was involved. Be that as it may, the proceedings were commenced by Mr Bettoni for the purpose of obtaining orders for the production of documents and other information. Those orders were obtained in February and March. The further orders for the provision of an affidavit were obtained in July. Some half a year later, what emerges is continued activity in the form of issuing subpoenas and putting together lengthy correspondence with what appears so far as I can see to have a two-fold purpose: (1) preparing for the next set of proceedings to be commenced next week and (2) attempting to advance the present application for costs.
I have given serious consideration to whether the appropriate exercise of the costs discretion is for Mr Bettoni to pay the costs of today. There is much to be said in favour of the proposition that these proceedings should have been dismissed no later than early July, after Mr Carelli's affidavit had been filed. There is also force, it seems to me, that the application today which has occupied most of the last day of the term, collides with the passages in Nichols which I have reproduced above. It is also difficult, with respect, to see how there has been compliance with the obligations in the Civil Procedure Act 2005 (NSW). The "real issues" were entirely resolved no later than July.
However, no such order was sought, and, on balance, this is not a case where Mr Carelli can maintain, or indeed has maintained, that his conduct has been blame free. I do not think that it has.
The plaintiff's fall back submission was for an order that the costs of the proceeding abide by the outcome of the next proceeding Mr Bettoni proposes to commence against the same parties and more. I do not accept that that is an appropriate exercise of the discretion as to costs.
First, notwithstanding the energy that has gone into prosecuting the application I have heard today, there remains no originating process or draft originating process that has been provided in order to give some concreteness to the contingent costs orders proposed. I do not think it is appropriate, where there is a dispute of long-standing nature and duration between Mr Bettoni and Mr Carelli, to provide Mr Bettoni with a forensic benefit of attending to future proceedings he might in due course commence the possibility of costs consequences of the present proceedings.
Secondly, the ordinary rule is that proceedings should stand and fall independently; it is most unusual for the costs incurred in one proceeding to be bound by what some other judicial officer adjudicating some other proceeding might ultimately determine.
None of what I have just said is intended to foreclose the possibility, in the event that further proceedings are brought by Mr Bettoni against Mr Carelli in relation to which documents produced by Mr Carelli in these proceedings are used, of some application that the costs or some of them of this proceeding be treated as costs of the other proceeding. I am not expressing a concluded view one way or the other as to the availability of that course. I am sceptical that such an application would succeed, and if any such application were made, it would be necessary to bring to account the exercise of the costs discretion that he has asked me to make today. I do not say that the course contemplated may be unavailable, but it does seem to collide with the exercise of discretion which he has asked this Court to make today.
I do not accept that a case has been made out that Mr Carelli's conduct has been so unreasonable as to warrant an order that he be ordered to pay Mr Bettoni's costs of these proceedings or any part of them. The appropriate order is no different from the order that is ordinarily made in a case such as this where there has not been any determination of the "event" for the purposes of UCPR r 42.1. That order is that there be no order as to costs with the intent that each party bear his own costs.
It was clarified at the outset of the hearing that no aspect of prayers one and two of the originating process remained outstanding. Accordingly, I shall make these orders: 1. Dismiss the originating process dated 13 February 2020. 2. No order as to the costs of the parties, with the intent that each pays their own costs. 3. The following pages of Exhibit SSB-1 are admitted into evidence: 24-26, 89, 91-97, 145-149, 152-158, 215-227, 306-312, 459-466, 468-503. Those pages not recorded are not included within Exhibit SSB-1. 4. Leave granted for either side to supply a note to Leeming JA's tipstaff indicating any pages omitted from Exhibit SSB-1 by 4pm, Tuesday 22 December.

Nichols v NFS Agribusiness Pty Ltd

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