Oztech Pty Ltd v Public Trustee of Queensland

Federal Court of Australia|2018-12-21|Before: Yates J

Subject to Order 5, the respondent's costs of the proceeding, including reserved costs, but excluding those costs already the subject of an order for costs (respondent's costs), be paid by the applicant and by International Litigation Partners No. 9 Pte Ltd (ILP).
The applicant and ILP be jointly and severally liable for the respondent's costs.
The security for the respondent's costs paid into Court by the applicant, plus any interest accrued thereon, be paid to the respondent.
The claim for relief in prayer 3 of the interlocutory application filed on 20 July 2018 (interlocutory application) be dismissed.
The respondent pay the applicant and ILP's costs of and incidental to the interlocutory application. For the avoidance of doubt, these costs do not include the costs reserved on 2 August 2018. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background 1 On 4 June 2018, I published reasons for judgment in which I found that the respondent did not breach his statutory and equitable (including fiduciary) duties in the manner alleged by the applicant. I also found that the respondent did not engage in unconscionable conduct, as the applicant had alleged. I also considered the applicant's detailed case on causation. I was not persuaded that the applicant's case on causation would have been established had, contrary to my findings, the respondent breached his duties as alleged: Oztech Pty Ltd v Public Trustee of Queensland (No 15) [2018] FCA 819 (Oztech (No 15)) at [13]. At the time, I said that I could see no reason why costs should not follow the event. Nonetheless, I thought there might be some complexities involved in that question. I left it to the parties to bring in agreed final orders (including on costs) or, if agreement could not be reached, to send a joint communication to my Associate outlining where their disagreement lay. 2 The parties agreed that, in accordance with my findings, the proceeding should be dismissed. An order dismissing the proceeding was made on 13 June 2018. However, the parties' position on costs was not agreed. 3 On 20 July 2018, the respondent filed an interlocutory application in which he sought, in summary, orders that the applicant and the applicant's litigation funder, International Litigation Partners No. 9 Pte Ltd (ILP), be jointly and severally liable for his costs of the proceeding on the basis that those costs be awarded on a party and party basis up to 11.00 am on 26 May 2015, and thereafter on an indemnity basis. 4 On 2 August 2018, I granted leave to the respondent to serve his interlocutory application on ILP in Singapore: Oztech Pty Ltd v Public Trustee of Queensland (No 16) [2018] FCA 1155. 5 There is no dispute that the respondent should have his costs. Further, there is no dispute that an order for costs should be made against the applicant and ILP so as to make them jointly and severally liable for those costs. The only dispute is whether the costs to which the respondent is entitled should be awarded on an indemnity basis from 11.00 am on 26 May 2015. 6 The respondent's claim for costs awarded on that basis is based on the following propositions: (a) First, the applicant unreasonably failed to accept the respondent's offer of compromise made on 22 May 2015 (the offer of compromise), which was that the applicant's claim be dismissed with each party to bear its own costs. (b) Secondly, the Court should make, in any event, a special costs order (to the effect of that sought) in the exercise of its discretion to award costs under s 43 of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act) because the proceeding was a speculative investment in litigation for commercial gain; unjustified allegations of fraud and dishonesty had been made; and the burden of the likely shortfall in cost recovery should not be borne by the noteholders for whose benefit the proceeding, ostensibly, had been brought.

Introduction 7 The respondent made the offer of compromise on 22 May 2015. It was open for acceptance for 14 days. It was made in conformity with Pt 25 of the Federal Court Rules 2011 (Rules). On 5 June 2015, the respondent extended the period in which the offer could be accepted, to 5.00 pm on 19 June 2015. On 16 June 2015, the respondent advised the applicant that, if his offer was not accepted, and he successfully defended the proceeding, he would seek an order for indemnity costs against the applicant from the date the offer of compromise expired. The applicant did not respond to the offer. 8 It is appropriate that I set out the terms of the respondent's solicitors' letter dated 22 May 2015 (omitting formal parts), which enclosed the respondent's Form 45 Notice of offer of compromise: We refer to the above proceedings and to our client's defence served on your client on 27 April 2015, and to the documents referred to in the defence, served on your client by letter dated 18 May 2015. We consider that it is clear from our client's defence and the documents that it refers to that your client's case is without basis and that our client is very likely to succeed at a trial of your client's claims. It is plain from the sequence of events pleaded in our client's defence that the Public Trustee took reasonable steps to inform himself of the financial position of Octaviar Limited (OL) and Octaviar Investment Notes Limited (OIN), to obtain appropriate advice, and that he acted diligently and properly to protect the interests of noteholders. It is plain also that there was no reasonable basis on the material available to our client as at 29 February 2008 to apply for orders freezing the assets of the Octaviar Group and/or to wind up OL and OIN. Also, insofar as your client asserts that steps should have been taken before 25 February 2008 and that Group Members suffered loss by reason of the failure of our client to take those steps, that case is statue barred. In order to avoid incurring further substantial costs in these proceedings, and which may in due course come to be charged to the trust estate to the prejudice of noteholders, our client is prepared to offer to settle the proceedings on the basis that: 1. the claim be dismissed; and 2. each party bear their own costs. We attach a Form 45 Notice of Offer to Compromise in the above terms. This offer is open for acceptance for 14 days from the date of this letter following which time it will lapse. Should the offer be accepted, our client will consent to orders of the Court seeking approval of the settlement it in accordance with s.33V of the Federal Court of Australia Act 1976 (Cth). Should our client successfully defend the proceedings, our client will refer to the content of this letter on the question of costs. 9 The Form 45 Notice of offer to compromise stated (omitting formal parts): The Respondent offers to compromise this proceeding. The offer is for the proceedings to be dismissed on the basis that each party bear their own costs. This offer of compromise is open to be accepted for 14 days after service of this offer of compromise and will lapse following that date. 10 It is also appropriate that I identify certain features of the applicant's case as pleaded in the statement of claim filed on 16 September 2014. This case was that the respondent should have formed the view, by no later than 29 February 2008, that the assets of OIN and the Guarantors were unlikely to be sufficient to repay the notes when they became due; had the respondent formed that view, he would immediately (by no later than 29 February 2008) have given notice to OIN calling in the notes; alternatively, he would immediately (by no later than 29 February 2008) have applied for orders that OIN and the Guarantors be wound up, and their assets be frozen; and such orders would have been made. 11 This is different to the case that was ultimately advanced at trial through amended pleadings, which was that OIN and the Guarantors would have been wound up by 29 February 2008, or shortly thereafter. It is true that the particulars to paragraph 91 of the unamended statement of claim (alleging loss and damage) state that the net assets of the Octaviar Group available to creditors were less than the net assets that would have been available on or shortly after 29 February 2008, but I do not think that those particulars necessarily govern the case on causation pleaded in other parts of that statement of claim. The case that I ultimately rejected as fanciful in light of the facts that actually occurred in 2008, is the applicant's case, as finally advanced at trial, that the respondent would have commenced winding up proceedings in mid-February 2008 and obtained a winding up order by 29 February 2008 or shortly thereafter. 12 It is to be noted that the premise for the allegation that the respondent would have called in the notes and/or sought orders that OIN and the Guarantors be wound up is that it was unlikely that the OIN would have had sufficient assets to repay the notes at maturity in December 2011. 13 In their 22 May 2015 letter, the respondent's solicitors pointed out that the statement of claim did not disclose a reasonable basis on which it could be said that, as at 29 February 2008, the respondent would have applied to wind up OIN and the Guarantors. The respondent's defence, as then pleaded, stated that if, by 29 February 2008, the respondent had come to the view that OIN's and the Guarantor's assets were unlikely to be sufficient to repay the notes at maturity, this would not necessarily mean that OIN and the Guarantors were then insolvent. Further, issuing a notice calling in the notes at that time would have carried the risk of actually causing OIN and the Guarantors to become insolvent and prejudice the realisable value of the Octaviar Group's assets - the realisable value of Stella in particular. Therefore, on the respondent's defence, there would not have been a proper basis for calling in the notes, and no proper basis on which the respondent could seek to wind up OIN and the Guarantors. 14 The defence also referred to the steps taken by the respondent prior to and after 29 February 2008 in respect of his trusteeship. The defence pleaded that, had the respondent sought orders to wind up OIN and the Guarantors on or prior to 29 February 2008, his application would have been opposed by OIN and the Guarantors, and some of the noteholders. In this latter connection, I should record that, in earlier correspondence between the applicant's solicitors and the respondent's solicitors (at a time when lead applicants, other than the applicant, were proposed), the respondent's solicitors drew attention to the fact that one of the intended lead applicants (Chimaera Capital Ltd) had actively opposed OIN and the Guarantors being wound up when the respondent in fact sought such orders on 20 June 2008, which was inconsistent with the case theory on causation which was then being advanced, and subsequently came to be advanced, in the statement of claim. 15 The respondent's defence also pleaded that an application to wind up OIN and the Guarantors on or prior to 29 February 2008 would have been unsupported by evidence in the respondent's possession (that is, as at 29 February 2008) that OIN and the Guarantors were insolvent. 16 The defence further pleaded that any application for orders that OIN and the Guarantors be wound up would have been improperly commenced (with the consequence that the respondent would not have been entitled to an indemnity from the trust estate for his costs, and would have been liable to the noteholders for breach of trust) and would have created a real risk that the sale of Stella would not proceed. 17 The defence further pleaded that, in the circumstances, such an application was not one that a prudent trustee in the position of the respondent would have made on or prior to 29 February 2008. 18 At the time the offer of compromise was made, the following steps had been taken in the proceeding: (a) the originating application and statement of claim had been filed on 16 September 2014; (b) the originating application and statement of claim had been served on the respondent on 16 October 2014; (c) a case management hearing had been held on 27 November 2014; (d) the respondent had requested particulars of the statement of claim on 4 December 2014; (e) the applicant had provided further particulars on 23 December 2014; (f) consent orders had been made on 16 February 2015 and 4 May 2015 in relation to the further conduct of the proceeding, including payment of security for the respondent's costs up to filing a defence in the amount of $200,000; (g) the respondent had filed and served his defence on 27 April 2015; (h) by letter dated 8 May 2015, the applicant had sought copies of all documents referred to in the defence; and (i) by letter dated 18 May 2015, the respondent had provided copies of these documents (a total of 168 documents). 19 A further case management hearing was conducted on 25 May 2015 (three days after the making of the offer of compromise). The respondent's solicitors had carried out work in preparation for that hearing at which orders were made for the further conduct of the proceeding up to the exchange of evidence. 20 At the time the offer was made, the respondent's costs were in the order of $1.352 million, although this fact was not communicated to the applicant. The applicant could be forgiven for thinking that the respondent's costs might be considerably less than that amount at that time. Even so, it must have been - or at least ought to have been - in the applicant's contemplation that the respondent had, by that time, incurred a substantial amount of costs in light of the allegations made, the time that had elapsed since the proceeding had been commenced, and the work that would have been involved in undertaking the above steps. After all, on 16 February 2015, the applicant had been ordered to provide security for the respondent's costs up to filing a defence, in the amount of $200,000. Whilst it now seems that this sum was nowhere near the costs which the respondent had actually incurred up to that point in time, it was still a significant sum in the scheme of things. Moreover, the possibility that the respondent's actual costs, at that time, would have been in excess of $200,000 should also have been in the applicant's contemplation given that an award of security is not intended to be a complete indemnity for the costs actually incurred by the party having the benefit of the security.

Respondent's submissions 21 In advancing this ground of his costs application, the respondent relies on r 25.14(2) of the Rules and general law principles: Calderbank v Calderbank [1975] 3 All ER 333. The respondent advanced the same submissions in support of each basis. 22 Rule 25.14(2) provides: If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant's proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent's costs: (a) before 11.00 am on the second business day after the offer was served - on a party and party basis; and (b) after the time mentioned in paragraph (a) - on an indemnity basis. 23 The respondent submits that, even though his offer of compromise was a "walk away" offer, it was, nonetheless, a genuine compromise, especially in light of the substantial costs he had incurred by that time: Szencorp Pty Ltd v Clean Energy Council (No 2) [2009] FCA 196 at [15]; Clark v Federal Commissioner of Taxation (2010) 222 FCR 102; [2010] FCA 415 at [88], [90] and [92]. The respondent submits that, by that time, the applicant had the benefit of a detailed defence and all the key documents referred to therein. The respondent submits, therefore, that, by that time, the applicant was in a position to accurately assess the strength of its case and ought to have appreciated that the respondent's offer involved him giving up a potentially substantial claim for costs. He submits that the period given to consider the offer - one month - was more than sufficient. Even then, on 16 June 2015, the respondent held out the prospect of more time being given should the applicant have requested it. No such request was made. 24 The respondent submits that the key consideration in the present application is whether the applicant's refusal of the offer of compromise was unreasonable or imprudent. The respondent says it was. He submits that, viewed as at May 2015, the applicant's case was entirely speculative and had no realistic prospect of being established at trial. This is because the case advanced through the statement of claim required a finding that, during the six week period from 18 January 2008 (when OL's share price unexpectedly collapsed) to 29 February 2008 (when the sale of Stella settled), the only course of conduct properly open to the respondent was to call on the notes, apply for orders winding up OIN and the Guarantors (and/or freezing their assets), and obtaining those orders in circumstances where: (a) OL's financial results in 2007 were strong; (b) in January and February 2008, the sale of Stella was in progress, the respondent was pressing OL for information, and a standstill proposal from OL was being formulated; and (c) in March to September 2008, the respondent's attempts to wind up OIN and the Guarantors were actively opposed, including by threats to restrain the respondent from taking those steps. 25 The respondent says that the applicant's knowledge of the actual events in 2008 should have informed a reasonable applicant, properly advised, that the case, as then pleaded, had no real prospect of success. 26 In support of this submission, the respondent points to what he perceives to be an inconsistency in the pleaded case (see the matters summarised at [13] to [17] above) of which, he says, the applicant had been made aware. The respondent also points to the findings I made in Oztech (No 15) that the making of winding up orders by 29 February 2008 was fundamental to the applicant's case (at [561] and [973]); that it was fanciful to think that, had winding up proceedings against OIN and the Guarantors been commenced on 15 February 2008, winding up orders would have been made by 29 February 2008 or shortly thereafter (at [975]), and that it was plain beyond reasonable argument that winding up orders would not have been obtained by 29 February 2008 or shortly thereafter (at [980]). 27 The respondent argues that, in refusing the offer of compromise, the applicant acted unreasonably, either because it did not give due consideration to the offer (indeed, it did not even bother to respond to it) or because the applicant must have disregarded serious problems confronting its case on liability: Commonwealth of Australia v Gretton [2008] NSWCA 117 at [15]. He submits that the applicant's "flawed" causation case would not have been improved by exchanging expert and lay evidence. The respondent submits that the "flaw" was manifest from at least the time when his defence, and the documents referred to in it, were served. The respondent further submits that amendments made to the statement of claim in January 2016 did not affect the "flawed" nature of the applicant's critical allegation that winding up orders would have been made by 29 February 2008, or shortly thereafter.

Applicant's submissions 28 The applicant submits that it was not unreasonable for it to refuse the offer of compromise. The offer was made at an early stage in the proceeding and did not represent a genuine compromise. According to the applicant, it was no more than an invitation to capitulate. In this connection, the applicant submits that its claim against the respondent was worth nearly $300 million to noteholders, having regard to the possible recovery by them on the liquidation of OIN. The applicant submits that, in the context of that claim, the degree of compromise represented by the offer was negligible. 29 Further, the applicant submits that, at the time the offer was made, it was in a position of "information asymmetry". On the one hand, the respondent had access to his officers and documents that would shed light on the conduct the subject of the proceeding. On the other hand, the applicant had not had the benefit of an exchange of evidence or of discovery of documents. Further, no subpoena or notice to produce had been issued. 30 The applicant disputes, therefore, that, at the time the offer was made, it should have known that its case was "entirely speculative", with no reasonable prospect of success. The applicant argues that, when the QSC Directors statement of claim was filed by the respondent on 15 January 2014, the respondent represented that he did not know, in 2007, the true financial position of OIN and OL and that, had he known the true position, he would have sought and obtained winding up orders by no later than 1 December 2007 or, alternatively, 16 January 2008. Further, although knowing of their existence, the applicant did not have the letter of instruction and or material relied upon by PwC to prepare PwC 3; PwC 3 itself; the respondent's letter to OL dated 13 June 2007 consequent on receiving PwC 3; or Mr Kelly's letter of 6 July 2007 to Mr Anderson. The applicant sought this material from the respondent, but the respondent declined to provide access to it. 31 Thus, the applicant says, at the time the offer of compromise was made, the facts of the case, as then known, showed that there was an unexpected failure of the respondent to understand the financial position of OIN and the Guarantors prior to January 2008, in respect of which the respondent had declined to provide further information. The applicant submits that it is difficult to see how it could have settled the proceeding reasonably on a "walk away" basis, compromising the claims of group members for a nil return, prior to any discovery or the production of documents which would have shed light on the respondent's action or inaction as trustee in 2007. Further, through the QSC Directors statement of claim, the respondent himself had advanced a plausible theory of causation which was that, had he had a better understanding of OIN's and the Guarantor's financial position at the time, he would have caused them to be wound up by no later than 29 February 2008. 32 The applicant also raises a number of important issues arising from the nature of the proceeding as a representative proceeding commenced under Pt IVA of the Federal Court Act. 33 First, the proceeding could not be settled without leave of the Court: see s 33V. The respondent's solicitors' letter of 22 May 2015 recognised that approval would be necessary but the Form 45 Notice of offer to compromise made no mention of approval or state that acceptance of the offer would be conditional on approval. 34 Secondly, the applicant submits that the proceeding could not be settled without giving group members the opportunity to opt out. Neither the letter of 22 May 2015 nor the Form 45 Notice of offer to compromise addressed the position of group members or whether they would be given an opportunity to opt out. The applicant submits that the respondent's intentions in this regard were unclear. Section 33V(1) is not limited to a global settlement: McMullin v ICI Australia Operations Pty Ltd (1998) 84 FCR 1 at 3. If the intention was that the claims of the open class be covered without an opportunity to opt out, then, the applicant says, it is unclear how the offer could have been accepted without disregarding the requirement of s 33J(1) of the Federal Court Act that the Court fix an opt out date. 35 The applicant submits that the failure of the offer of compromise to make these matters clear renders it unclear; and if there is any reasonable doubt about what is being offered, then the Court should not have regard to the offer when awarding costs: Grbavac v Hart [1997] 1 VR 154 at 155. Put another way, the applicant says that it cannot be unreasonable not to accept an offer which does not make clear what is being offered. 36 The applicant's submissions also question what would have happened had the applicant accepted the offer. If the offer covered the claims of group members, how could the Court be satisfied that an acceptance was in the interests of those members rather than in the interests of the applicant's funder? See, in that regard, the caution expressed by Lee J in Clarke v Sandhurst Trustees Ltd (No 2) [2018] FCA 511 at [7]. The applicant points out that the only potential benefit in accepting the offer of compromise fell to the applicant and its funder, who would be relieved of the potential burden of the respondent's costs. 37 Finally in this connection, the applicant submits that the Court should not award indemnity costs based on the failure of the applicant to accept the offer of compromise, because the Court has no way of knowing whether a settlement on such terms would have been approved by the Court. The applicant submits that it could not have obtained an opinion from Counsel that a settlement involving total capitulation would have been reasonable and in the best interest of group members. Further, on the footing that group members would have been given an opportunity to object to the settlement, it is reasonable to assume that at least some of them would have objected to a settlement that extinguished their claims without obtaining any return, bearing in mind that the total losses of the group would be approximately $300 million. The applicant submits that the Court could not be satisfied on the balance of probabilities that a settlement would have been approved. Absent that finding, the Court should not be persuaded that acceptance by the applicant of the offer of compromise would have brought the proceeding to an end. 38 The applicant summed up its submissions as follows: 30 Having regard to the foregoing, the Court should not be persuaded that the applicant acted unreasonably in not accepting the Walk Away Offer. The offer would have required the applicant to give up claims, for which the applicant had a plausible case theory based upon the material then available to it, for no benefit other than being relieved of liability for an unspecified sum of costs which could reasonably have been expected to be modest, having regard to the stage of the proceedings. In truth, it did not represent a genuine attempt at compromise. It would have required the applicant to capitulate prior to receiving discovery or evidence and obtaining the benefit of other pre-trial processes. Indeed, had the applicant accepted the offer, the applicant would never have obtained (inter-alia) the PwC 3 report (which was first produced to the applicant on 26 August 2015, pursuant to a notice to produce dated 21 August 2015) nor Mr Prostamo's email of 17 May 2007 (produced to the applicant in February 2016 as part of supplementary discovery), which were significant to the applicant's case at trial. 31 Further, there were real difficulties with the applicant accepting the offer in the context of Part IVA proceedings, in circumstances where opt out had not occurred, the offer did not provide for opt out or notification to group members, nor clearly indicate whether the intention was that all group members' claims were to be settled, and where s 33V approval would have been required for an offer that would not return any amount to group members.

Conclusion 39 Even if I were to accept that the offer of compromise represented a genuine compromise of the applicant's claims as at 22 May 2015, I am not persuaded that the applicant's refusal to accept the offer was unreasonable at that time. 40 In this connection, I accept that, in the state of information then available, it was reasonable for the applicant to proceed on the basis that it had an arguably plausible theory of causation. The respondent calls in aid the actual course of events in 2008 as being enough to inform the applicant that winding up orders would not have been made by 29 February 2008, or shortly thereafter. Whilst, undoubtedly, knowledge of the actual course of events in 2008 would be relevant when considering whether the applicant's then pleaded case on causation was plausible and arguable, the respondent's submission cuts two ways. The respondent also knew the actual course of events in 2008. Indeed, he was intimately acquainted with them. This did not stop him from alleging in the QSC Directors statement of claim that, had he known the true state of OIN's and OL's financial circumstances at the time, he would have applied for and obtained winding up orders by either 1 December 2007 or 16 January 2008. In other words, even knowing of the opposition that he in fact encountered when trying to wind up OIN and the Guarantors, the respondent was nonetheless of the view that he would have sought and obtained winding up orders as he had pleaded. 41 It is true that, in the present proceeding, I did not accept that, if applied for, winding up orders would have been made against OIN and the Guarantors by 29 February 2008 or shortly thereafter. But my findings on that matter were informed by a large body of evidence that had been adduced at the hearing, as well as Mr Jenkins' explanation in oral evidence of the weaknesses that he came to perceive with the case pleaded in the QSC Directors statement of claim after it had been filed. I do not think that, as at 22 May 2015, the applicant can be said to have been in a better position than the respondent was in when he (the respondent) filed the QSC Directors statement of claim; quite the contrary. If the QSC Directors statement of claim pleaded a genuine, and hence plausible, theory of causation at the time it was filed, I do not think it can be argued cogently that, as at 22 May 2015, the applicant should have appreciated that the case it had pleaded on causation was fanciful and beyond reasonable argument. I should add that my ultimate findings in respect of the applicant's case on causation were on the case that came to be developed in amended pleadings, and even further developed in closing submissions, which was that, by 31 January 2008, the respondent had a proper basis to call in the notes; the respondent would have called in the notes at that time and demanded repayment by mid-February 2008; the notes would not have been repaid and the respondent would have applied in mid-February 2008 to wind up OIN and the Guarantors; and orders to wind up OIN and the Guarantors would have been made by 29 February 2008 or shortly thereafter. Although in their letter of 22 May 2015 the respondent's solicitors asserted that there was no reasonable basis on the material available to the respondent as at 29 February 2008 to apply for winding up orders, this bare assertion sits inconsistently with the detailed pleading in the QSC Directors statement of claim from which the respondent had not resiled, at least not publicly, by 22 May 2015. The QSC Directors statement of claim was one of the documents that the respondent provided to the applicant on 18 May 2015 (see [18(i)] above). The respondent relies on these documents as aiding the applicant's assessment of its prospects of success as at 22 May 2015. If that be so, the QSC Directors statement of claim would only have supported the applicant's then pleaded claim. 42 For completeness, I should record that I am unable to reach a concluded view on the limited evidence before me as to whether the offer of compromise represented a genuine compromise of the applicant's claims as at 22 May 2015. Consideration of the offer of compromise involves balancing the value of the applicant's potential claim at that time against the immediate advantage of avoiding a potential liability for costs of, say, around $200,000. The applicant values its potential claim at around $300 million. This amount is illusory, for the reasons advanced by the respondent in submissions. In this connection, the applicant's case theory, as then pleaded, was that, at some time before 29 February 2008 (the exact time is not clear), it was unlikely that OIN and the Guarantors would have had sufficient assets at the maturity date to pay the noteholders, and that they did not have a present ability to make early repayment, if called upon. If that be accepted, the amount of $300 million advanced by the applicant is obviously an overstatement of the true value of the applicant's claim because it is calculated on the basis of a winding up some time after 29 February 2008 in which the noteholders would have received 100 cents on the dollar. This sits inconsistently with the premise that, as at 29 February 2008, and arguably well before then, OIN and the Guarantors were insolvent. 43 Accepting (as I do) that the applicant's valuation of "potentially" $300 million is illusory and an obvious overstatement of the true value of its claim, I simply have no way of telling, on the evidence before me, how great the overstatement is. The respondent, of course, bears the onus of establishing that the offer of compromise was a genuine compromise. Beyond demonstrating that the amount of $300 million should not, readily, be accepted, the respondent has not suggested what he regards the true value of the applicant's claim to have been as at 22 May 2015, assuming the success of that claim, although in oral submissions the respondent advanced a rough calculation of, possibly, 30% of $50 million (or $15 million). In this state of affairs, I am certainly not prepared to assume that, as at 22 May 2015, the applicant's potential claim was for an amount which was, say, only marginally better than the costs which the respondent had reasonably incurred up to that time or, as the respondent suggested in oral submissions, that the applicant's claim could well have been "a very trivial claim". 44 For these reasons alone, I am not persuaded that the applicant's refusal of the offer of compromise was unreasonable. It is not necessary for me to reach any final view on the various submissions made by the applicant concerning the particular difficulties or challenges in accepting the offer of compromise posed by the fact that the proceeding is a representative proceeding under Pt IVA of the Federal Court Act. Nonetheless, I do accept that it would have been improbable that the Court would have accepted a settlement on a "walk away" basis, which bound all group members, without providing the opportunity for group members to opt out and without a cogent submission being advanced as to why a settlement on that basis should be approved at such an early stage of the proceeding. I have no reason to find that proper consideration was not given to the offer of compromise by the applicant's legal advisers, at the time it was made. Proceeding on that basis, I can conclude, comfortably, that they would not have provided a legal opinion that would have supported acceptance of a settlement on that basis. Having said that, I think this limb of the applicant's submissions is, ultimately, no more than an elaboration of why refusal to accept the offer of compromise was not unreasonable for the reasons discussed at [40] - [43] above.

Introduction 45 As I have noted at [6(b)] above, the respondent seeks, alternatively, a special costs order because of three asserted features of the case which make it unjust that he should be limited to the recovery only of party and party costs: it was a speculative investment in litigation for commercial gain; unjustified allegations of fraud and dishonesty had been made; and the burden of the shortfall in cost recovery should not be borne by the noteholders for whose benefit the proceeding, ostensibly, had been brought.

Respondent's submissions 46 The respondent submits that, from its commencement, the proceeding has been "stamped with the character of a nakedly speculative commercial venture launched by the funder". The respondent submits: The losses suffered by the noteholders of the OIN Trust and the position occupied by the [respondent] in connection with that trust were obviously enough perceived by the funder as presenting an opportunity to extract a profit from the "deep pockets" of a public entity. The history of this litigation reveals a process by which the allegations, evidence and even the identity of the applicant were constantly shaped and re-shaped (often radically), not with a view to the consistent pursuit of any fundamental grievance, but merely by reference to their perceived capacity to serve the ultimate commercial aim of the funder in the forensic exigencies of the moment. 47 The respondent submits that the speculative nature of the case is revealed by the following. 48 First, the respondent submits that the case theory changed from a foreshadowed case that the respondent breached his duty because he applied to wind up OIN and the Guarantors rather than accepting the moratorium offered by OL during 2008 and the Deed of Company Arrangement put forward by the Octaviar Group's management, to one where it was alleged that the respondent breached his duty because he failed to obtain winding up orders quickly enough. The former allegations were communicated to noteholders in late 2013, although not directly to the respondent. The latter allegations were pleaded in the proceeding that was commenced. The respondent submits that the former allegations (the respondent acted too quickly) are anchored in a proposition which is precisely the opposite of that pleaded and brought to trial (the respondent acted too slowly). This submission is based on hearsay evidence which I admitted provisionally. For the reasons given below (see [86] - [90]), this evidence should be rejected. I will, nonetheless, deal with the submission should the view be taken that my rejection is in error. 49 Secondly, the respondent submits that the lead applicant changed after the respondent's solicitors drew attention to the fact that one of the originally proposed applicants, Chimaera Capital Limited (see [14] above), had in fact opposed the winding up of OIN and the Guarantors, and the applicant had thus acted in a way that was inconsistent with the case on causation advanced in the pleading. 50 Thirdly, the respondent submits that the statement of claim, as originally filed, included a number of claims which, ultimately, were not pursued. The respondent submits that this is consistent with the case being constructed for a commercial purpose, rather than anchored in a particular grievance about the respondent's conduct at the time. 51 Fourthly, the respondent submits that the applicant's case on causation was based substantially on expert evidence which began with an endpoint of 29 February 2008 and worked backwards. Here, the respondent points to a number of criticisms made in Oztech No 15 about the structure of that case and of the evidence given by the applicant's experts Mr Borrelli and Mr Joseph. 52 Fifthly, the respondent submits that, faced with the difficulties of its case on causation, which had been pleaded and particularised, the applicant retreated from that case by asserting new and unpleaded cases on causation in closing submissions.

Applicant's submissions 53 The applicant disputes the respondent's characterisation of the proceeding (see [46] above) which it, in turn, labels as a "vituperative and offensive description" without a "proper basis in the evidence". 54 The applicant submits that it is impossible to see how any change in case theory (see [48] above) or change in intended lead applicant (see [49] above) can be sheeted home to it, such as to visit it with an increased costs burden. The applicant submits that it should not bear any responsibility for the fact that another noteholder may have advanced a different position at a different time with respect to the respondent's conduct as trustee. 55 Further, the applicant submits that the fact that a number of pleaded claims were not ultimately pursued, or that its expert evidence was not ultimately accepted, are not reasons to characterise the proceeding in the way the respondent has. 56 Finally, the applicant submits that it is not uncommon to advance a case in closing submissions which is considered to be open on the pleadings and on the way in which the case had been conducted, only to find that the court does not accept that such a case is not open. The applicant submits that this could not justify an order for payment of costs on an indemnity basis. Relatedly, it submits that the Court should not draw adverse inferences against it from the "narrowing of issues as the case progressed". It submits that the respondent's submissions, if accepted, would encourage applicants to press all pleaded claims, rather than to deal with the real issues in dispute, for fear of exposing themselves to indemnity costs.

ILP's submissions 57 ILP relies generally on the applicant's submissions. It only sought to advance particular submissions on this aspect of the respondent's costs claim. ILP submits that the respondent's submission that the proceeding was a nakedly speculative commercial venture launched by ILP to serve its own commercial aims should not be accepted because that submission lacks an adequate evidentiary foundation; distracts the Court from properly exercising its costs discretion; raises no more than a public policy issue that is inapt for judicial resolution; and would only be relevant if the Court were to be persuaded that ILP engaged in or facilitated an abuse of the Court's process.

Conclusion 58 Funded litigation, of the present kind, will always bear the character of litigation undertaken for commercial gain, when seen from the perspective of the funder. What other objective can the funder have than to derive profit from taking on the risk of exploiting a legal asset? Minds will differ about the desirability of permitting such a course, but funded litigation is now an accepted feature of the legal landscape of group proceedings. I do not think that either the applicant in the group proceedings, or the funder of those proceedings, should bear indemnity costs if the proceedings are unsuccessful, just because, from the perspective of the funder, they are carried on for commercial gain. In short, the motive of commercial gain does not mean that the case is thereby elevated to a special status for the purpose of awarding costs. This is why the respondent's submissions are conditioned on the further allegation that the proceedings were speculative. His submission is that the case was principally directed and controlled by a funder for its commercial ends rather than an attempt to satisfy or remedy a pre-existing grievance of noteholders. 59 Although I rejected the applicant's case on a large number of bases, and made a number of significant criticisms of its structure and of the evidence adduced in support of it, I am not persuaded that it would be appropriate for me to find that it was a speculative case. My ultimate findings and conclusions were based on a considerable amount of analysis and arrived at after a significant period of reflection. Although I do not doubt the soundness of my own findings and conclusions, it does not follow that, as a consequence, the applicant's case was speculative. Still less does it follow that the proceeding has the character which the respondent says it bears. 60 Further, I accept the thrust of the applicant's submission that I should not be distracted by comparing its case theory, as advanced in the proceeding, with another case theory that was foreshadowed in different circumstances and not advanced, even though the incongruity between the two theories is obvious. The true question, shorn of considerations of commercial motivation, is whether the case advanced by the applicant was so untenable, or so wanting in substance, that it should attract the sanction of indemnity costs. I am unable to reach that level of satisfaction. Moreover, I do not accept that the applicant should be visited with a special costs order simply because it did not pursue a number of its pleaded claims.

Respondent's submissions 61 The second feature that is advanced by the respondent is the fact that the applicant made a series of allegations that were rejected in Oztech (No 15), namely: (a) serious allegations of dishonesty against Mr Kelly without an adequate foundation; (b) allegations that the respondent had breached his fiduciary duties and acted unconscionably when he resigned, once again without an adequate foundation, including a serious allegation that the respondent deliberately took steps not to monitor the OIN Trust out of a concern that, by doing so, he might learn information which would make it difficult to find a replacement trustee; (c) allegations of fraudulent concealment by the respondent which were unsupported but which the applicant nevertheless persisted with in the face of a clear warning by the respondent that, if the allegations were not withdrawn, he would seek indemnity costs if the Court found that the allegations were made without a proper basis (as, in effect, the Court did find); and (d) allegations about a number of witnesses called by the respondent, such as that the witnesses were coached, dishonest or not independent. 62 The respondent submits: The history of these proceedings and the findings of the Court, reveals a preparedness by [the applicant] to make very serious allegations of wrongdoing against the [respondent] and his present and former officers without scruple as to whether the objective facts provided a proper foundation for those allegations. That is a weighty consideration supporting an order of indemnity costs against [the applicant].

Applicant's submissions 63 The applicant submits that, in a claim for a special costs order, it is not enough for the respondent to establish that it (the applicant) made allegations of fraud or dishonesty that were not accepted by the Court. Something more is required, such as knowledge on the part of the person making the allegations that the allegations are false or irrelevant to the issues between the parties: Australian Transport Insurance Pty Ltd v Graeme Phillips Road Transport Insurance Pty Ltd (1986) 10 FCR 177 at 178; Thors v Weekes (1989) 92 ALR 131 at 152. The applicant submits that the "something more" has not been established in the present case. 64 As regards the allegations of dishonesty made against Mr Kelly in closing submissions, the applicant advances a number of reasons why it says it was justified in making those allegations. 65 As regards my rejection of the allegations that the respondent breached his fiduciary duties and acted unconscionably, the applicant submits that my rejection was based on my acceptance of Mr Kelly's evidence. The applicant submits that it does not follow from my rejection of its challenge to Mr Kelly's evidence that I should then find that the allegations lacked a proper basis and therefore warrant the imposition of indemnity costs. 66 As regards my rejection of the allegations of fraudulent concealment, the applicant points out that in closing submissions these allegations were confined to the factual allegations underpinning its case on breach of fiduciary duties and unconscionable conduct (as to which, see immediately above). Further, the applicant made clear, as I recorded in Oztech No 15 at [461], that it was not advancing a case amounting to common law fraud or deceit involving moral turpitude. 67 The applicant also points out that when the respondent threatened to seek an indemnity costs order against the applicant's legal representatives personally if the allegations of fraudulent concealment were pursued, they ceased acting while advice was obtained from independent senior counsel (Mr Walker SC) and only resumed acting once that advice was received. The applicant submits that this demonstrates that careful consideration was given to this particular aspect of its case, in particular whether the allegations of fraudulent concealment had a reasonable basis. 68 As regards the criticisms made by the applicant in its closing submissions about a number of the respondent's witnesses (including Mr Kelly), the applicant submits that it provided the basis for those criticisms in its closing submissions and the fact that the Court did not accept the applicant's submissions does not mean that the submissions were advanced without a proper basis. 69 The applicant submits that I should not accept an overarching submission made by the respondent that it (the applicant) was prepared to make very serious allegations of wronging without scruple as to whether the objective facts provided a proper foundation for the allegations made. The applicant says that this submission is tantamount to saying that its legal advisers, particularly the counsel briefed on its behalf, disregarded their professional responsibilities. The applicant submits that this is not a finding that should be made lightly, particularly in view of the detailed submissions that were advanced in closing concerning these matters.

Conclusion 70 In considering this aspect of the respondent's claim for a special costs order, I do not propose to revisit the reasons for the findings I made in respect of my acceptance or otherwise of a particular witness's evidence. I consider that my reasons in Oztech (No 15) adequately explain why I reached the conclusions I did. I mention, in particular, Mr Kelly's position because it was against him that the applicant made its most trenchant criticisms. There were some aspects of Mr Kelly's evidence that I did not accept. But my non-acceptance of a particular aspect of his evidence should not be seen or understood as any reflection whatsoever on his honesty or integrity. To revisit those matters now would only give fresh life to the criticisms made of him which, overall, I have rejected. 71 That said, I am not persuaded that the applicant's attack upon Mr Kelly's evidence or the evidence of certain of the other witnesses called in the respondent's case, went beyond acceptable bounds or otherwise warrants the imposition of a special costs order against the applicant. 72 As to the other matters raised by the respondent, it is true that I found that the applicant's allegations of breach of fiduciary duties and unconscionable conduct were without substance. This was because they were not supported by the facts. The allegations were not supported by the facts primarily because I accepted Mr Kelly's evidence which explained his thinking, at the time of the respondent's resignation, as to the suitability of the respondent acting as the trustee of the OIN Trust. Mr Kelly's evidence also put into context or explained statements made in a number of the documents relied upon by the applicant in advancing this part of its case. 73 The applicant is correct to point out that its case on fraudulent concealment was put on a particular basis. Once I accepted Mr Kelly's evidence, that case, and its case on breach of fiduciary duties and unconscionable conduct, fell away. The rejection of those claims is a reason why the applicant should bear the respondent's costs, but not reason enough to warrant the sanction of a special costs order.

Respondent's submissions 74 The third feature advanced by the respondent relates to his claimed entitlement, in accordance with National Trustees Executors and Agency Co of Australia Ltd v Barnes (1941) 64 CLR 268, to be indemnified out of the trust estate for his costs of defending the proceeding. 75 In a letter dated 5 June 2015, the respondent's solicitors put the applicant on notice that he intended to seek an order for indemnity costs if his defence was upheld. The reason for that position was put in the letter as follows: A large portion of the current noteholders of the Octaviar Note Trust are not able to be members of the Group, and a number of noteholders who are within the definition of Group Members will likely opt out of the Proceedings. Both of these categories of noteholders are prejudiced by the Proceedings. It is not only that they cannot receive distributions from the trust because your client's claims have created uncertainty as to the funds that may be required to meet the Public Trustee's indemnity for his costs, but, more fundamentally, the final distribution to noteholders will be reduced if the Public Trustee successfully defends the Proceedings and, being unable to recover all of his costs from your client, is obliged to have recourse to the trust estate to do so. 76 The letter went on to state that the respondent considered it to be his duty to seek an order for indemnity costs in order to protect the trust estate, which might otherwise be charged with the respondent's defence costs. 77 The respondent submits that a costs order in his favour on a party and party basis would create a significant costs shortfall. His costs run to some $12 million and the shortfall to which the noteholders will be exposed is likely to be several million dollars. 78 The respondent submits that, as the present proceeding was a "nakedly speculative commercial venture" by the applicant and IPL which has "utterly failed", the practical choice confronting the Court is whether the applicant and IPL should bear all the costs of this (now) "commercial misadventure" or whether it should be carried by the noteholders, thus allowing the applicant and IPL to avoid a significant share of the burden which is rightfully theirs. 79 The respondent submits that: [The applicant's] complete failure in the proceedings, coupled with its very poor prospects of success, of which it ought to have known by 26 May 2015, mean that noteholders not involved in these proceedings ought not be prejudiced by the bringing of them. The noteholders ought not be left as hostages to the funder's commercial fortunes or collateral damage in its commercial failure. These are further special or exceptional circumstances warranting a departure from the award of costs on a party and party basis.

Applicant's submissions 80 The applicant submits that there are three difficulties standing in the way of acceptance of the respondent's submissions. 81 First, although the discretion to award costs is unfettered and absolute, it is to be exercised judicially - that is, not by reference to irrelevant or extraneous considerations but upon facts connected with or leading up to the litigation: Latoudis v Casey (1990) 170 CLR 534 at 557; Oshlack v Richmond River Council (1998) 193 CLR 72 at [34] (Gaudron and Gummow JJ), [65] (McHugh J) and [134.2] (Kirby J). The applicant submits that the fact that the respondent might have a right of indemnity out of the trust estate has nothing to do with its (the applicant's) conduct of the litigation. 82 Secondly, the applicant submits that it is not clear that the noteholders will find themselves unjustly exposed to the respondent's costs. A trustee is only entitled to an indemnity out of the trust estate for expenses properly incurred. The applicant submits that the respondent has not sought to justify its substantial costs of around $12 million or to establish that he would be entitled to be indemnified out of the trust estate for costs of this amount, or that he would be entitled to an indemnity in respect of all items of expenditure he has incurred. The applicant also raises the prospect that the respondent might, in fact, be insured for his defence costs. 83 Thirdly, the applicant points to the respondent's indication that he proposes to charge unrecovered costs to the share of the trust estate held by noteholders who are group members, before charging the share held by noteholders who are not group members. The applicant submits that, whether or not this course is appropriate or permitted, there is no present basis on which the Court can conclude that it is likely that the respondent's costs will not be fully satisfied following payment of party and party costs and the charging of the group members' share of the trust estate for unrecovered costs reasonably incurred.

Conclusion 84 I accept the applicant's first submission. The fact that the respondent is a trustee with a right of indemnity out of the trust estate is not a factor that is directly related to the conduct of the litigation itself. If the respondent were correct in his submission, it would suggest that, as a matter of principle, an unsuccessful applicant suing a trustee will always be exposed to a special costs order simply because of the trustee's right of indemnity out of the trust estate. I am not aware of any such principle and I doubt that such a principle would be soundly-based. This is why the respondent, once again, coupled his submission with the characterisation that the proceeding was a nakedly speculative commercial venture with little prospects of success. I have not accepted that characterisation elsewhere in these reasons. Had I accepted that characterisation, it would have been reason enough to make a special costs order. 85 This is a complete answer to the respondent's submissions on this aspect of its costs claim. I should nonetheless state that while the applicant's second and third submissions might, in due course, stand as reasons why noteholders who are not group members, or perhaps even noteholders who are group members, might not be prejudiced, I do not think that it is appropriate that I should speculate on the matters that have been raised for the purposes of determining whether a special costs order should be made. In other words, a special costs order, if warranted, should be made on the basis of presently known facts. Further, the exercise of the discretion involved should not be swayed by idiosyncratic notions concerning the magnitude of the likely shortfall in recoverable costs, or the magnitude of the indemnity that might be allowed. A special costs order is either justified, or it is not. The financial consequences will fall where they must.

Ruling 86 As I have noted at [48] above, the respondent seeks to rely on certain hearsay evidence given in paras 646 to 648 and 656 of the affidavit of Gareth John Jenkins sworn 23 June 2016. The respondent submits that these paragraphs are admissible on the basis that his application for costs is interlocutory in nature. He submits, therefore, that the paragraphs are admissible by dint of s 75 of the Evidence Act 1995 (Cth) (the Evidence Act). 87 The respondent relies on Brooke & McKenzie Pty Ltd v El-Gra Engineering Pty Ltd [2015] FCA 1495; 116 IPR 521 (Brooke & McKenzie) at [59], where Middleton J admitted certain evidence (to the extent to which it was hearsay) on the basis that the application for costs before him was interlocutory in nature. I note in this regard that the application for costs was made in the context of the applicant seeking a modified Scott-Paine order (see the discussion in Wimmera Industrial Minerals Pty Ltd v RGC Mineral Sands Ltd [1999] FCA 421; 46 IPR 173 at [5]) in an application for leave to discontinue patent infringement proceedings. 88 For its part, the applicant relies on Probiotec Ltd v University of Melbourne [2008] FCAFC 5; 166 FCR 30 (Probiotec) where, at [79], Rares J expressed the prima facie view that the hearing of an application for costs, as an incident of the grant of final relief, leads to the making of a final order disposing of the controversy between the parties as to costs. Finn and Besanko JJ (at [1] and [82] respectively) expressed agreement with Rares J's reasons. The Full Court in Les Laboratories Servier v Apotex Pty Ltd [2016] FCAFC 27; 247 FCR 61 at [291] expressed the same view. Based on this, the applicant submits that the hearing of an application for costs, as it arises in the present proceeding, is not "an interlocutory proceeding" for the purposes of s 75 of the Evidence Act. The applicant also relies on s 135 of the Evidence Act. It submits that the impugned evidence raises no more than a tangential issue which could not affect the discretion as to how costs should be awarded in the present case. The applicant also submits that the hearsay nature of the evidence means that its substance cannot be tested and its reception would require Ms Banton, the applicant's solicitor, to be called to give evidence in circumstances where questions of legal privilege might well be raised. 89 Although the respondent's application for a special costs order is made through the filing of an interlocutory application, the application nonetheless arises in the context described by Rares J in Probiotec at [79], namely as part of the final orders determining the rights of the parties in the principal proceeding. The setting is provided by my remark in Oztech (No 15) at [987]: … I can see no reason why costs should not follow the event. However, there might be complexities of which I am unaware that mean that the making of final orders might not be as straightforward as I apprehend … 90 In these circumstances, I do not see the present application as "an interlocutory proceeding" for the purposes of s 75 of the Evidence Act. Further, I think the position in Brooke & McKenzie is distinguishable. I therefore propose to reject paras 646 to 648 and 656 of Mr Jenkins' affidavit. In addition, I would also reject this evidence under s 135 of the Evidence Act in light of the view I have expressed at [60] above concerning its utility. I am satisfied that the probative value of the evidence is substantially outweighed by the danger that it might be unfairly prejudicial to the applicant, for the reasons advanced by the applicant at [88] above.

Conclusion and disposition 91 For the above reasons, I am not persuaded that costs should be awarded on an indemnity basis as sought by the respondent. Therefore, the claim for relief in prayer 3 of the interlocutory application should be dismissed. 92 The applicant and ILP do not oppose the orders sought in prayers 1, 2 and 4 of the interlocutory application. Those orders will be made. 93 The respondent must pay the applicant's and ILP's costs of and incidental to the interlocutory application, other than the costs reserved in Oztech (No 16). In this regard, ILP's acceptance that an order for costs should be made against it was only recent - in fact, on the eve of the hearing of the present application. The respondent submits, and I accept, that he should have his costs of the application to serve ILP out of the jurisdiction because, as events have now transpired, that application ought not to have been necessary. Those costs will be captured by the order sought in prayer 1 of the present application (being, costs reserved on 2 August 2018). I certify that the preceding ninety-three (93) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.

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