Peters v Coastace [2006] NSWSC 289 | Case summary

6537/05 ROGER WILLIAM PETERS V COASTACE PTY LTD JUDGMENT 1 HIS HONOUR: These reasons for judgment relate to the plaintiff's application for an order that the costs of a proceeding for leave under s 237 of the Corporations Act 2001 (Cth) be paid by two persons described as "interested parties", but not formally joined as defendants in the proceeding. 2 The plaintiff and Rodney Charles Bate are the sole shareholders of Coastace Pty Ltd ("the Company"), each holding one ordinary share. The directors of the Company are Mr Bate and Louella Jane Peters (the plaintiff's wife). 3 By an originating process filed on 23 December 2005, joining only the Company as a defendant, the plaintiff applied for an order under s 237 for leave to commence a proceeding against Mr Bate and his wife, Felicity Catherine Bate. According to the draft statement of claim annexed to the affidavit of Mrs Peters, the Company as plaintiff will allege against Mr and Mrs Bate as defendants that Mr Bate transferred a total amount of $490,000 out of the company's bank account and into the bank account of Mrs Bate, in breach of his fiduciary duty to the Company. The Company will seek recovery of the $490,000 and declarations of contravention. 4 The application under s 237 was referred to me as Corporations List Judge by the Registrar on 10 April 2006. A solicitor appeared on behalf of Mr and Mrs Bate as "interested parties". He informed the court that his clients neither consented to nor opposed the granting of leave, but he addressed the court on the form of the orders and on the question of costs. He did not object to the reading of the plaintiff's affidavits, although he was given the opportunity to do so. I was persuaded by the plaintiff's evidence that the grounds for granting leave set out in s 237(2) had been established, and that an order should be made. I delivered brief ex tempore reasons for judgment. 5 I expressed the view that Mr and Mrs Bate should be ordered to pay the plaintiff's costs, and directed the plaintiff to bring in draft short minutes of orders. Subsequent reflection led me to conclude that the question whether the court has jurisdiction to make an order for costs against Mr and Mrs Bate is not straightforward. I therefore set the matter down for further consideration of the question of costs on 11 April 2006. At that further hearing, I had the benefit of submissions on the question from counsel for the plaintiff and counsel for Mr and Mrs Bate. Additionally, the plaintiff sought and was granted leave to file in court a notice of motion seeking to join Mr and Mrs Bate as defendants, notwithstanding that the sole remaining issue in the proceeding is costs. I therefore now have before me two related questions, namely whether to join Mr and Mrs Bate as defendants for the purpose of considering whether to make a costs order against them, and whether to make such an order. 6 Mr Bate is co-shareholder of the Company with the plaintiff, and he is co-director of the company with Mrs Peters. When the proceeding was initiated on 23 December 2005, the plaintiff obtained urgent interlocutory relief against Mr and Mrs Bate, restraining them from dealing with Mrs Bate's bank account so that the balance of the account would not fall below $490,000, and also restraining them from disposing of any assets of the Company. When the matter returned to the court on 7 February 2006 and the injunctions were extended, the court noted the appearance of Mr and Mrs Bate as "interested parties" and as "proposed defendants to proposed action by Coastace Pty Ltd". Subsequently leave was granted to Mr and Mrs Bate to file subpoenas, which the plaintiff then applied to set aside. The subpoenas that they issued on 3 March 2006 described them as "defendants". Directions were made which included directions for Mr and Mrs Bate, described as "interested parties", to file affidavits. 7 There was substantial correspondence between the solicitors for the plaintiff and the solicitors for Mr and Mrs Bate. There was correspondence about Mr and Mrs Bate taking action to place the Company in liquidation. I was informed from the bar table that such a proceeding has been initiated, and an application for the appointment of the provisional liquidator will be before the court on Thursday 13 April. 8 On 3 April 2006 the solicitors for Mr and Mrs Bate wrote to the plaintiff's solicitors stating that their clients "shall neither consent nor oppose the originating process" in the present proceeding, and would not be filing affidavits. They invited the plaintiff's solicitors to clarify the orders as to costs that they would be seeking at the hearing of the originating process. The plaintiff's solicitors replied on 6 April 2006, saying that they had applied to have the matter re-listed for transfer to the Corporations List, so that they could have the s 237 matter dealt with forthwith, and they continued: "In relation to costs, we will seek orders that Rodney Charles Bate and Felicity Catherine Bate pay the costs of the plaintiff in relation to the interim relief application and the application for leave pursuant to section 237 of the Corporations Act". 9 The general power of the court to make an order for the payment of costs is governed by s 98 of the Civil Procedure Act 2005 (NSW). Section 98(1) states that costs are in the discretion of the court, and the court has full power to determine by whom, to whom and to what extent costs are to be paid. But those propositions are expressed to be "subject to rules of court". Rule 42.3 of the Uniform Civil Procedure Rules 2005 states that "the court may not, in the exercise of its powers and discretions under section 98 of the Civil Procedure Act 2005, make any order for costs against a person who is not a party". Sub-rule (2) of Rule 42.3 sets out a number of exceptions to that general proposition, but it was not contended that any of the exemptions is applicable here. 10 There is some debate in the cases as to whether the court has retained any inherent power to make an order for costs against a non-party in circumstances not addressed by Rule 42.3, although the prevailing view seems to be that the statute and the rule have replaced the inherent jurisdiction (see Leicester v Walton (Court of Appeal of New South Wales, unreported, 7 November 1995, BC 9501770), citing Knight v FP Special Assets Ltd (1992) 174 CLR 178; other cases are collected in Ritchie's Uniform Civil Procedure NSW at [s 98.25]). There is also an issue as to whether, if the general power to award costs is now governed solely by the statute and the rule, a special additional discretion to award costs against a non-party arises in proceedings under Part 2F.1A of the Corporations Act, having regard to the broad terms of s 242 (see HPM Pty Ltd v Fear [2002] WASCA 249 at [3]-[4] per Malcolm CJ, Murray and Steytler JJ; Jeans v Deangrove Pty Ltd [2001] NSWSC 84, at [12] per Santow J). 11 In the present case I have decided, for reasons I shall give, that it is appropriate to make an order joining Mr and Mrs Bate as defendants. Once they become parties pursuant to that order, they are amenable to a costs order under s 98 and Rule 42.3. It is therefore unnecessary for me to decide whether there is an inherent power to make an order against a non-party, and whether s 242 creates a special statutory power to do so in proceedings under Part 2F.1A. 12 I note one other matter, in passing. At various points during the progress of this case, the court has granted leave to Mr and Mrs Bate to appear as "interested parties". The power to do so arises, in a matter under the Corporations Act, from Rule 2.13(1) of the Supreme Court (Corporations) Rules 1999 (NSW) ("the Corporations Rules"), which permits the court to grant leave, to any person who is, or claims to be, an interested person, to be heard in a proceeding under the Corporations Act without becoming a party. Sub-rule 2.13(2) expressly authorises the court to direct that a person granted leave under sub-rule (1) pay the additional costs of any party, if it considers that the person's attendance has resulted in additional costs that should be borne by that person. In the present case the plaintiff did not invoke Rule 2.13; further, it is unnecessary to explore its availability, in view of my decision to join Mr and Mrs Bate as parties. 13 There is a limited power of joinder of parties in Rule 2.13(3) of the Corporations Rules, but it does not apply here. So far as they are relevant and not inconsistent with the Corporations Rules, the general rules of court are applicable to a proceeding under the Corporations Act (see Corporations Rules, Rule 1.3(2)). The applicable general power to make an order for the joinder of a person as a party to a proceeding is now found in Rule 6.24(1) of the Uniform Civil Procedure Rules 2005. That sub-rule states: "If the court considers that a person ought to have been joined as a party, or is a person whose joinder as a party is necessary to the determination of all matters in dispute in any proceedings, the court may order that the person be joined as a party." 14 It was submitted on behalf of Mr and Mrs Bate that it cannot have been necessary for the determination of the matters in dispute in this proceeding that they be joined as parties, because the court has already determined the substantive matter, namely whether leave should be granted to the plaintiff under s 237 of the Corporations Act, without yet having joined Mr and Mrs Bate as defendants. Be that as it may, it seems to me clear that Mr and Mrs Bate are persons who ought to have been joined as defendants in the present proceeding (that is, the first, discretionary limb of Rule 6.24(1) applies, whether or not the second, mandatory limb applies: see Ritchie's Uniform Civil Procedure NSW, [6.24.5] and cases there cited). 15 Although the matter has not been finally determined on a contested basis, it appears that the Company is deadlocked, with two equal shareholders in opposition to one another, the board comprising one of the combatants and the wife of the other. In such a case, if the plaintiff's application under s 237 succeeds, the effect is to give the plaintiff control of the derivative action to the exclusion of the opposing shareholder/director. The opposing shareholder/director is the person with an interest in opposing the application for leave. The company, though joined as a party to the application for leave, is inert because it is paralysed by the dispute between the opposing camps. It seems to me that, as a matter of common sense, the opposing shareholder/director should be joined as a defendant to the application for leave. 16 It would be clearly unjust if the opposing shareholder were denied the opportunity to make submissions opposing an application for leave under s 237; or, given that the granting of leave is final relief (Swansson v RA Pratt Properties Pty Ltd (2002) 55 NSWLR 166), it would seem to be beyond argument that the opposing shareholder should have standing to appeal. These considerations have been treated as significant in cases concerning the joinder of parties under general rules of court (see, for example, News Ltd v Australian Rugby Football League (1996) 20 ACSR 637, at 739; see also Wentworth v Wentworth (2001) 52 NSWLR 602 at 630-631 per Heydon JA). 17 I have not been able to find any case directly holding that the opposing shareholder should be joined as a defendant in an application for leave to bring a derivative proceeding against that person. The issue was addressed but not resolved in Resource Equities Ltd v Weston Ventures Pty Ltd (2004) 51 ACSR 436, at [13] per McLure J (with whom Simmonds J agreed). In my experience the practice is for the opposing shareholder to be joined as a party to an application for leave under s 237, in a case where the company is deadlocked at board and shareholder levels and leave is sought by one combatant to use the company's name to bring a derivative proceeding against the other combatant. Such a case is to be contrasted with a case where a shareholder or other eligible applicant seeks leave to bring a proceeding on behalf of the company against a third party. There are cases holding that the third party should not be a party to the application for leave. 18 In Carpenter v Pioneer Park Pty Ltd (2004) 186 FLR 104, the application was for leave to commence a proceeding on behalf of the company against a bank. The bank sought to be joined as a party to the s 237 application, but joinder was refused. Barrett J said (at 109): "The provisions [of Part 2F.1A] do not, in my opinion, have in view the welfare or interests of persons who are, from the company's perspective, 'outsiders'. They enable anyone with a particular form of 'insider' status described in s 236(1)(a) to seek the court's assistance in taking over the role of the normal decision-makers in relation to a particular proceeding." 19 His Honour also said (at 109): "The intended defendant in the proposed proceeding no doubt has an interest of a general kind in the question whether leave should be granted under Part 2F.1A. If leave is granted, that person will be sued (or is likely to be sued). If it is not granted, the person will not be sued, at least at the instigation of the person who has failed to obtain leave under Part 2F.1A. But this cannot, in my view, form a basis for intervention under [the predecessor of Rule 6.24(1)]." 20 His Honour applied that reasoning in Roach v Winnote Pty Ltd [2006] NSWSC 231. 21 Here, the interests of Mr Bate are clearly not, from the company's perspective, the interests of "outsiders". An application by one equal shareholder to use the company's name to sue the other equal shareholder requires the court to assess, by reference to the criteria in s 237(2), the claim of one of the combatants to have the advantage of suing in the company's name, having regard to the counterclaims of the opposing combatant. Consideration of the plaintiff's claim necessarily requires consideration of the interests of the opposing shareholder, who is in no sense external to the matters to be addressed. 22 In light of these considerations, if there had been a contested application before me to join Mr Bate as a defendant in an early stage in the present proceeding, I would have made an order for joinder. That would clearly have exposed Mr Bate to potential liability for costs. The question is whether an order for joinder should be made now, when the only remaining issue in the proceeding is the issue of costs. 23 Rule 6.26 of the Uniform Civil Procedure Rules 2005 states, to the extent relevant: "(1) Except to the extent to which these rules expressly provide, a party may not join another person as a party to any proceedings for the purpose of making an application for costs against the other person. (2) This rule does not apply: (a) if the other person would otherwise be a proper party to the proceedings, …". 24 In my view the considerations to which I have referred lead to the conclusion that Mr Bate, as the opposing shareholder/director, would "otherwise" be a proper party to the present proceeding. It is appropriate, therefore, to join him as a defendant at the present stage, even though the only outstanding question in the proceeding is the question of costs. 25 Mrs Bate is in a different position. She is not a director or shareholder of the Company, but it is alleged that she received property of the Company transferred to her by her husband in breach of his fiduciary duty as a director, and orders are sought for the recovery of that property. She is therefore a necessary defendant in the proposed derivative proceeding. Moreover, she "intermeddled" in the present proceeding in the ways that I have indicated: to summarise, she appeared as an "interested party" on several occasions, including the appearances before me on 10 and 11 April; with her husband she obtained leave to issue subpoenas and was described in the subpoenas as a defendant; her solicitors corresponded with the plaintiff's solicitors on various matters concerning the merits of the proceeding; and she was bound by an interlocutory injunction with respect to her use of her bank accounts. Given her role in the proposed derivative proceeding, and these activities, she became a person who, for the purposes of Rule 6.24(1), ought to be joined as a party to the present proceeding. If an application for her joinder had been made after her "intermeddling" activity and before the final hearing, I would have acceded to it. Therefore, for the purposes of Rule 6.26(2) she would "otherwise" be a proper party to the proceeding, and it is appropriate that she be joined as a defendant notwithstanding that the only remaining issue is costs. 26 Counsel for Mr and Mrs Bate opposed the joinder of his clients as defendants on the ground that the plaintiff made a forensic decision not to name them as defendants in the originating process, and not to apply to join them as defendants at any later stage, even though they appeared in court on several occasions as "interested parties". He said the plaintiff should not be permitted to reverse that forensic decision after the substantive issues in the case had been determined, solely in order to gain an advantage with respect to costs. I would agree with this submission if the evidence indicated that Mr and Mrs Bate had been proceeding on the basis that they were not at risk as to costs, because they had not been joined as defendants. But during the period from the commencement of the proceeding until the present time, they have acted in a role tantamount to the role the defendants, even describing themselves as "defendants" on the subpoenas that they issued. In the letter of 3 April 2006, their solicitors did not assert that their clients had no liability for costs, but instead asked the plaintiff's solicitors to "clarify the Orders as to costs which your client shall be seeking at the hearing of the originating process". Three days later, the plaintiff's solicitors said that the plaintiff would be seeking costs against Mr and Mrs Bate. The objection that might otherwise have arisen from the plaintiff's change of forensic tactics seems to me to be very much diluted by these facts. 27 I shall therefore make an order joining Mr and Mrs Bate as defendants to the proceeding. The plaintiff's application was that the order be made nunc pro tunc. I do not think it appropriate to do so. Joining Mr and Mrs Bate as defendants by prospective order overcomes the restriction in Rule 42.3(1), which does no more than prevent the making of an order for costs against a person who is not, at the time of the making of that order, a party to the proceeding. The appropriateness of an order for the costs incurred before their joinder should be assessed by reference to the real facts and circumstances that applied at relevant times, rather than by recourse to an artificial deeming. 28 Once they are parties, the court has the discretionary power to make a costs order against them, by virtue of s 98 and Rule 42.3. Ought it to do so? 29 First, it is significant that the plaintiff has succeeded in obtaining the principal relief sought in the proceeding, while Mr and Mrs Bate occupied a position substantially the same as would be occupied by defendants. That suggests there is room to apply the principle that costs normally follow the event. 30 Secondly, Mr and Mrs Bate's participation as interested persons has led the plaintiff to incur costs that would not otherwise have been incurred. There was a substantial amount of correspondence between the solicitors. Subpoenas were issued by Mr and Mrs Bate and then challenged by the plaintiff. Directions were made for the filing of evidence. True it is that Mr and Mrs Bate elected not to file evidence and not to oppose the granting of leave (though they did not choose to consent to it). But their decision on these matters was communicated only recently, confirmed by their solicitors' letter dated 3 April 2006. The plaintiff might have been saved substantial costs had they reached this position in December 2005. 31 Counsel for Mr and Mrs Bate strenuously submitted that the court should not make a costs order in circumstances where it has necessarily only heard one side of the substantive dispute. He informed the court that on his instructions, his clients claimed an entitlement to receive and retain the money transferred into Mrs Bate's bank account. He said that his clients asserted a substantial entitlement to be paid wages by the Company, and that they claimed to be creditors. He said the plaintiff did not have clean hands. 32 Counsel for Mr and Mrs Bate sought to read, on the question of costs, a long affidavit by Mr Bate prepared for the purposes of the application for the appointment of a provisional liquidator, due to be heard on 13 April. He also sought to tender the exhibits to that affidavit. He told the court that much of this material would not need to be considered on the question of costs, but it would show the court the other side of the dispute. I decided not to allow the affidavit to be read and not to receive the tender of the exhibits to the affidavit, after counsel for the plaintiff agreed that I could take into account the fact that Mr and Mrs Bate asserted a claim of right over the money that had been transferred. I took the view that receiving such a large volume of evidence at this stage, when the plaintiff would not have the opportunity to respond to it, would not be conducive to the just, quick and cheap resolution of the question of costs of the present proceeding. Although I could see that small parts of the evidence may have some marginal relevance on the question of costs, it seemed to me unnecessary to explore the basis of the claim of entitlement asserted by Mr and Mrs Bate, bearing in mind that I had already concluded without opposition from them that the ingredients of s 237(2) (including the "serious question to be tried" element in s 237(2)(d)) were satisfied. 33 In my view an order that Mr and Mrs Bate should pay the plaintiff's costs of the present proceeding is justified, having regard to the plaintiff's success in obtaining the principal relief that he sought, and the substantial role they played in all phases of the litigation, including the interlocutory phase and the issue of subpoenas as well as the final hearing, which was a role tantamount to the role of defendants. The fact that they intend to oppose vigorously the claims to be made in the derivative proceeding, and to assert their case when applying for the appointment of a provisional liquidator, is beside the point. Their recent decision not to file evidence or oppose the granting of leave no doubt reduced the costs that they might otherwise become liable to pay, but it ought not to be a basis for relieving them from all liability to pay costs. 34 I have considered whether to limit cost recoverable against either or both of Mr and Mrs Bate by reference to the events that I have described, but in view of their steady participation in a "defendant-like" role, I have decided that the most appropriate order is simply in order that they pay the plaintiff's costs of the proceeding, including the cost of the interlocutory application for injunctions. I have also considered whether I should make an order that would prevent the plaintiff from recovering costs unless he causes the Company to succeed in the derivative proceeding, but I have decided not to do so. Though the present proceeding is related to the derivative proceeding and to the application by Mr and Mrs Bate to wind the Company up, the present proceeding is now over and the appropriate course to make an immediate and final costs order. 35 I shall therefore order Mr and Mrs Bate to pay the plaintiff's costs of the proceeding, including the costs of the interlocutory application for injunctions.

Peters v Coastace

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Judgment (12 paragraphs)

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Legislation Cited (3)

Cases Cited (7)

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