Plaintiff v Defendant

For Non-Party Respondent Eggleston Mitchell Lawyers

1 These reasons involve a consideration of what order for costs should be made consequent on the discontinuance by Walter Fehring of an application brought by him as plaintiff to challenge the appointment of Mr Bruce Mulvaney as administrator of Fehring Livestock Pty Ltd ("the company").

2 On 27 September 2010, the directors of the company, Mr Fehring and his wife, Irene, signed a document which appointed Mr Mulvaney as administrator of the company under Part 5.3A of the Corporations Act 2001 ("the Act"). At the time, Mr Fehring was recuperating in hospital from an accident he had been involved in on 19 September 2010. The documents appointing Mr Mulvaney were delivered to Mr Fehring at the hospital, signed by him and returned to Mr Mulvaney.

3 The following day, Mr Mulvaney visited Mr Fehring in hospital and Irene Fehring was present. At that meeting, Mr Fehring explained the company's business, its assets and other matters in connection with the administration.

4 Subsequent to this, Mr Fehring met with Mr Mulvaney and his staff on a number of occasions and had numerous telephone discussions with him and his staff in respect of the financial position of the company and transactions that it had entered into prior to Mr Mulvaney's appointment. Mr Fehring executed a report as to affairs for the company. He attended the first and second meetings of creditors and addressed the creditors.

5 Mr Mulvaney's appointment as administrator was confirmed by the creditors at the first meeting on 7 October 2010. Mr Fehring formulated proposals for a deed of company arrangement and a revised deed of company arrangement. Mr Fehring submitted a document (curiously, dated 19 September 2010, the date of the accident) containing two proposals for consideration by the creditors. Both proposals envisaged the creditors being paid 100%. The letter to Mr Mulvaney began "I would like to put forward two proposals for consideration by the creditors of Fehring Livestock (administrator appointed). In both proposals it is the intention to get a 100% repayment result for creditors. If creditors do not want to take either option, then you do what you have to do, at least I have tried my best." On 29 October 2010, the second meeting of creditors was adjourned to 29 November 2010 in order that the company's assets and liabilities could be further investigated.

6 On 29 November 2010, the creditors resolved to accept a revised proposal for a deed of company arrangement and appointed Mr Chris Chamberlain, an insolvency practitioner, as deed administrator in place of Mr Mulvaney. The deed of company arrangement was executed on 16 December 2010.

7 On 5 July 2011, because of the failure of the company to comply with the deed of company arrangement, the creditors voted to terminate the deed of company arrangement and Mr Chamberlain became the liquidator of the company.

8 I observe at this point that from the time of the appointment of Mr Mulvaney, Mr Fehring was closely involved in the administration process and made no attack on the validity of Mr Mulvaney's appointment.

9 In August 2011, Mr Mulvaney made application to the Court for his remuneration to be fixed under s 449E of the Corporations Act. Objections were received to the application for remuneration from Mr Fehring, W.C. Fehring Nominees Pty Ltd, and Brighter Directions Pty Ltd.

10 On 7 October 2011, when the application by Mr Mulvaney for his remuneration was first returnable, Mr Shirrefs of Counsel, instructed by Eggleston Mitchell Lawyers ("EML"), announced an appearance on behalf of Mr Fehring. In addition to indicating that Mr Fehring opposed the application for remuneration, Mr Shirrefs foreshadowed that Mr Fehring would be making application to challenge the validity of Mr Mulvaney's appointment as administrator. Directions were made and the application by Mr Mulvaney was adjourned to 6 December 2011.

11 On 20 October 2011, Mr Mulvaney's solicitors sent Mr Fehring's solicitors, EML, two letters. The letters detailed what Mr Mulvaney's solicitors considered to be the serious shortcomings in Mr Fehring's challenge to Mr Mulvaney's application for remuneration and the foreshadowed application to attack the validity of Mr Mulvaney's appointment as administrator. The letters put both Mr Fehring and EML on notice that applications would be made for indemnity costs against Mr Fehring and EML if it should be found that there was no proper basis for Mr Fehring's allegations. The letters also warned that relief would be sought pursuant to the provisions of the Civil Procedure Act 2010.

12 On 28 October 2011, Mr Fehring filed an originating process under s 436A of the Act seeking an order that the appointment of Mr Mulvaney as administrator be set aside ("the appointment proceeding"). By that point, Mr Mulvaney had been displaced as administrator by Mr Chamberlain, the deed of company arrangement had been terminated, and the company had been in liquidation for several months. The originating process makes the following claims:

1. That there was no meeting of directors held on 27 September 2010.
2. On 27 September 2010, the directors did not discuss the company's solvency.
3. That the directors of the company did not pass a resolution that the company was insolvent or likely to become insolvent at some future time.
4. The directors did not pass a resolution that an administrator of the company should be appointed.

13 On 30 November 2011, an interlocutory process was filed on behalf of Mr Mulvaney seeking orders pursuant to s 447A and s 1322 of the Act regularizing his appointment in the event that, by reason of the matters raised by Mr Fehring in the appointment proceeding, the Court considered, his appointment was invalid.

14 The appointment proceeding was made returnable on 6 December 2011 when the application for remuneration by Mr Mulvaney was to be determined. Mr Fehring and his family swore several affidavits in support of the appointment proceeding and Mr Mulvaney filed affidavits in opposition to the application. It is obvious that significant legal costs were expended.

15 The affidavits filed by Mr Fehring are concerned with the events leading up to and after the appointment of Mr Mulvaney as administrator. Mr Fehring states that as a result of his accident on 19 September 2011, he was rendered unconscious. The accident occurred in rural Victoria and he was transferred to the Royal Melbourne Hospital for treatment. He was placed into a medically induced coma because of his injuries. Mr Fehring deposes that on 27 September 2011, after he recovered consciousness, he was visited in his hospital by his wife. She was distressed because she had become aware of the financial position of the company and told him their son Anthony had arranged a meeting with an accountant which they had attended earlier that day. Mrs Fehring produced some papers for him to sign and because of her distress, he did so without reading them. He says that at the time he signed the documents he was exhausted, he felt concerned about his recent injuries and was upset at his wife's distress. He gave the documents to his son Jonas who happened to be employed as a nurse at the Royal Melbourne Hospital. He states his belief that at the time he signed the documents he did not have the mental capacity to make determinations in relation to the solvency of the company. In particular, he states that at the time of signing the documents he did not have sufficient knowledge of developments in the company's financial position since his accident on 19 September 2010 to determine whether the company was insolvent or likely to become insolvent.

16 Mr Fehring exhibits a letter from the doctor who originally treated him at Cohuna, Dr Barker. In that letter, Dr Barker expressed the opinion that by reason of the drugs given to Mr Fehring after his accident, Mr Fehring would have been incapable of rational and logical thought for ten days from the commencement of the infusion of those drugs on 20 September 2011.

17 When the applications came on for hearing on 6 December 2011, Mr Fehring was represented by Mr Waldren of Counsel and Mr Kohn of Counsel appeared on behalf of Mr Mulvaney. The liquidator, Mr Chamberlain, was notified of the application for remuneration by Mr Mulvaney. He did not appear or take any part the proceedings, save to file a short affidavit deposing to his appointments as the deed administrator and liquidator of the company.

18 Mr Waldren announced that Mr Fehring discontinued the appointment proceeding and no longer maintained his opposition to the application for remuneration. He did, however, wish to be heard in relation to the issue of costs.

19 Mr Kohn foreshadowed that he would be making application for costs against Mr Fehring and for those costs to be a on a special basis. In addition, he foreshadowed an application for indemnity costs against EML. Directions were then made for affidavit material to be filed in respect of the application for costs and for service of any necessary process against EML.

20 On 21 February 2012, the applications for costs returned to court. On that occasion, Mr Kohn again appeared on behalf of Mr Mulvaney, Mr Shirrefs appeared on behalf of EML and Mr Fehring appeared in person.

21 Mr Kohn submitted that the appointment proceeding was doomed to fail, misconceived and hopeless. Mr Kohn contended that Mr Fehring did not have standing to issue the proceeding, the objective evidence in any event indicated that Mr Mulvaney had been validly appointed and that Mr Fehring's conduct was consistent with Mr Mulvaney being validly appointed. It was submitted that I should find that the application had been commenced or continued in circumstances where Mr Fehring, properly advised, should have known that he had no chance of success, with the result that the proceedings must be presumed to have been "commenced or continued for some ulterior motive or because of some wilful disregard of the known facts or clearly established law", phrases adopted from the decision of Sheppard J in Colgate Palmolive Company v Cussons Pty Ltd.[1]

22 In addition, Mr Kohn observed that the attack on Mr Mulvaney's appointment was only made after Mr Mulvaney made application for his remuneration which, he said, called into question the bona fides of Mr Fehring and whether the appointment application was issued for an ulterior purpose.

23 It was also submitted that Mr Fehring, when he filed the application attacking Mr Mulvaney's appointment, did not put on any evidence as to his standing. It was only later in his affidavit of 25 November 2011 that he contended that he personally was a creditor by reason that he personally made a number of payments on behalf of the company.

24 It was also contended that the solicitors for Mr Fehring, EML, should have realised these matters before commencing Mr Fehring's application; this is not a case where supervening events beyond Mr Fehring's control subsequently occurred or which he and EML could not have foreseen and Mr Fehring's discontinuance of his attack of Mr Mulvaney's appointment amounts to a surrender.

25 In his affidavits, Mr Mulvaney detailed the involvement of Mr Fehring and his family in his appointment as administrator and also deposed to the involvement that Mr Fehring had consequent to his appointment, including the attendance and participation by him at the first and second meetings of creditors, his advancement of the proposal for a deed of company arrangement made by Mr Fehring and the revised proposal. Mr Mulvaney says that to the best of his recollection, during the course of the administration Mr Fehring did not at any time question the validity of his appointment or ask him if the administration could be set aside. Mr Mulvaney also exhibits the report as to affairs signed by Mr Fehring on 13 October 2010.

26 Mr Fehring, addressing the Court in response, said by way of explanation that he had decided to withdraw his application for personal reasons. He stated that there was serious illness in his wife's family and that he was not prepared to expose his wife to the anxiety of the litigation. He also said that it was not practicable to obtain the attendance of his doctor, Dr Barker, who would have to cancel appointments of longstanding in order to give evidence in the case. Another difficulty he pointed to was the fact that one of his sons, who works in Western Australia, would be required to attend for crossexamination and that he had to be in Western Australia in connection with his work.

27 Rule 25.05 of the Supreme Court (General Civil Procedure) Rules 2005 provides:

Where a proceeding, counterclaim or claim by third party notice is discontinued, or where part of a proceeding, counterclaim or third party notice is withdrawn, liability for costs shall be determined in accordance with Rule 63.15.

28 Rule 63.15 provides:

Unless the Court otherwise orders, a party who discontinues or withdraws part of a proceeding, counterclaim or claim by a third party notice shall pay the costs of the party to whom the discontinuance or withdrawal relates to the time of discontinuance or withdrawal. [emphasis added]

29 In Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin, McHugh J observed:[2]

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 factors that usually control 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 by which 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. ...

...

If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continue to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the costs discretion will usually mean that the Court will make no order as to the cost of the proceeding. This approach has been adopted in a large number of cases.

30 In Johnson & Anor v Clancy & Anor,[3] Hallen AsJ collected the principles to be applied where proceedings were discontinued by a plaintiff before a final hearing. His Honour was there dealing with Rule 12.1 and Rule 42.19 of the Uniform Civil Procedure Rules 2005 of New South Wales which are very similar in their terms to the Victorian rules to which I have referred. In particular, Rule 42.19(2) contains a provision that "unless the Court otherwise orders" a plaintiff will be required to pay the defendant's costs in the event of a discontinuance. His Honour stated at paragraph 21:

The following principles may be regarded as relevant in determining who is to bear the burden of costs in a case where the proceedings are discontinued before a final hearing:

(a) Costs discretions are truly discretionary: see Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at 84 and there are no absolute rules; the discretion must be exercised "judicially".

(b) The purpose of a costs order is to compensate, or indemnify, the person in whose favour it is made, not to punish the person against whom it is made: Ohn v Walton (1995) 36 NSWLR 77 at 79 per Gleeson CJ.

(c) Rule 42.19 of the UCPR does not give rise to a presumption that costs will be ordered against the plaintiff: Fordyce v Fordham [2006] NSWCA 274; (2006) 67 NSWLR 497; Foukkare v Angreb Pty Limited [2006] NSWCA 335 at [65]; Pentroth Pty Ltd v Kirschild Pty Ltd [2006] SASC 356; (2006) 96 SASR 129; Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [53]; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32. However, the rule does create a starting point by requiring "... the plaintiff must pay such of the defendant's costs ..." unless that outcome is displaced by a discretionary decision ("unless the court orders otherwise").

(d) The rule makes it clear that a court may order otherwise; but the burden is on the party who seeks to persuade the court that some other consequence should follow. Generally, there must be some proper justification, sound positive ground, or a good reason, for departing from the ordinary position: Fordyce v Fordham at [2] per Santow JA; Australiawide at [54] per Bryson JA; circumstances in which it has been held appropriate to depart from the ordinary position include where the proceedings have been rendered unnecessary by circumstances beyond the plaintiff's control; where the plaintiff achieved practical success in the proceedings, or where costs have been significantly increased by the unreasonable conduct of the defendant. If there is to be a departure it should be done in a particularized, and principled way.

(e) The plaintiff should be the moving party on an application for an alternative costs order: Bitannia at [70] per Basten JA. If facts are to be relied upon to found the court making a different order, the plaintiff will bear the onus of proving the relevant facts.

(f) Where the proceedings are discontinued prior to any hearing on the merits, "the Court cannot try a hypothetical action between the parties" to determine the question of costs: Australian Securities Commission v Aust-Home Investments Ltd [1993] FCA 585; (1993) 44 FCR 194 at 201; Minister for Immigration and Ethnic Affairs; ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622 at 624; Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2007] NSWSC 1120 at [35]. At the time of discontinuance, usually it will be impracticable to assess the eventual prospects of success in the action.

(g) It may be necessary to analyze the whole of the proceedings to determine the appropriate costs order: Fordyce at [67] per McColl JA. A relevant consideration is whether the plaintiff acted reasonably in commencing the proceedings and whether the defendant acted reasonably in defending them: Australian Securities Commission v Aust-Home Investments Ltd at 201 (cited with approval in Foukkare); all the relevant circumstances, and not just the fact of discontinuance, should be considered; thus, the reasons for the discontinuance can bear heavily on the exercise of the discretion as to costs: McClure v City of Stirling (No 3) [2009] WASC 247 [4]; O'Neill v Mann [2000] FCA 1680; Beeson v Carrello As Liquidator of Gecko Management Pty Ltd (In Liq) [2010] WASCA 155 at [13].

(h) In a particular case, it might be appropriate for the Court, in its discretion, to consider the conduct of the defendant prior to the commencement of the proceedings where such conduct may have precipitated the litigation: Foukkare at [66] per Beazley JA;

(i) It is also important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event, or settlement, so removes, or modifies, the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the court's discretion otherwise than by an award of costs by the successful party. It is the latter type of case that usually creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs: One.Tel Ltd v Deputy Commissioner of Taxation [2000] FCA 270; (2000) 101 FCR 548 at 553; cited with approval in Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 per Davies AJA (with whom Mason P and Meagher JA agreed) at [5].

(j) The distinction between the two categories referred to above is often helpful in exercising the costs discretion, notwithstanding that neither category can be precisely defined, the boundary between them is unclear and other factors may be relevant: Bitannia per Basten JA at [79]-[81]; Perre v State of New South Wales [2009] NSWLEC 51 at [49].

(k) Where the proceedings are discontinued after interlocutory relief has been granted, the court may take into account the fact that that interlocutory relief has been granted: Australian Securities Commission v Aust-Home Investments Ltd at 201.

(l) There is a risk that the subjective motivations of the plaintiff in discontinuing may be put forward as a basis for some other order. Except to the extent that such views may have been put before the defendant, for example as a basis for settlement, and are established as such on the evidence, subjective considerations of one party will generally be immaterial, so that the discretion will be exercised on the basis of the objective circumstances established on the evidence: Bitannia at [81].

(m) The court is required to make such order as it thinks just in the particular circumstances of the case.

31 In Ringwood Plus Pty Ltd v Commissioner of State Revenue,[4] it was stated that it is now generally accepted that a distinction needs to be drawn between cases in which one party, after litigating for some time, effectively surrenders to the other, to cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs.

32 The circumstances which Mr Fehring described in his address to the Court are unfortunate, but they are not events which have arisen directly in the course of the litigation or which have supervened in the relevant sense to render the application nugatory. If one accepts Mr Fehring's reasons for discontinuing his application, they were entirely personal, that is, based on what is described in Bitannia as subjective considerations. Certainly, there was no event which rendered Mr Fehring's application "unnecessary" or which brought "practical success" to him.

33 Mr Fehring does not identify a relevant supervening event that so removes or modifies the subject of the proceeding in the way spoken of in the Ringwood Plus decision. Rather, for reasons which are personal to him and his family, he has determined not to proceed with the application.

34 Although one does not embark on an assessment of the merits of the case itself, I indicated to Mr Fehring when the appointment application was first foreshadowed, that his case was a very difficult one. The application required the unravelling of an insolvency administration in circumstances where the creditors had proceeded to resolve to place the company into liquidation after the failure to comply with the terms of a Deed of Company Arrangement and where there was abundant evidence of insolvency. The evidence pointed to the fact that Mr Fehring, and those associated with him, had participated in the administration process and had put up proposals for a Deed of Company Arrangement. No relevant event occurred after the commencement of his application which "cut the ground from underneath him". I do not consider that the making of the application on behalf of Mr Mulvaney to regularise his appointment was such an event; it was a procedural reaction in response to Mr Fehring's application.

35 In my view, Mr Fehring should pay Mr Mulvaney's costs of the proceeding.

Should a special order for costs be made against Mr Fehring?

36 The question then arises as to whether the costs of Mr Mulvaney should be paid on a special basis. In Manderson M & F Consulting v Incitec Pivot Limited (No 3),[5] Croft J reviewed the authorities dealing with this issue. He stated:

[8] The jurisdiction of the Court as to costs is conferred by sub-s 24(1) of the Supreme Court Act 1986, in the following terms:

"24(1) Unless otherwise expressly provided by this or any other Act or by the Rules, the costs of and incidental to all matters in the Court, including the administration of estates and trusts, is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid."

This general discretion must be exercised in accordance with Order 63 of the Rules.

[9] The usual order as to costs is an award of costs to the successful party on a party and party basis. This position is reflected in rule 63.31 of the Rules. Nevertheless, the Court has a discretion to make special costs orders. The previously identified categories of circumstances that warrant a special costs order provide guidance in relation to the exercise of this discretion. These categories were identified by Sheppard J in Colgate Palmolive Company v Cussons Pty Ltd as including:

"...the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud ...; evidence of particular misconduct that causes loss of time to the Court and to other parties ...; the fact that the proceedings were commenced or continued for some ulterior motive ... or in wilful disregard of known facts or clearly established law ...; the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions ...; an imprudent refusal of an offer to compromise ...; and an award of costs on an indemnity basis against a contemnor..."

[10] In Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd, Woodward J commented in relation to the commencement or continuation of proceedings with no chance of success:

"... it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established laws."

[11] Further, with respect to this category or circumstance, the Victorian Court of Appeal said in Macedon Ranges Shire Council v Thompson that:

"Where the proceeding has no prospect of success

Costs may be ordered whenever it appears that an action has been commenced in circumstances where the applicant properly advised should have known it had no chance of success. When a litigant presses on where on proper consideration their case should have been seen to be hopeless, the discretion to make a special costs order may be enlivened. French J (as he then was) in J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers Western Australia & Anor considered that the discretion to award such costs would be enlivened when a party persisted, for whatever reason, in what should on proper consideration have been seen to be a hopeless case, and alluding to the presumption referred to by Woodward J in Fountain Selected Meats said that it was an unnecessary condition of the power to award such costs that a collateral purpose or some species of fraud be established. But where the litigant did not recognise that its case was without merit a court may be disinclined to make a special costs order. The Court must measure the litigant's conduct against the facts then known or which ought to have been known, the inquiries that the litigant ought reasonably to have made and the legal advice which the litigant ought reasonably to have obtained. This exercise may be subject to some qualification in respect of a self represented litigant."

[12] As was made clear by Sheppard J in Colgate Palmolive Company v Cussons Pty Ltd, a special costs order may be warranted where a party has engaged in misconduct leading to unnecessary costs or delay. An application for a special costs order on this basis was considered by French J (as he then was) in Re Tetijo Holdings Pty Ltd v Keeprite Australia Pty Ltd:

"[21] Counsel for the respondent next attacked the applicant's conduct of the proceedings saying that interlocutory steps had been protracted by its failure to comply with requests for particulars and discovery and with orders of the Court. Further, it was said, there were untenable applications to amend pleadings and for leave to appeal. Discontinuance of the action was at the last minute and no explanation had been advanced for it. He submitted that it should be inferred that there had been a sudden acceptance by the applicant of the hopelessness of its case and that this was a matter which should have been apparent very shortly after the commencement of the proceedings.

[22] I accept that the interlocutory processes were unduly protracted and that the applicant must bear much of the responsibility for this. However, costs orders were made in favour of the respondent where the applicant was responsible for wasted appearances. When, in an individual case, there is evidence of particular misconduct on the part of a party that causes loss of time to the Court and to other parties then an order for solicitor-client costs and/or costs to be paid forthwith may be made. In my opinion a global order of this kind is not warranted in this case."

37 Mr Fehring's case had what I would describe as insuperable hurdles to overcome in order to succeed and, given that the company had proceeded to go from a deed administration into liquidation with a significant deficiency to its creditors, if successful, had little or no practical benefit to Mr Fehring or the company. Mr Fehring may well have had an impairment when he signed the document appointing Mr Mulvaney but his condition apparently improved to the point that he was able to be closely involved in the administration process and propound proposals to creditors. It seems that it was only when all was lost did he feel minded to bring the appointment application. While I am not satisfied that he had some ulterior motive for commencing it, I cannot but conclude that he chose to disregard the weight of legal and practical impediments which his application faced. He and his family had been intimately involved in the administration process for a period well after he recovered including the submission of detailed proposals to creditors which in the end came to nought, resulting in the company being placed into liquidation.

38 The evidence of Mr Fehring's solicitor, Mr Mitchell, indicates that Mr Fehring was advised at least twice of the risks in running the appointment application and that it was unlikely that it would result in the company emerging from liquidation. He chose not to accept that advice until the eve of the hearing of the application, when all the costs had been incurred.

39 I consider that on an application of the relevant principles a special order for costs should be made against him and he should be made to pay Mr Mulvaney's costs of the appointment proceeding on a solicitor-client basis. The affidavit of Mr Mitchell which is referred to below states that Mr Mulvaney's lawyers indicated that costs of $48,000 had been incurred by Mr Mulvaney. It is not clear whether such costs include the preparation of material in connection with the remuneration application but even if it did, I regard it as being an extraordinary amount for what appears to have been involved. This however, is a matter for negotiation between the parties or ultimately for the Costs Court on a taxation if costs are not agreed.

40 I now turn to the application by Mr Mulvaney that EML should be subject to an order for costs against it.

41 An award of costs against solicitors can be sought pursuant to the inherent jurisdiction of the Court or pursuant to statute. Mr Mulvaney applies to Order 63.23 of the Supreme Court Rules which provides:

Where a solicitor for a party, whether personally or through a servant or agent, has caused costs to be incurred improperly or without reasonable cause or to be wasted by a failure to act with reasonable competence and expedition, the Court may make an order that -

...

(c) the solicitor pay all or any of the costs payable by any party other than the client.

42 In Gippsreal Limited v Kurek Investments Pty Ltd,[6] Pagone J observed:

The jurisdiction to order that a legal practitioner personally pay the costs of a litigant must be exercised with caution but in an appropriate case should be exercised. However wide or narrow the Court's inherent jurisdiction may be, under either the inherent jurisdiction or that conferred by Rule 63.23, it extends to circumstances where costs have been incurred improperly or without reasonable cause or have been wasted due to a failure by a legal practitioner to act with reasonable competence and expedition. The exercise of the power to award costs against a legal practitioner may punish the legal practitioner for misconduct but the risks of a costs order assists more generally in the administration of justice. The possibility of personal liability gives confidence to the courts and litigants that legal practitioners are acting in the best interests of their clients in accordance with appropriate professional standards as an officer of the Court with duties they are bound to uphold to clients, the courts and to justice.

43 Other authorities confirm that the power to make an order against a solicitor under this Rule should be exercised with care and, in particular, the practice of solicitors threatening their opposing solicitor as a tactic to impose pressure during the course of litigation should not be encouraged. In Re Bendeich,[7] Drummond J observed:[8]

As the Chief Justice observed in Bent v Gough, supra, at 207, the power to award costs against a solicitor personally involves special considerations. The cases show that this jurisdiction must be exercised with caution. There is good reason for caution. Too ready an exposure of the lawyer for a party to personal liability for the costs of his client or of the other party is likely to inhibit the way the lawyer acts in conducting the litigation. It frequently happens that a lawyer will have to make judgments as to which of a number of courses is the optimum one to follow, bearing in mind his duty to advance his client's interests by all proper means and his duty to the Court to conduct the litigation in proper fashion. The introduction of a third consideration into every day litigation that requires a solicitor to keep in mind the need to minimise the chances of a costs order being made against him personally, would raise a conflict between the lawyer's duties to his client and to the Court, on the one hand, and his own interests, on the other. As is understandable, such a conflict would likely be resolved by the solicitor concentrating on identifying and adopting the course most likely to minimise his own personal exposure at the expense of following courses best fitted to advantage his client and to bring the action to an expeditious end. Moreover, practitioners should not be encouraged to see the threat to seek a costs order against their opposing solicitor as a tactic available to be employed in the course of litigation to put pressure on their opponent: cf. the comments of the Master of the Rolls and of Dillon LJ in Orchard v South Eastern Electricity Board (1987) 1 QB 565 at 577 and 580.

Myers v Elman, supra, provides a sound guide to the circumstances in which it will be proper under s. 43 the Federal Court of Australia Act and under s. 32 the Bankruptcy Act to make an order that the solicitor for one party pay the costs of that party or the other party. Lawyers should know that, so long as they are not guilty of either professional misconduct or gross, as opposed to mere, negligence in the way they conduct their client's case, they will not be exposed to any personal liability to pay either the costs of their own client or those of the opposing litigant.

44 The solicitor at EML having the conduct of this matter on behalf of Mr Fehring, Mr Mitchell, has sworn an affidavit in opposition to the application by Mr Mulvaney for costs against EML. Mr Mitchell deposes that on 4 October 2011 during his conference with Mr Fehring, he formed the opinion that Mr Mulvaney was not validly appointed as administrator of the company. He states that he formed that view on the basis of the material produced by Mr Fehring, as well as researching case law and considering the various elements necessary to satisfy a court to support a successful application. Mr Fehring had indicated to Mr Mitchell that Mr Fehring's wife, Irene, and other members of his family, would confirm his position by way of affidavit. At that conference, Mr Fehring informed Mr Mitchell that a creditor of the company, a Mr Rayner, was to make a large payment which would be sufficient to satisfy all the outstanding creditors of the company. Mr Mitchell states that he formed the view if the creditors were paid, the company may be able to be brought out of liquidation.

45 On the same day, Mr Mitchell contacted Mr Watson of TressCox Lawyers for Mr Mulvaney and during the course of the conversation with him, mentioned that Mr Fehring considered that the appointment of Mr Mulvaney as administrator of the company was invalid as there was no meeting of directors properly so called. Counsel was engaged on behalf of Mr Fehring on the evening of 6 October 2011.

46 Subsequently, at a conference on 13 October 2011, Mr Fehring and his wife attended a conference at Mr Mitchell's office at which the facts surrounding the appointment of Mr Mulvaney, including Mr Fehring's accident and hospital stay were discussed. Mr Mitchell subsequently spoke to Mr Fehring's sons, Jonas and Anthony Fehring, concerning the events surrounding the appointment of Mr Mulvaney. In late October 2011, he spoke with Mr Rayner who advised him that there had been some minor delays in the receipt of the anticipated funds but assured Mr Mitchell that Mr Fehring would be paid a large sum of money when the funds became available. The following day the originating process for the appointment proceeding, together with affidavit material in support, was filed in the Court. Subsequently, material supporting Mr Fehring's position that he was a creditor of the company was sent to the administrator's solicitors.

47 On 29 November 2011, Mr Mitchell attended a conference in the chambers of Mr Waldren, barrister, with Mr Fehring and another solicitor of his firm. During that conference, Mr Waldren stated that the appointment of the defendant as administrator of the company appeared to be invalid but he expressed concern as to what Mr Fehring hoped to achieve from the proceeding. Despite this, Mr Fehring was not deterred from continuing with his application.

48 On 30 November 2011, TressCox, Mr Mulvaney's solicitors, served a copy of the interlocutory application, described above, which sought relief under s 447A, alternatively s 1322 of the Corporations Act 2001 that in the event that a court made a finding that the appointment of Mr Mulvaney was invalid, that it be regularised. The nature of this application was explained to Mr Fehring the following day.

49 On 1 December 2011, a solicitor assisting Mr Mitchell, Ms Sullivan, spoke with Mr Fehring and during that conversation Mr Fehring instructed her that if he had not received the anticipated funds from Mr Rayner by 2 December 2011 he would give instructions to discontinue his application. On 2 December 2011, the cheque provided by Mr Fehring in payment of professional costs was dishonoured. On that same day, Mr Fehring gave instructions to discontinue the proceeding.

50 On 5 December 2011, the day before the hearing of this matter, EML sent correspondence to Mr Mulvaney's solicitors indicating a willingness to consent to orders in the application that it be struck out with an order that Mr Fehring pay the costs of Mr Mulvaney, fixed in the sum of $10,000, and that Mr Fehring would not oppose the defendant's application for approval of his remuneration. In response, Mr Watson of TressCox stated that the legal costs of the administrator totalled $48,000.

51 In my view, I do not consider it is appropriate to make an order for costs against EML. Mr Mitchell deposes that EML advised Mr Fehring of the risks of the appointment proceeding on at least two occasions and that it was unlikely to result in the company coming out of liquidation. The case commenced by Mr Fehring was a very difficult one in which to succeed with little or no practical benefit to Mr Fehring. Despite advice in that regard he elected to proceed with it. EML took instructions from Mr Fehring and his family, who all swore affidavits in support of the application.

52 I agree with the submission of counsel for EML that the application for costs made against it conflates the question of the prospects of Mr Fehring's proceeding with the question of how EML conducted the case. In my view, there is no evidence that EML was guilty of professional misconduct or gross negligence in the way it conducted Mr Fehring's case. In my view, it conducted a difficult case on the instructions of their client; I do not consider that their conduct has the features which are requisite to an order for costs being made against them. As the authorities indicate, as long as lawyers are not guilty of either professional misconduct or gross as distinct from mere negligence, they should not be exposed to an order for costs. The application for costs against EML is dismissed.

[1] [1993] FCA 536; (1993) 46 FCR 225, 233.

[2] [1997] HCA 6; (1997) 186 CLR 622, 624-5 (citations omitted).

[3] [2010] NSWSC 1301.

[4] [2004] VSC 494.

[5] [2011] VSC 441, [8]-[12] (citations omitted).

[6] [2009] VSC 344, [2].

[7] [1994] FCA 1504; (1994) 126 ALR 643.