Plaintiff v Defendants

1 On 10 September 2013, the Court published reasons for judgment.[1] The essential background facts are there described and I will not repeat them. I will adopt the terminology of those principal reasons in these reasons for judgment concerning costs. For the reasons given during the course of argument this morning, I have determined as follows:

(1) The defendants are entitled to an order for their costs of the proceeding including reserved costs but not including the costs reserved by Associate Justice Efthim on the leave to proceed application.

(2) The costs of and incidental to the re-openings should not all be paid by the plaintiff. The defendants' costs of the proceeding will therefore not include their costs of the hearings on 5, 12, 18 and 19 June 2013.

(3) The defendants should pay the plaintiff's costs of the hearings on 5, 12, 18 and 19 June 2013. Of course those costs will be set-off against the plaintiff's liability for the defendants costs of the proceeding generally.

(4) Senior counsels' fees should be taxed at the maximum allowable scale fee, and the Costs Court should not increase that fee in the exercise of its discretion.

2 The question remains as to whether a non-party costs order should be made against Bradley and Kelly Mischel for the costs to which the defendants are entitled. Section 24 of the Supreme Court Act 1986 empowers the Court to make a costs order against a non-party. The making of a non-party costs order is exceptional.[2]

3 In Knight v FP Special Assets Limited,[3] the High Court recognised a general class of case where courts may exercise the power to make a non-party costs order:

For our part, we consider it appropriate to recognise a general category of case in which an order for costs could be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting, or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.[4]

4 In Knight, Dawson J said that the cases establish a jurisdiction to award costs in appropriate cases 'against a person who was not a party to the proceedings where that person is the effective litigant standing behind an actual party'.[5]

5 As the above quoted passages from Knight show, the fact that a proceeding is being brought by a person who is the effective litigant but who is standing behind an insolvent party to the litigation opens the door to exercising a judicial discretion to make a non-party costs order but does not require it. Each case depends upon its own facts and the interests of justice in the particular case. The discretion is unfettered.

6 Other cases emphasise the exceptional and unfettered nature of the discretion. Some of them are referred to in the plaintiff's written outline of submissions. For example, in FMP Constructions Pty Ltd v Council of the City of Blue Mountains,[6] the Court of Appeal in New South Wales set aside a non-party costs order made at first instance against the sole director of the defendant company who was the only witness for the defendant at trial and for whose effective benefit the litigation was run. The Court warned that the recognised classes of cases where a non-party costs order have been held to be open, including the circumstances summarised by the High Court in Knight, do not create a general rule or fetter the discretion.[7]

7 Reference should also be made to statements to similar effect in Rushton (Queensland) Pty Ltd v Rushton (NSW) Pty Ltd[8] and Permark International Interiors Pty Ltd v Amoveo Pty Ltd.[9]

8 Those cases emphasise that each case must depend upon its own particular facts and circumstances, and that the mere fact that the first three factors identified by the High Court in Knight exist does not require the making of a non-party costs order.

9 Further, as Bradley and Kelly contended in their outline of submissions, and in oral submissions, the authorities establish that a failure to seek an order for security for costs (for example, see Knight[10]) or the failure to give a warning that non-party costs may be sought (for example, see Manderson M & F Consulting v Incitec Pivot Ltd (No. 3)[11]) are factors which may be taken into account in exercising the Court's unfettered discretion in the circumstances of a particular case.

10 I will first consider whether the first three factors mentioned by the High Court in Knight have been satisfied, thus opening the door to the exercise of the discretion to make a non-party costs order.

11 First, Bradley and Kelly deny that the plaintiff company is insolvent or the equivalent of a man of straw. They point to the value of the properties owned by the two unit trusts and on that basis contend as follows:

1. There is no evidence to suggest that, at the time the proceeding was commenced, Ballantyne Suites was made of straw. Conversely, there is evidence that:

(a) the Properties were commercial premises that were partially tenanted;

(b) the Properties were the subject of a mortgage in favour of the Commonwealth Bank of Australia (CBA);

(c) had the Ballantyne Suites' case succeeded, it could have refinanced a loan to CBA and/or procured new or additional tenants for the Properties.

1. Thus, it cannot be said that Ballantyne Suites commenced the proceeding contemplating that it was insolvent or that it was made of straw.[12]

12 I reject those submissions. There is no evidence that the plaintiff had any assets other than its $12 capital and its claim to be the new trustee of the unit trusts, which was dismissed at trial.

13 The evidence establishes the following facts which support a finding of insolvency:

(1) The plaintiff was registered on 21 October 2001 with paid up capital of only $12.

(2) The plaintiff was registered after the date of the document which purported to remove the defendant as trustee, and just days before the nomination deadline of 31 October expired. I infer that the plaintiff was incorporated for the sole purpose of taking the properties from the defendant as trustee.

(3) When demanding that the defendant transfer the properties to it, the plaintiff offered to indemnify the defendant for its obligations under the mortgage. It indicated that it was seeking to refinance the loans. I infer that the practical enforceability of the indemnity offered was contingent upon the availability of refinance if successful in the proceeding.

(4) There is no evidence that the plaintiff could pay the costs order made against it. Bradley and Kelly have had ample opportunity to put on evidence to that effect since the non-party costs issue was raised in December last year. I infer that the plaintiff's assets are limited to its $12 paid up capital.

14 The second factor in Knight is conceded. Bradley and Kelly played an active role in the conduct of the litigation, which could not have been commenced or prosecuted without their authority.

15 Third, Bradley and Kelly contend that they are not direct beneficiaries of the children's trusts and thus their interest in the litigation was only indirect. On this basis it was contended on their behalf that they have an insufficient interest to satisfy the third factor identified by the High Court in Knight. Reliance was placed on the decision of Gobbo J in Bischof v Adams,[13] where his Honour said that the necessary connection between the non-party and the proceedings must be 'real and direct', and on the decision of Sifris J in IPEX ITG Pty Ltd (in liq) v State of Victoria (No 2),[14] where his Honour stated:

I am not convinced that being a potential beneficiary (or having the ability to determine any distributions if this be the case) makes any real difference or is sufficient to underpin the critical basis of liability, namely a sufficient personal interest in the litigation.[15]

16 I do not accept that a direct financial interest is required. The High Court in Knight spoke only in general terms, of the non-party having 'an interest in the subject of the litigation'.[16] Further, on the application for leave to appeal in IPEX,[17] Macaulay AJA doubted the correctness of Sifris J's quoted statement and noted that Byrne J had reached the opposite conclusion on the same facts in related litigation. [18] Byrne J had stated that the fruits of success in the litigation either belonged to the non-party: 'or were substantially within his gift'. In his Honour's view, that was enough to satisfy the third factor mentioned in Knight.

17 I prefer the reasoning of Byrne J. Applying it to the facts of this case, it is clear that Bradley and Kelly have a sufficient interest in the subject of the litigation to satisfy the third factor in Knight. This is evident from the following matters:

(1) The directors of the plaintiff are Bradley and Kelly.

(2) The directors of Babinda Pty Ltd and Glenapp Pty Ltd, the trustees of the children's trusts, are Kelly and Bradley respectively.

(3) The dealing that instigated this litigation was Bradley and Kelly purporting to remove the defendant as trustee of the unit trusts.

(4) Bradley's trust is constituted with Bradley as appointor, guardian and specified beneficiary, with general beneficiaries including his family. Bradley is the sole director and shareholder of the corporate trustee.

(5) Kelly's trust is constituted with Kelly as appointor, guardian and specified beneficiary, with general beneficiaries including her family. Kelly is the sole director and shareholder of the corporate trustee.

(6) Against the background of their father's impending bankruptcy, Kelly and Bradley took steps to secure the trusts for their benefit by removing the defendant as trustee and appointing the plaintiff in its place. In that regard I refer to paragraph 62 of my principal reasons and the letters from Piper Alderman, solicitors for the plaintiff, and for Bradley and Kelly, to the liquidator dated 2 February and 24 September 2012.

(7) The interposition of the children's trusts, while formally making Kelly and Bradley have prospective benefits only, does not detract from the practical consequences that they are the real parties who stood to benefit if the plaintiff succeeded in its claims.

18 Accordingly I am satisfied that the gateway for the exercise of the discretion to make a non-party costs order is open.

19 Addressing the interests of justice, Bradley and Kelly contend that the Court should have regard to particular factors. First, the fact that no order for security for costs was ever sought. Second, the fact that no warning was given to them that a non-party costs order may be sought against them in the event that the plaintiff's claim was dismissed. Instead of these steps being taken, in earlier proceedings between the parties, the liquidator:

(1) unsuccessfully opposed leave being granted to the plaintiff under s 471B of the Corporations Act 2001 to bring this proceeding, unless conditions were imposed securing his costs of opposing the proceeding; and

(2) unsuccessfully sought to be appointed a receiver of the defendant's assets, so as to secure his fees and expenses.[19]

These matters are obviously relevant and must be taken into account in the discretionary mix.

20 Counsel for Bradley and Kelly next contended that there is no suggestion that they were complicit in or knew of their father's fraud, as found by the Court. The Court should infer that they brought and prosecuted the proceeding in good faith and in the belief that their father was telling the truth. In short, that the sins of their father should not be visited upon them; and that this was especially so in circumstances where they were not cross-examined at trial to the effect that they were knowingly concerned in their father's fraud.

21 Other factors were relied upon by Bradley and Kelly, but they do not in my view influence the exercise of discretion in any meaningful way.

22 Taking all of the relevant factors into account, in my opinion this case is sufficiently exceptional to justify the making of a non-party costs order. Although an application for security for costs, or an express warning, would have given Bradley and Kelly an opportunity to consider whether or not to continue relying upon their father's word and to proceed with this case, there is no reason to infer that they would not have proceeded if such a warning had been given. They have had an ample opportunity to put on evidence to that effect if they wanted to, as the submissions in support of the non-party costs orders were served as long ago as 9 December 2013.

23 Further, counsel for the defendants was, in my view, justified in not cross-examining at trial as to their knowledge of their father's fraud, as they gave uncontroversial evidence in their written statements and Bradley's evidence about the context of the purported change in trustees of the unit trusts was not only not disputed but relied on by the defendants.

24 The fact remains that the litigation fits within the scope of the cases recognised by the High Court in Knight for the making of a non-party costs order if the interests of justice require it. As I have stated, I am satisfied that the litigation was determined upon and pursued by Bradley and Kelly through an insolvent company and for their principal benefit. They played an active part in the litigation by determining to accept the word of their father and prosecute a case which depended upon his word being accepted by the Court. This was in circumstances where they knew of their father's chequered history, involving fraud on his clients, and had no personal knowledge of the contemporaneous facts surrounding preparation and execution of the critical documents. It was not until August 2013 that they were told by their father of the critical documents, and then only in the context of his impending bankruptcy and of his express desire to take steps to ensure that the equity in the properties did not form part of his bankrupt estate. This was expressly for their benefit. Bradley was open about this in his evidence, as noted in paragraph 62 of the principal reasons, and in paragraphs 9 and 13 of his witness statement. In the highly unusual circumstances of this case, I find that Bradley and Kelly, while hiding behind corporate and trust veils, took the significant risk that the Court would believe their father. The Court did not, and the litigation was lost because of a finding that their father practised an elaborate fraud. It would be unjust if the successful defendants were unable to recover their costs in these circumstances.

25 Further, as stated in the Court's principal reasons, neither Bradley nor Kelly, nor their respective trusts, gave any consideration for the purported transfers of units in the unit trusts from their father to the children's trusts.

26 In all the circumstances I am of the opinion that the interests of justice justify making a non-party costs order and I will make such an order.

[1] [2013] VSC 482.

[2] For example, Kebaro Pty Ltd v Saunders [2003] FCAFC 5, 103.

[3] [1992] HCA 28; (1992) 174 CLR 178.

[4] Ibid 192-3 (Mason CJ and Deane J) (emphasis added).

[6] [2005] NSWCA 340.

[8] [2004] QSC 47.

[9] [2013] VSC 563.

[11] [2011] VSC 441, 29.

[12] Plaintiff's outline of submissions costs and final orders, [11]-[12] (citation omitted).

[13] [1992] VicRp 61; [1992] 2 VR 198, 205.

[14] [2011] VSC 39.

[17] [2011] VSCA 134.

[19] See Ballantyne Suites Pty Ltd v Ballantyne Chambers Pty Ltd [2013] VSC 66 (Ferguson J).