Prechelt, in the matter of Hillcrest Pty Ltd v Hillcrest Pty Ltd

The Substantive Proceeding 3 On 8 July 2016, the plaintiff issued an Originating process against Hillcrest in which he sought an order that Hillcrest be wound up on one or more of five grounds. Those grounds were as follows: (a) The company has suspended its business for 12 consecutive months; (b) The company is unable to pay its debts; (c) The directors have acted in the affairs of the company in their own interests rather than in the interests of the members as a whole or some other manner that appears to be unfair or unjust to some or all of the members; (d) An act or omission by or on behalf of the company was oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or was contrary to the interests of the members as a whole; and (e) It is just that the company be wound up. 4 The plaintiff swore an affidavit in support of the application. In that affidavit, he referred to the sale of Hillcrest's assets to Heritage Hill Investments Pty Ltd (Heritage Hill). He stated that he was concerned that the directors of Hillcrest had sold or caused to be sold all of the assets and undertaking of Hillcrest to Heritage Hill without his prior knowledge and that the sale was at a significant undervalue (the Heritage Hill transaction). He stated that in the event that Hillcrest was wound up and liquidators were appointed, he proposed to offer funding to the liquidators to investigate the sale to Heritage Hill. 5 The directors instructed solicitors to oppose the application for winding up. In Amended Grounds to Opposition to Winding Up, Hillcrest said that it opposed the application on the following grounds: 1. (a) In answer to ground (a) of the application for winding-up of the Defendant as set out in the Originating Process filed 8 July 2016 ("the application"), the Defendant admits that it has suspended its business for 12 consecutive months but says that the Court's power under section 468(1)(c) of the Companies Act 1985 of Norfolk Island ("Act") to wind up the company on that ground alone is discretionary, and in the circumstances should not be exercised. (b) In answer to ground (b) of the application, the Defendant says and it is the case that: (i) it has no debts other than to the following shareholders in the following amounts: o Kerry Douran: $1,034,930.00 o The Plaintiff: $1,368.00 ("the shareholder loans"); (ii) the shareholder loans are repayable on demand; (iii) neither Kerry Douran nor the plaintiff have demanded repayment by the company of the shareholder loans; (iv) demand not having been made, the shareholder loans are not due and payable; (v) it is the present intention of Kerry Douran not to demand repayment of the shareholder loan made by him in the sum of $1,034,930.00; (vi) in the premises, as a matter of commercial reality having regard to the practice business environment, the Defendant is not insolvent. (c) In answer to ground (c) of the application, the Defendant says and it is the case that: (i) the directors have acted in the affairs of the company in the interests of the company and of the members as a whole; (ii) in so doing, the directors have incurred personal detriments; (iii) the directors have acted in the affairs of the company in a manner which is fair and just to all members of the company. (d) In answer to ground (d) of the application, the Defendant says and it is the case that no act or omission by or on behalf of the company was: (i) oppressive or unfairly prejudicial to any member; (ii) unfairly discriminatory against any member; (iii) contrary to the interests of the members as a whole. (e) In the premises, it is not just that the company be wound up. 6 Mr Douran swore an affidavit on 30 August 2016. That affidavit was filed in the proceeding. In the affidavit, he states the following: 1. I am a director of the Defendant in these proceedings, Hillcrest Pty Ltd ("the company"). The company has two directors, namely my sister Gordina Douran ("Gordina") and myself. I am authorised by Gordina to swear this affidavit on behalf of the defendant. 7 Mr Douran swore a second affidavit on 12 September 2016 and that affidavit included in paragraph 1, statements to similar effect to the statements in paragraph 1 of his affidavit sworn on 30 August 2016. 8 In the course of the proceeding, the plaintiff served two notices to produce on two non-parties to the proceeding. The defendant applied for orders setting aside or amending the notices to produce and that application was the subject of a decision by the Court (Prechelt, in the matter of Hillcrest Pty Ltd v Hillcrest Pty Ltd [2017] NFSC 1). The orders which were made on the application on 19 January 2017 were as follows: 1. The Notice of Non-Party Production addressed to Heritage Hill Investments Pty Ltd filed on 16 August 2016 be amended as follows: (a) paragraphs 2 and 8 of the Schedule be deleted; and (b) paragraph 7 of the Schedule be deleted and replaced with the following words: "All written shareholders agreements between Mr Kerry Douran and Mr King concerning the ownership of shares in Heritage Hill". 2. The Notice of Non-Party Production addressed to Michael William King filed on 16 August 2016 be amended as follows: (a) paragraphs 1, 2, 4, 6, 7 and 9 of the Schedule be deleted; and (b) paragraph 8 of the Schedule be deleted and replaced with the following words: "All written shareholders agreements between Mr Kerry Douran and Mr King concerning the ownership of shares in Heritage Hill". 3. The parties be heard as to the costs of the defendant's application. 9 In its case summary filed shortly before the hearing, Hillcrest's opposition was based on the following: (1) Only one ground for winding up had been established - Hillcrest had suspended business for 12 consecutive months; (2) The discretion to make a winding up order should be exercised against making such an order; (3) The company is not unable to pay its debts; and (4) The plaintiff could and should pursue an oppressive conduct claim either in this proceeding or in a fresh proceeding. 10 The application for an order winding up Hillcrest came on for hearing before me on 8 February 2017. The evidence at the hearing consisted of two affidavits of the plaintiff, two affidavits of Mr Kerry Douran, and a number of exhibits. The plaintiff and Mr Douran were each cross-examined. 11 Early in Mr Douran's cross-examination, he gave the following evidence: MR SHAW: Mr Douran, why are you opposing this application?---It's because of the expense of winding the company up, because my - all my resources were extinguished. You're aware that Mr Prechelt has offered to fund any investigations of the liquidator, aren't you?---I am. So what expense, is it, that you will incur in the winding up of the company that you're concerned about?---Well, I just think that there's an expense hanging over there that I might have to pay. An expense to you personally as a shareholder director?---Yes. And if there were no such expense that you would have to pay then you would have no opposition to the company being wound up and a liquidator appointed?---No. What would that objection be then, if it were not the expense?---No. I have no objection. You would have no objection. And so the expense that you're concerned about that may be incurred by you personally, do you mean the costs of the liquidator in performing his or her role?---Yes. And only that?---Only that, your Honour. 12 I delivered reasons for judgment on 31 May 2017 (Prechelt, in the matter of Hillcrest Pty Ltd v Hillcrest Pty Ltd (No 2) [2017] NFSC 3). Those reasons should be read with these reasons. I decided that the company should be wound up. I indicated that I would hear the parties as to the form of the orders and costs. 13 On 2 June 2017, I made a number of orders. Relevantly, I made the following orders: Upon the plaintiff, Gregg Prechelt, undertaking to the Court, pursuant to a signed written undertaking dated 10 February 2017, to pay the reasonable fees and outlays of the liquidators in conducting the winding-up of the defendant, Hillcrest Pty Ltd, including such conduct relating to investigations in regards to the Asset Sale Agreement dated 20 November 2012, but not (without further agreement) including any conduct by the liquidators which involves commencing and prosecuting any legal action on behalf of Hillcrest Pty Ltd, THE COURT ORDERS THAT: 1. Hillcrest Pty Ltd (NI Company Registration no. 02/96) be wound-up in insolvency pursuant to section 467 of the Companies Act 1985 (Norfolk Island). 2. Mark William Pearce and Michael Dullaway be appointed as joint and several liquidators to conduct the winding-up. 14 I also made orders directed to the determination of the plaintiff's application for costs against Mr Douran and Ms Douran on the papers.

The Power to make an Order for Costs against Third Parties 15 Section 5(1) of the Supreme Court Act 1960 (NI) (the Act) provides that subject to the Act, the Supreme Court has the same jurisdiction in and in relation to the Territory as the Supreme Court of the Australian Capital Territory has in and in relation to the Australian Capital Territory. 16 Section 6 of the Act deals with the power to award costs and relevantly provides: (1) The Supreme Court and a Judge sitting in chambers have jurisdiction to award costs in all matters brought before the Court, including matters dismissed for want of jurisdiction. (2) Subject to rules of court, the costs of and incidental to proceedings in the Supreme Court, including the administration of estates and trusts, are in the discretion of the Court or Judge, and the Court or Judge has power to determine by whom and to what extent the costs are to be paid. (2A) Until the Chief Justice has made rules under section 19 for determining the costs that may be payable by a party, the rules in respect of costs in the Supreme Court and the scale of costs shall be in accordance with the Supreme Court rules made under the Supreme Court Act 1933 of the Australian Capital Territory from time to time or such rules as may replace them under the Court Procedures Act 2004 (A.C.T.) and if required to be taxed shall be taxed as the court may direct. 17 Section 19(4) provides as follows: (4) Until, in relation to a matter or class of matters, rules of court are made by the Chief Justice, under subsection (1), the rules of court for the time being in force of the Supreme Court of the Australian Capital Territory in relation to that matter or class of matters shall, so far as applicable and mutatis mutandis, be the rules of court of the Supreme Court. 18 The Rules of Court of the Supreme Court of the Australian Capital Territory - the Court Procedures Rules 2006 (ACT) (the Rules) - in relation to costs apply in Norfolk Island. 19 Part 2.17 of the Rules deals with costs. Rule 1703 deals with the Court's power to make a costs order against a non-party. It is in the following terms, relevantly: (1) Unless these rules otherwise provide, the court must not make an order for costs in a proceeding against a person who is not a party to the proceeding except in accordance with subrule (2). (2) The court may make an order - … (e) for costs against a person who starts or carried on a proceeding, or purports to do so, as an authorised director of a corporation; … (g) for costs against a person in the exercise of its supervisory jurisdiction over its own proceedings and its own officers, including, for example, an order for costs against legal practitioners and court-appointed liquidators and receivers. 20 In the leading Australian authority on the power to award costs against non-parties, Knight and Another v FP Special Assets Limited and Others (1992) 174 CLR 178 (Knight v FP Special Assets), the High Court said that in that case the source of the power to award costs against non-parties was O 91 r 1 of the Rules of the Supreme Court of Queensland and not s 58 of the Supreme Court Act 1867 (Qd). Order 91, r 1 provided as follows: Subject to the provisions of the Judicature Act and these Rules, the costs of and incident to all proceedings in the Court, including the administration of estates and trusts, shall be in the discretion of the Court or Judge: Provided that nothing herein contained shall deprive an executor, administrator, trustee, or mortgagee who has not unreasonably instituted or carried on or resisted any proceedings of any right to costs out of a particular estate or fund to which he would be entitled according to the Rules heretofore acted upon in Courts of Equity: Provided also, that, subject to the next following Rule, when any cause, matter, or issue is tried with a jury, the costs shall follow the event, unless the Judge by whom such cause, matter, or issue is tried, or the Court, shall for good cause otherwise order. Section 58 was in the following terms: The Supreme Court shall have power to award costs in all cases lawfully brought before it and not provided for otherwise than by this section. (at 185 per Mason CJ and Deane J, with whom Gaudron J agreed; at 203 per Dawson J; at 207 per McHugh J). 21 In Kleiner v Randall [2006] NFSC 3, Kiefel J (as her Honour then was) said at [4]: Section 6(2) is in the same terms as s 5 of the Judicature Act 1890 (Vic) [sic UK] which has been held to confer a power to award costs against non-parties: see Knight v FP Special Assets Limited (1992) 174 CLR 178, 196-7 ('Knight'). The plaintiff does not dispute this. 22 The argument that is put in this case by the directors is that the power in s 6(2) of the Act is subject to the Rules of Court and that means r 1703. The circumstances in this case, so the directors contend, do not fall within r 1703(2)(e) because that rule only applies where a corporation brings and maintains the proceeding. 23 The plaintiff put four submissions in response. I will identify those submissions, although it is necessary for me to deal only with the first submission because I think that submission is correct. 24 The first three submissions are put on the premise that the Court's power to award costs against a non-party is limited to those cases identified in r 1703(2). They are as follows: (1) an authorised director of a corporation carries on a proceeding whether the corporation is plaintiff or defendant within r 1703(2)(e); (2) the Court can make an order for costs against the directors in the exercise of its supervisory jurisdiction over its own proceeding within r 1703(2)(g); (3) the Court may dispense with r 1703(1) under the power in r 6(1). 25 The fourth submission is that s 6(2) of the Act provides the source of the power to award costs against a non-party. The adoption of the rules of the Australian Capital Territory is for matters of procedure and cannot limit the breadth of the jurisdiction conferred by subsections 6(1) and (2) of the Act. 26 Although r 1703 limits the cases in which the Court may order costs against a non-party, that is no reason to read the rules creating those cases in a restrictive fashion. They should not be construed by reference to implied limitations (Knight v FP Special Assets at 185 per Mason CJ and Deane J; at 205 per Gaudron J). In my opinion, r 1307(2)(e) should be given a broad interpretation. Depending on context, a defendant who defends a proceeding carries on a proceeding as much as a plaintiff who pursues a proceeding. There does not seem to be any reason, in the context of whether an order for non-party costs ought to be made, to distinguish between corporation as plaintiff and corporation as defendant. I note that in a related context, the Federal Circuit Court has taken a similar view in the case of its rule regulating the appearance of a corporation before the Court (Hall v Cadillac Transport Repairs Pty Ltd [2011] FMCA 189; Alcantara & Anor v Buildpower Pty Ltd [2010] FMCA 626).

Whether an Order for Costs should be made against the Directors 27 In Knight v FP Special Assets, Mason CJ and Deane J said (at 192-193): For our part, we consider it appropriate to recognize a general category of case in which an order for costs should 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 non­party, 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. 28 In the substantive proceeding, I found that the company was unable to pay its debts. I will not rehearse the reasons for that conclusion (at [34]-[36]). Mr Douran played an active part in the conduct of the litigation. With the authority of Ms Douran, he gave instructions to the solicitors acting for Hillcrest, including instructions to oppose the application. 29 Mr Douran had an interest in the subject matter of the litigation. He either wished to avoid an investigation by the liquidators into the Heritage Hill transaction because of the potential consequences of such an investigation to him or, if his evidence is to be believed, because he considered that he may be liable for the costs of the liquidator in performing his or her role. In my opinion, Mr Douran's explanation is implausible. It is not mentioned in the Amended Grounds of Opposition and the law is clear that Mr Douran would not have been liable for the costs of the liquidator performing his or her role. Even if the explanation is accepted, it satisfies the criterion of Mr Douran having an interest in the subject of the litigation. 30 Another relevant consideration is whether the directors were put on notice that an order for costs would be sought against them. In this case, that occurred when the plaintiff's solicitors wrote to the company's solicitors on 24 November 2016 in the following terms: The purpose of this correspondence is to put both of the Directors on notice, for the reasons and in the circumstances as outlined below, that if the defendant persists with its opposition to our client's application for a winding up order and our client's application is successful, then our client will be seeking an order from the Court, in addition to the relief being sought in the winding up application, that the Directors personally be ordered to pay our client's costs of the proceeding, and that such costs be assessed on a full indemnity basis. (Footnote omitted.) 31 The author of the letter then went on to set out the events and circumstances that the plaintiff would rely on in support of his application for an order for indemnity costs against the directors. 32 I am satisfied that it is appropriate to make an order for costs against the directors. Mr Douran was acting throughout with the authority of Ms Douran. The directors did not suggest in their submissions that the two directors should be dealt with any differently from each other. 33 Notice to the non-party that a costs order will be sought against him or her will not always be the critical or determining factor. However, in this case I think that it is important. On the face of it, one of the non-parties (i.e., Mr Douran) is by far and away the most substantial creditor and it is not known at this point whether overall the plaintiff's endeavours in relation to the company will prove fruitful. I will make the usual order for costs, albeit to be assessed on an indemnity basis, in relation to the period before 25 November 2016 and order that the directors pay the plaintiff's costs assessed on an indemnity basis from 25 November 2016.

Whether the Order for Costs should be Costs Assessed on an Indemnity Basis 34 A striking feature of this proceeding is that, despite the Amended Grounds of Opposition and the affidavit evidence filed, Mr Douran gave the explanation he did as to the reason the company opposed the order for winding up. As I have said, I do not think that the explanation is plausible and the more likely explanation is that Mr Douran did not want the Heritage Hill transaction to be investigated by a liquidator. Even if that be wrong, the reason he gave is unreasonable. He had access to legal advice and that legal advice if taken would have disabused him of his belief. If that had happened, the plaintiff's application would not have been opposed and the substantial costs of opposition would have been avoided. In those circumstances, an order that the plaintiff's costs, including those to be paid by the directors, be assessed on an indemnity basis is appropriate.

The Costs of the Defendant's Interlocutory Process dated 12 September 2016 35 The Notices for Non-Party Production were filed by the plaintiff on 16 August 2016. The defendant issued its Interlocutory process seeking an order that the notices be set aside or amended on 12 September 2016. On 5 October 2016, I made an order that the application be determined on the papers and the parties filed their written submissions in October 2016. 36 I have already set out the orders which I made on the application. I have re-read my reasons for making those orders. The defendant applied for an order setting aside the notices or, in the alternative, amending the notices. It failed to have the notices set aside, but I did amend the notices in material respects. Each party had a measure of success and failure on the application and I think the appropriate order is that each party bear their own costs of the Interlocutory process dated 12 September 2016.

Conclusion 37 Each party should bear his or its costs of the defendant's Interlocutory process dated 12 September 2016. Subject to that, I will make an order that the plaintiff's costs before 25 November 2016 of and incidental to the proceeding be reimbursed out of the property of the company on an indemnity basis and an order that from that date, the directors of Hillcrest pay the plaintiff's costs of the proceeding assessed on an indemnity basis. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Besanko.