Queenfield Pty Ltd v Gordon Finance Pty Ltd

1. The plaintiff's claims in proceedings S ECI 2018 01312 and S ECI 2018 01313 (consolidated by orders of the Honourable Justice Riordan made 6 May 2019) are dismissed.
2. The Sale of Units Deed executed on 1 July 2015 between the plaintiff ('Queenfield'), the second defendant ('Gordon Nominees') and the second defendant by counterclaim ('TLP Nominees') and others is rectified by the inclusion of the following clause:

'The intercompany loans, being the loans to Gordon Finance Pty Ltd (ACN 006 407 27) and Gordon Nominees Pty Ltd (ACN 004 707 617), be assigned to Gordon Nominees Pty Ltd (ACN 004 707 617) as trustee for the Gordon Family Trust (ABN 58 145 003 904).'

1. By 6 March 2020, Queenfield execute all documents necessary to assign all of its right, title and interest in debts owed to it by Gordon Nominees and the first defendant ('Gordon Finance') to Gordon Nominees.

2 A detailed background to the dispute is set out in paragraphs 15 to 66 of the Principal Reasons, but a short summary of the essential facts was set out in paragraphs 1 to 11 of the Principal Reasons as follows:

1. The plaintiff, Queenfield Pty Ltd ('Queenfield'), as trustee of the Travel Inn Motel Unit Trust ('Unit Trust'), is proprietor of the Travel Inn Motel in Carlton ('the Motel').
2. Before 1 July 2015, the second defendant, Gordon Nominees Pty Ltd ('Gordon Nominees'), as trustee of the Gordon Family Trust, was the sole shareholder in Queenfield and sole unitholder in the Unit Trust. Moishe Gordon was a director of Gordon Nominees.
3. By a Sale of Units Deed executed on 1 July 2015, Gordon Nominees transferred to TLP Nominees Pty Ltd ('TLP'), a company associated with the Paolacci family, 50% of the shares in Queenfield and 50% of the units in the Unit Trust.
4. At the time the Sale of Units Deed was executed, Queenfield's books recorded that it had made the following intercompany loans to other entities associated with Mr Gordon (together 'the Gordon Debts'):

(a) A loan of $4,347,611 ('the Gordon Finance Debt') from Queenfield to the first defendant, Gordon Finance Pty Ltd ('Gordon Finance'); and

(b) A loan of $2,000,786 ('the Gordon Nominees Debt') from Queenfield to Gordon Nominees.

1. In 2017, entities associated with the Paolaccis acquired majority ownership of Queenfield, and on 8 March 2017, Queenfield demanded repayment of the Gordon Debts.

6. On 12 September 2018, Queenfield filed:

(a) a writ in proceeding S ECI 2018 01312 against Gordon Finance claiming repayment of the Gordon Finance Debt, plus interest from the date of demand; and

(b) a writ in proceeding S ECI 2018 01313 against Gordon Nominees claiming repayment of the Gordon Nominees Debt, plus interest from the date of demand.

1. By order of 6 May 2019, the two proceedings were consolidated into proceeding S ECI 2018 01312.
2. The defendants deny the Gordon Debts and allege that when the Sale of Units Deed was executed, there was either:

(a) a common intention ('the Common Intention'); or alternatively

(b) a common assumption ('the Common Assumption');

that the sale of units in the Unit Trust by Gordon Nominees to TLP would exclude any interest of the Unit Trust in the Gordon Debts recorded in its books as being owed to it by Gordon Finance and Gordon Nominees, and that such debts would instead be held by Queenfield solely on trust for the benefit of Gordon Nominees as trustee of the Gordon Family Trust.

1. By counterclaim filed on 11 April 2019, Gordon Nominees seeks a declaration that Queenfield holds the Gordon Debts on trust for Gordon Nominees as trustee of the Gordon Family Trust. Alternatively, Gordon Nominees seeks an order that the Sale of Units Deed be rectified to include the following term:

The parties acknowledge, and the Trustee declares, that the Trustee holds on trust for the Vendor [Gordon Nominees Pty Ltd] all of its right, title and interest in debts owed to it by Gordon Finance Pty Ltd and Gordon Nominees Pty Ltd, and that those assets do not form part of the assets of the Unit Trust but are instead held on a separate trust by the Trustee as stated.

1. By third party notices filed on 15 May 2019, the defendants claimed damages to the extent of the Gordon Debts claimed by the plaintiff in the principal proceeding on the basis of alleged breaches of duties of care by:

(a) its accountant, MJM Financial and Business Services Pty Ltd ('MJM'); and

(b) its solicitor, Efron & Associates.

1. On the first day of trial, the claim against MJM was dismissed with the consent of the defendants and MJM, without objection by the other parties. On the fourth day of trial, counsel for Efron & Associates informed the Court that it had resolved its dispute with the defendants.

3 As the Principal Reasons set out, I concluded that:

(a) the parties shared the Common Intention and the Sale of Units Deed should be rectified in accordance with the orders made on 31 January 2020; and

(b) a defence based on conventional estoppel was not available.

4 The remaining issue to resolve is the appropriate orders for costs, in respect of which the parties rely on the following further relevant background facts:

(a) By letter dated 8 March 2017 to the defendants' solicitors, the plaintiff's solicitors demanded repayment of the Gordon Debts.

(b) By email of 22 June 2017 to the plaintiff's solicitors, the defendants' accountant attached a copy of a purported minute of meeting of 5 June 2015 discharging the Gordon Debts ('the 5 June 2015 Minute').

(c) By statutory demands dated 11 August 2017, the plaintiff demanded repayment of the Gordon Debts.

(d) By Originating Processes each filed 1 September 2017, the defendants applied to set aside the statutory demands pursuant to s 459G of the Corporations Act 2001 (Cth).

(e) On 22 June 2018, Randall AsJ set aside both statutory demands. Although he found that the 5 June 2015 Minute was a fabrication,[2] his Honour was satisfied that there was a genuine dispute as to the existence of the Gordon Debts.[3]

(f) On 12 September 2018, each of the current proceedings were filed.

(g) On 26 October 2018, the defendants each filed defences to the claims and alleged that the Gordon Debts had each been discharged on 5 June 2015.

(h) By orders of 11 April 2019, Garde J granted the defendants leave to file and serve an amended defence and a counterclaim. The amended defences removed reliance on the purported 5 June 2015 Minute. The defendants were ordered to pay the costs thrown away by reason of the amendment.

(i) On 6 May 2019, I granted the defendants leave to apply to join Mr Gordon's former accountant as a third party and ordered the defendants to pay the costs of the application.

(j) On 15 May 2019, I granted the defendants leave to join the third parties and vacated a trial date. I ordered the defendants to pay the costs of the application.

5 The plaintiff submits that each party should bear its own costs, for the following reasons.

(a) Mr Gordon contravened each of the overarching obligations in ss 16 to 26 of the Civil Procedure Act 2010 (Vic) by:

(i) perjuring himself and causing his son to perjure himself in the proceedings before Randall AsJ;

(ii) filing defences in these proceedings relying on the 5 June 2015 Minute, which he knew to be false; and

(iii) attempting to interfere with the plaintiff paying its lawyers, and to obtain the lawyer's invoices to the plaintiff.

(b) The defendants' failed claim based on conventional estoppel wasted costs.

(c) The defendants' joinder of two third parties resulted in increased costs to the plaintiff by delaying the proceeding and extending the duration of the trial. In particular, counsel for the second third party cross-examined Mr Gordon for almost a day.

6 It was further submitted that the Court should reject the application for costs in the terms sought by the defendants for the following reasons:

(a) The first defendant did not have a counterclaim and therefore is only entitled to costs for defending the claim brought by the plaintiff.

(b) The proceeding was commenced and run by the plaintiff to call in debts which were recorded in its books, signed off by Mr Gordon in 2016, and recorded in each of the defendants' books and records up to December 2018.

(c) The benefit of the loans was to the plaintiff and each of its unit holders. As trustee of the Trust, the plaintiff was obliged to call in such debts.

(d) The rectification claim was first made on 11 April 2019.

(e) The Court should not impermissibly interfere with the plaintiff's governance by denying the plaintiff's right of indemnification from the assets of the Trust, ordering the second defendant by counterclaim to pay all of the plaintiff's costs and preventing the plaintiff from indemnifying the second defendant by counterclaim if it so chooses.

(f) The defendants' reliance on Re DG Brims and Sons Pty Ltd[4] is misplaced because it relates to an oppression proceeding. There is an oppression proceeding currently on foot between the second defendant, the second defendant by counterclaim and others.[5]

7 The defendants submit that the Court should make the following costs orders:

(a) TLP pay the Defendants' costs of this proceeding, including any reserved costs, and including the costs of proceeding number S ECI 2018 01313 consolidated with this proceeding by order made on 6 May 2019, on a standard basis, to be taxed in default of agreement.

(b) TLP pay to Queenfield its costs of this proceeding, including any reserved costs, and including the costs of proceeding number S ECI 2018 01313 consolidated with this proceeding by order made on 6 May 2019, on a standard basis to be taxed in default of agreement.

(c) Queenfield shall not indemnify or reimburse TLP in relation to its costs liability arising from these orders or otherwise be liable for the costs of proceedings number S ECI 2018 01312 or S ECI 2018 01313.

8 It was submitted that these orders were appropriate for the following reasons:

(a) The real dispute in the litigation was an attempt by the majority unit holder, the second defendant by counterclaim, to secure repayment of the alleged debts for its benefit and to the detriment of the 30% unit holder, the second defendant.

(b) It would be unfair to order that the costs be paid by the plaintiff because 30% of the burden will fall on the second defendant.

(c) The defendants believe that the plaintiff has borne responsibility for the payment of legal fees for itself and the second defendant by counterclaim in conducting these proceedings. Therefore an order should be made that the second defendant by counterclaim not be indemnified by the plaintiff for costs ordered against it. The application of company funds to prosecute the claims of some of the persons interested in the company against other persons interested in the company has been held to constitute oppressive conduct for the purposes of Chapter 2F of the Corporations Act 2001 (Cth).[6]

9 It was further submitted that the Court should refuse to make costs orders in the terms sought by the plaintiff and second defendant by counterclaim, for the following reasons:

(a) The defendants do not seek their costs in respect of the third party proceedings which were resolved in the course of the trial. There is no basis to grant either the second defendant by counterclaim or the plaintiff the costs associated with the third party proceedings. The plaintiff placed great reliance on the cross-examination by counsel for the second third party at trial.

(b) The defendants were wholly successful at trial and none of the criteria identified by Dixon J in Smith v Gould (No 2)[7]applied.

(c) Although the defendants did not succeed on the conventional estoppel issue, it was not a 'significant separate issue in the proceeding',[8] which would require the Court to adopt an apportionment.

10 With respect to the allegations of misconduct by Mr Gordon, costs orders were made against the defendants for the amendment of the defence on 11 April 2019 and the joinder of third parties and vacation of the trial date on 6 May 2019 and 15 May 2019.

11 Mr Gordon is not a party to this proceeding and there is no basis to argue that the falsity of the 5 June 2015 Minute led the plaintiff to reasonably believe that it had a good cause of action. Further, there was a finding in the proceeding that Mr Paolacci's evidence was unsatisfactory.[9] The standards to which the plaintiff hold Mr Gordon should apply to Mr Paolacci.

12 The submissions with respect to Mr Gordon's efforts with regard to the payment of the plaintiff's legal bills should be disregarded. But if considered, they reinforce the defendants' submission that only the second defendant by counterclaim stood to benefit from any recovery in this proceeding.

13 The second defendant by counterclaim submitted that it should not be ordered to pay any parties' costs and should not be out of pocket for its costs arising from the third party claims, for the following reasons:

(a) The second defendant was only successful on one issue.

(b) Substantial costs were wasted in the third party proceedings.

(c) Substantial costs were wasted on the conventional estoppel claim.

(d) The defendants' application for the second defendant by counterclaim to pay the costs of the entire proceeding was akin to an application for a non-party to pay costs, for which no exceptional circumstances were established.

(e) There is no evidence that the second defendant by counterclaim acted unreasonably in defending the counterclaim.

(f) There is no evidence that the plaintiff acted unreasonably in prosecuting its claim.

(g) The second defendant by counterclaim should not be held responsible for any of the costs incurred by the defendants prior to the counterclaim, or in respect of the defences raised and not pursued, or the defences raised and unsuccessfully argued.

(h) The factual and legal basis for a mandatory injunction that the plaintiff be prevented from indemnifying the second defendant by counterclaim for costs is unexplained by the defendants.

14 The relevant principles in determining applications for costs are as follows:

(a) The power to award costs under s 24(1) of the Supreme Court Act 1986 (Vic) is in the discretion of the Court, which must be exercised judicially.[10]

(b) The usual rule is that costs follow the event and departure from the usual rule is only warranted in special circumstances.[11]

(c) Costs should follow the event even where the successful party failed to establish some of the claims, defences or other issues.[12] However the failure to establish such issues is a basis on which the court may decline to order costs in favour of the successful party, or may order that the successful party pay the costs of the unsuccessful party.[13]

(d) The touchstone for departing from the general rule is what is required to do justice between the parties.[14] Circumstances which may justify a departure from the usual rule include where the successful party:

(i) contested many issues on which they failed;

(ii) required the losing party to contest issues abandoned during trial;

(iii) took unnecessarily technical points;

(iv) inappropriately prolonged the litigation;

(v) pressed a substantially exaggerated claim;

(vi) caused the real issues to be obscured or unnecessary evidence to be led; or

(vii) facilitated the loss of the opportunity to expeditiously dispose of the case.[15]

(e) The apportionment of costs between different claims or issues may be based on an impressionistic discretionary evaluation, rather than a precise arithmetical calculation.[16]

(f) Costs are compensatory and are awarded to indemnify the successful party against expenses incurred in legal proceedings. Costs orders are not intended to punish.[17]

15 In my opinion, none of the parties have demonstrated circumstances to justify a departure from the usual order as to costs, for the following reasons.

(a) The falsity of the 5 June 2015 Minute was accepted well before the trial of this proceeding. There was no evidence that the costs that may have resulted from this false allegation prior to the amendment on 11 April 2019 would not be compensated by the costs order made by Garde J on that day.

(b) While the conduct of Mr Gordon in fabricating the 5 June 2015 Minute should be subject to the strongest condemnation, the purpose of a costs order is not to penalise or punish a party for such conduct.

17 With respect to the defendants' delay in joining the third parties and the need to vacate the trial date, costs orders were made with respect to those defaults.

18 With respect to the failed defence based on conventional estoppel:

(a) it was an alternative claim to that which succeeded. In accordance with usual practice, this does not justify a departure from the usual order for costs;

(b) the conventional estoppel claim was based on similar facts to the successful claim for rectification, and did not cause significant additional costs; and

(c) there is no suggestion that the claim was not properly put and the question of whether such a claim is available in Australia is vexed.[18]

(a) the defendants make no claim for costs with respect to them;

(b) the claims were brought in response to the plaintiff's unsuccessful claim;

(c) there is no allegation that the third party claims were not properly brought;

(d) by settling those claims, the Court did not need to determine the issues they raised; and

(e) the duration of the trial was not substantially affected by the third parties' involvement.

20 The claim was brought by the plaintiff as trustee, and the counterclaim was defended by the plaintiff as trustee and by the second defendant by counterclaim as the other party to the Sale of Units Deed. The claim was in accordance with the books and records of the plaintiff at the time it was brought and, if it had been successful, the plaintiff as trustee would have been liable to account to the unit holders, including the second defendant as the 30% unit holder.

21 I do not consider that questions relating to internal management of the plaintiff and the dispute between unitholders are of assistance in considering the question of costs. Questions such as:

(a) which of the defendants by counterclaim funded the litigation;

(b) the propriety of funding arrangements between the plaintiff and second defendant by counterclaim; and

(c) Mr Gordon's conduct with respect to the payment by the plaintiff of its lawyers' fees;

may well be relevant material in the related oppression proceeding.

(2) The defendants by counterclaim pay the costs of the plaintiff by counterclaim.

[1] Queenfield Pty Ltd v Gordon Finance Pty Ltd [2019] VSC 857.

[2] Gordon Finance Pty Ltd v Queenfield Pty Ltd [2018] VSC 341, [27].

[4] Re DG Brims and Sons Pty Ltd (1995) 16 ACSR 559 (Byrne J).

[5] Victorian Supreme Court proceeding number S ECI 2017 00274.

[6] Re DG Brims and Sons Pty Ltd (1995) 16 ACSR 559, 592 (Byrne J); Alborn v Stephens [2011] QSC 341, [115]-[118] (Atkinson J).

[7] [2012] VSC 541, [11] (Dixon J).

[10] Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72, 86 [34] (Gaudron and Gummow JJ).

[11] Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd [2010] VSCA 355; (2010) 31 VR 46, 50 [15] (Maxwell P, Tate JA and Habersberger AJA).

[12] ASIC v Flugge (No 2) [2017] VSC 117; (2017) 342 ALR 478, 501 [130](5) (Robson J); McFadzean v CFMEU [2007] VSCA 289; (2007) 20 VR 250, 290 [153] (Warren CJ, Nettle and Redlich JJA).

[13] Supreme Court (General Civil Procedure) Rules 2015 (Vic) r 63.04(1).

[14] Live Group Pty Ltd v Rabbi Ulman [2018] NSWSC 393, [50].

[15] Smith v Gould (No 2) [2012] VSC 541, [11] (Dixon J).

[16] Mirboo Ridge v Minister for Resources [2018] VSC 668, [5](f).

[17] Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 534, 543 (Mason CJ), 562-3 (Toohey J), 566-7 (McHugh J).

[18] Principal Reasons [125]-[150].