Rinfort Pty Limited & Anor v Arianna Holdings Pty Limited

Rinfort Pty Limited & Anor v Arianna Holdings Pty Limited - [2016] NSWSC 648 - NSWSC 2016 case summary — Zoe

Whether the costs of the leave application should be ordered in favour of Mr Mekler

Mr Assaf, who appears for Mr Mekler, seeks an order that Arianna pay Mr Mekler's costs of the application for leave under ss 236-237 of the Corporations Act and the application to set aside the Demand on an indemnity basis. Mr Svehla, who appears for Arianna, submits that the appropriate order is that each party should bear its own costs of the application.
Mr Assaf relies, inter alia, on s 242 of the Corporations Act which provides that the Court may make orders that it considers appropriate about the costs of, relevantly, a person who applied for or was granted leave in proceedings brought with leave under s 237 of the Corporations Act or an application for leave under that section.
I also have regard to s 98 of the Civil Procedure Act 2005 (NSW) which confers a discretionary power to determine costs on the Court and requires that that discretion be exercised judicially. I note that Mr Assaf also draws attention, in reply, to the observations in Commonwealth of Australia v Gretton [2008] NSWCA 117, where Hodgson JA with whom Mason P agreed observed (at [121]) that: "In my opinion, underlying both the general rule that costs follow the event, and the qualifications to that rule, is the idea that costs should be paid in a way that is fair, having regard to what the court considers to be the responsibility of each party for the incurring of the costs. Costs follow the event generally because, if a plaintiff wins, the incurring of costs was the defendant's responsibility because the plaintiff was caused to incur costs by the defendant's failure otherwise to accord to the plaintiff that to which the plaintiff was entitled; while if a defendant wins, the defendant was caused to incur costs in resisting a claim for something to which the plaintiff was not entitled … Departures from the general rule that costs follow the event are broadly based on a similar approach." That observation was recently cited, with apparent approval, by the Court of Appeal in Health v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [98].
Mr Svehla submits that, had Rinfort and Mr Mekler commenced and prosecuted the proceedings in a different manner, they would have been within a more limited compass and would have occupied less than one hearing day. Mr Svehla also submits that Mr Mekler and his legal advisers were aware of the ability to bring an application for leave to bring the proceedings before the Duty Judge, prior to the commencement of the application to set aside the Demand, and had they done so, and obtained such leave, then issues as to their ability to obtain such leave outside the 21 day period specified in s 459G of the Corporations Act would not have arisen in the proceedings before me. Mr Assaf responds that an application under s 237 of the Corporations Act could be brought contemporaneously with the application to set aside the Demand, and that an application by Mr Mekler for leave to bring the proceedings, even if brought prior to their commencement, would have been vigorously opposed by Arianna, as was the application brought by Mr Mekler after the proceedings had commenced, including on the grounds that it was in fact opposed, namely the claims that the application was not brought in good faith, was not in Rinfort's best interests and did not give rise to a serious question to be tried.
It does not seem to me that Mr Svehla's submissions support making no order as to costs as to the leave application or the application to set aside the Demand. The criticism of Mr Mekler for not bringing proceedings to seek leave, in advance of the application, is substantially weakened by my finding that Mr Mekler was entitled to seek leave to bring the proceedings after the event, and the only reason that an application to seek such leave, after the event, was more controversial than an application before the event was that Arianna unsuccessfully contested that entitlement. Second, there is every reason to think that there would have been a vigorous contest as to an application for leave even if it had been brought within the 21 day period specified in s 459G of the Corporations Act, although it would likely have involved one less issue. Third, it might equally be put that it was open to Arianna to authorise Mr Mekler's commencement of the proceedings on Rinfort's behalf, so as to avoid the extended argument as to those issues, or not to take the point that it advanced, unsuccessfully, that leave could not be granted nunc pro tunc outside that 21 day period. Had it taken either approach, the application would have been less complex and less costly for both parties. No doubt, both parties could have conducted themselves differently, but that matter does not seem to me to support no order as to costs where Mr Mekler and Rinfort were successful in the result of the proceedings.
Mr Svehla also criticises the fact that an application was brought by Mr Mekler, on the first day of the hearing to add himself as a second plaintiff in the proceedings. It seems to me that that matter involved little addition to the length of the hearing. Mr Svehla submits that, in any event, any costs order should only be made from the time that Mr Mekler was joined as party to the proceedings. I also do not accept that submission, since much of the work necessary to prepare the proceedings, which ultimately supported Mr Mekler's success in them, would necessarily have been done prior to the first day of the hearing on which Mr Mekler was joined, and should properly be recoverable as part of the costs of the proceedings.
Mr Svehla also advances various other criticisms of the conduct of the proceedings by Mr Mekler. While I have had regard to those criticisms, I do not consider it necessary to deal, seriatim, with a range of contentions made by an unsuccessful party as to how the successful party could have better conducted the proceedings. It seems to me that, in the ordinary course, such an approach will not advance a costs application and that it does not do so here.
Mr Svehla also submits that, although the issues raised were of general importance and their determination has provided legal clarity, that is not a reason why Mr Mekler or Rinfort should obtain an order for costs and why Arianna should be "penalised" where the issues would not have arisen if Mr Mekler had adopted a different approach. I also do not accept that submission. Mr Mekler adopted an approach in seeking leave to bring the proceedings nunc pro tunc which, in the event, I have held that he was entitled to adopt, notwithstanding Arianna's contention to the contrary. It seems to me that, where Arianna chose to contest Mr Mekler's entitlement to take that course, then the ordinary rule that costs should follow the event of that consequence should be applied. The jurisdiction as to costs is not, of course, "penal" in character and is instead exercised to compensate the successful party for costs that it has in fact incurred.
It seems to me that Mr Mekler, having succeeded in the leave application under ss 236-237 of the Corporations Act, and also in the substantive application which he sought leave to bring on the Company's behalf, should have his costs of the leave application. That approach is consistent with a result that costs follow the event, and with treating the leave application as a necessary step in bringing the substantive application.

[4]

Whether the costs of the application to set aside the Demand should be ordered in favour of Mr Mekler

Mr Svehla submits that Rinfort or Mr Mekler should not have argued several grounds to set aside the Demand, including that there was a genuine dispute as to whether a loan had been established, the amount of the loan had been established, and the correctness of the calculation of interest had been established, and that Arianna was required to prepare detailed evidence to address those matters. The Court generally does not attempt to differentiate between the issues on which a party was successful and those on which it failed, although it may deprive a successful party of the costs relating to an issue on which it lost when that issue is clearly dominant or separable: Bostik Australia Pty Ltd v Liddiard (No 2) [2009] NSWCA 304 at [38], Corbett Court Pty Ltd v Quasar Constructions (NSW) Pty Ltd [2008] NSWSC 1423 at [28]-[31]; The Owners - Strata Plan 61162 v Lipman [2014] NSWSC 622 at [241]; Monie v Commonwealth of Australia (No 2) [2008] NSWCA 15 at [64]; Doppstadt Australia Pty Ltd v Lovick & Son Development Pty Ltd (No 2) [2014] NSWCA 219 at [17]. There were here several grounds to set aside the Demand, which overlapped. Ultimately, Mr Mekler was successful on one of those grounds and it does not seem to me to be a case that costs of the different issues can or should be segregated.
It also seems to me that, as Brereton J noted in a similar situation in Hawes v Dean [2013] NSWSC 1246 at [29], it would be doubtful whether Rinfort, having itself incurred no costs, could recover such costs, and it would be inappropriate that costs be recovered by it, to the extent that Arianna would potentially benefit from half of that recovery, notwithstanding that it had not incurred the relevant costs. Accordingly, where Mr Mekler has been required to incur costs in his personal capacity in order to conduct the application to set aside the Demand on the Company's behalf, and has conducted those proceedings successfully, then an order for costs should be made in his favour.

[5]

Whether costs should be ordered on an indemnity basis

As I noted above, Mr Assaf submits that the costs of the leave application and the application to set aside the Demand should be ordered in favour of Mr Mekler on an indemnity basis.
Mr Assaf puts the claim for indemnity costs on the basis, first, that Arianna had unreasonably failed to accept several offers made in the proceedings. Mr Assaf submits that Arianna's rejection of those offers was unreasonable, because Mr Mekler's solicitors had contended that the Demand was an abuse of process and should be withdrawn, and I ultimately accepted that the Demand was inconsistent with the statutory regime and should be set aside under s 459J of the Corporations Act.
In support of this submission, Mr Mekler relied on an affidavit of his solicitor, Mr Brown, dated 8 April 2015. Mr Brown's evidence is that, several days after the date of the Demand, Mr Mekler's solicitors had written to Arianna's solicitors contending that the Demand was liable to be set aside and inviting Arianna to withdraw the Demand. On 15 October 2015, Mr Mekler made a second offer, expressed as an offer under Calderbank v Calderbank [1975] 3 All ER 333, inviting Arianna to set aside the Demand on the basis that each party should bear their own costs. Mr Svehla submits that this letter should not have been annexed to Mr Brown's affidavit, on the basis that it was a "without prejudice" offer. I do not understand that submission, where the letter is labelled "without prejudice except as to costs", which would permit reliance on it in support of an application as to costs. On 9 February 2016, shortly before the three day hearing which commenced on 11 February 2016, Mr Mekler made a further offer that the Demand be set aside, this time on the basis that Arianna pay Mr Mekler's costs.
Assuming, without deciding, that at least the second offer to which I referred above is properly characterised as an offer in accordance with the principles in Calderbank v Calderbank above, the Court must determine the question whether to order indemnity costs in accordance with well-established principles. In Re Alsafe Security Products Pty Ltd atf the Alsafe Trust (in liq) [2016] NSWSC 575 at [8], I summarised those principles as follows: "[T]he fact that a party ultimately achieves a worse result than he or she would have achieved if he or she had accepted a Calderbank offer does not itself establish that the other party should be awarded indemnity costs, unless it can be said that it was unreasonable for the first party not to accept that offer, so as to warrant a departure from the general rule as to costs: Nu Line Construction Group Pty Ltd v Fowler (aka Grippaudo) [2012] NSWSC 816 at [9]-[15]; Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268 at [14], [16]. In Lawrence v Gunner; Gunner v Lawrence [2015] NSWSC 1229 at [26], Stevenson J observed that: 'If a Calderbank offer is made, but not accepted, the court's discretion to make a special order is enlivened. The court's discretion is an open one, but is commonly enlivened if (a) the party that made the offer achieves a better result than the amount offered, (b) the offer was a genuine offer of compromise, and (c) it was unreasonable of the offeree not to accept: for example Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [7]-[8].'"
It seems to me that the first letter sent by Mr Mekler's solicitors provides little support for an order for indemnity costs. Although that letter contended that there was a genuine dispute as to the debt which was the subject of the Demand and that the Demand was deficient in form, and pointed to conflicts of interest affecting the director of Arianna and alternate director of Rinfort who had authorised the issue of the Demand on behalf of Arianna, those and other matters, or at least their legal impact, were properly open to dispute. It seems to me that Arianna did not act unreasonably in seeking to have the application to set aside the Demand determined on its merits at a hearing.
I accept that the second letter referred to above involved at least a degree of compromise, so far as it proposed that each party bear its own costs, However, Mr Svehla submits, and I accept, that that second letter related to wider disputes between Mr Mekler and his mother, Mrs Mekler, rather than only the Demand. The offer made in that letter contemplated the transfer of a property at Bondi as Mr Mekler directed, payment of the costs of that transfer by Arianna and a release and indemnity of liability in connection with that transfer in favour of Mr Mekler, and the transfer of Mr Mekler's shares in Rinfort to Mrs Mekler or as she directed. The introduction of those other matters in that offer means that it is not properly comparable with the outcome of the application to set aside the Demand.
It seems to me that the third letter referred to above amounted to an invitation to Arianna to surrender, rather than a compromise of the proceedings and Arianna did not act unreasonably in then proceeding to a hearing on the merits, so as to support an order for indemnity costs against it.
Mr Assaf also submits that an order for indemnity costs is justified because there had been a relevant delinquency by Arianna as explained by the High Court in Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72. Brennan CJ there observed (at [44]) that: "It may be true in a general sense that costs orders are not made to punish an unsuccessful party. However, in the particular circumstance of a case involving some relevant delinquency on the part of the unsuccessful party, an order is made not for party and party costs but for costs on a "solicitor and client" basis or on an indemnity basis. The result is more fully or adequately to compensate the successful party to the disadvantage of what otherwise would have been the position of the unsuccessful party in the absence of such delinquency on its part."
Mr Assaf also submits that the issue of the Demand was a "clear abuse" of the statutory demand procedure; Arianna should have withdrawn the Demand at Mr Mekler's invitation; and I ultimately held that the director of Arianna was in a position where there was at least a real and sensible possibility of the conflict of duty and duty in the issue of the Demand, although I did not consider it necessary to reach a finding as to whether an actual conflict of interest was established in that respect. Mr Svehla in turn submits that Arianna acted properly and in conformity with the requirements of s 56 of the Civil Procedure Act. I did not understand Mr Assaf to seek to support an order for indemnity costs against Arianna on the basis of any specific allegation of improper conduct in the proceedings, as distinct from criticism of its conduct in respect of the issue of the Demand. I consider that I should give primary weight, in determining the question of costs, to the conduct of the proceedings rather than the events which preceded them. The proceedings were properly conducted by Arianna and I am not satisfied that an order for indemnity costs against it is justified on that basis.
Mr Assaf also submits that the order for costs in favour of Mr Mekler in respect of the application should properly be made on an indemnity basis since Mr Mekler, as distinct from Rinfort, was personally liable for all of the costs incurred in the proceeding. I recognise that, if an order for costs is not made on that basis, Mr Mekler would potentially subsidise the other shareholder in Rinfort, Arianna, to the extent that he incurred the actual costs of the proceedings on Rinfort's behalf, but is only reimbursed for those costs on the ordinary and not on an indemnity basis. Mr Assaf also submits that there would also be intrinsic unfairness if Mr Mekler was not awarded indemnity costs, where he succeeded in the application, where he had been required to indemnify Rinfort against the risks of an adverse costs order in that application.
I am not persuaded by that submission in respect of the costs of the leave application which was brought on Mr Mekler's own behalf and does not differ from any other application brought by a litigant in that respect. It seems to me that no question of a subsidy to the other shareholder of Rinfort arises in respect of that application. That submission has greater force in respect of the application to set aside the Demand. On the other hand, Mr Svehla is correct to note that Mr Mekler (and Rinfort through him) did not succeed in respect of a number of the grounds of that application. I have held above that that was not a basis to deprive Mr Mekler of an order for costs on an ordinary basis, but it seems to me that it does indicate that an order for indemnity costs would not have been made in favour of Rinfort had it brought the proceedings against Arianna. On balance, it seems to me that Mr Mekler should not be placed in a more favourable position as to costs than Rinfort would have been, where he was conducting the application to set aside the Demand on its behalf. Accordingly, the order for costs in Mr Mekler's favour in respect of the application to set aside the Demand, should be made on an ordinary and not an indemnity basis.
Accordingly, I order that the Defendant pay the Second Plaintiff's costs of and incidental to the proceedings, including the Second Plaintiff's application under s 237 of the Corporations Act 2001 (Cth) on an ordinary basis, as agreed or as assessed.

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