Senatore v Andriolo

1. Ezio Senatore brought proceedings in his capacity as the liquidator of Italo-Australian Club (ACT) Ltd (In Liq) against former directors of the company for alleged breaches of statutory or fiduciary duties owed to the company. The company in liquidation was the second plaintiff in the proceedings. The matter was heard by Crowe AJ. His Honour entered judgment for the defendants and ordered the plaintiffs to pay the defendants’ costs as agreed or assessed: Senatore v Andriolo [2022] ACTSC 285. That order was to be suspended if either party sought a different order as to costs.

2. The first defendant, Mr Andriolo, sought a different order based on the plaintiffs’ failure to accept an offer of compromise. The order sought was that the plaintiffs pay his costs on a party and party basis up to the date of the offer of compromise and on a solicitor and client basis thereafter. The plaintiffs opposed an order in those terms but accepted that there should be an order that they pay Mr Andriolo’s costs on a party and party basis. Due to no fault on the part of Crowe AJ, the determination of Mr Andriolo’s application had to be reallocated to a different judge. This judgment determines that application. The delay in the preparation of the judgment is mine, not that of Crowe AJ.

3. The application invokes r 1012 of the Court Procedures Rules 2006 (ACT), which is contained within Pt 2.10 of the Rules, the part that addresses offers of compromise. Rule 1012 provides: Offer not accepted and judgment no less favourable to defendant (1) This rule applies if the offer is made by the defendant, but not accepted by the plaintiff, and the defendant obtains an order or judgment on the claim no less favourable to the defendant than the terms of the offer. (2) Unless the court orders otherwise— (a) the defendant is entitled to an order against the plaintiff for the defendant’s costs in relation to the claim, to be assessed on a party and party basis, up to the time when the defendant is entitled to costs under paragraph (b); and (b) the defendant is entitled to an order against the plaintiff for the defendant’s costs in relation to the claim, assessed on a solicitor and client basis— (i) if the offer was made before the first day of the trial—on and from the day after the offer was made; and (ii) if the offer was made on or after the first day of the trial—at and from 11 am on the day after the offer was made.

4. Mr Andriolo’s offer of compromise was expressed to be made under Pt 2.10. The offer proposed that, without admission as to liability, Mr Andriolo would pay $20,000 to the plaintiff; that the claim against him be dismissed; that there be no order as to costs and that the parties enter a deed of release. The letter asserted that an objective view of the evidence showed that Mr Andriolo did not breach the provisions of the Corporations Act 2001 (Cth) relied upon by the liquidator and that, from the evidence “now available”, it “should not be said that the first defendant acted in a way that no honest and reasonable director would have done the same”. The letter did not descend to any detail or discussion of the evidence to support those assertions. While that is not a requirement of an offer made under the Rules, the absence of any such detail may inform the exercise of the court’s discretion to depart from the order contemplated by the rule.

5. The letter further asserted that, in circumstances where Mr Andriolo had in fact gone “well beyond” his duties to the Club and made “significant personal contributions, and provided his building skills and materials, in the hope of maintaining the Club”, the offer to pay $20,000 reflected considerable compromise. Again, no detail was provided to support those assertions or to explain their relevance to the causes of action pleaded by the liquidator. On its face, the assertion of personal contribution of “building skills and materials” was not relevant to those causes of action, which pleaded breaches of duties owed to the company by Mr Andriolo in his capacity as a director of the company (not as a builder).

6. Finally, the letter noted that Mr Andriolo’s costs up to that point were $324,620.73 and that the matter was listed for hearing for five days. The letter allowed a clear 28 days for the plaintiffs to consider the offer, in accordance with the requirement of the Rules.

7. There was no response to the letter. Crowe AJ having entered judgment for the defendants, it may be accepted that Mr Andriolo obtained a more favourable result than the terms of his offer.

8. The parties’ written submissions contended for different legal tests for determining the application. The test or tests identified on behalf of the liquidator were, with respect, not correct. The submissions filed for Mr Andriolo identified the correct approach.

9. The liquidator relied on several authorities that discuss the existence of a test of unreasonableness for awarding indemnity or party and party costs. The first was the decision of the High Court in Ruhani v Director of Police [2005] HCA 42; 222 CLR 489 at [243]. That was a case involving a different kind of application under a different rule in a different court. With respect, the decision has nothing to do with the present application.

10. The second was the decision of this Court in Faris v Savage (No 3) [2021] ACTSC 60, where Loukas-Karlsson J said at [51] that “indemnity costs orders should be reserved for the most unreasonable actions by unsuccessful plaintiffs” (the liquidator’s submissions did not identify the authority or pinpoint reference for this quote but I was able to find it). The application considered in that case was an application for indemnity costs under r 1752. Loukas-Karlsson J recorded at [11] that the applicant for indemnity costs had not made any offer of compromise under the Rules. Accordingly, that decision is also irrelevant to the present application.

11. The liquidator’s submissions also contended in a footnote that Faris v Savage (No 3) was “cited with approval by Crowe AJ in Gang v You (No 4) [2022] ACTSC 2”. Again, no pinpoint reference was provided. The only reference to Faris v Savage (No 3) in Gang v You (No 4) is at [13], where Crowe AJ was recording the plaintiff’s submissions, not citing an authority with approval.

12. Finally, the liquidator cited the decision of the Court of Appeal in Hulanicki v Walton (No 2) [2015] ACTCA 45, where the Court said at [13]: The acceptance of reasonable offers of compromise is in the interests of litigants and the public; it minimises the personal and financial costs to litigants and it enables the courts to focus resources on claims that are not amenable to compromise. “The non-acceptance of a Calderbank offer is a factor, in some cases a strong factor, to be taken into account on an application for indemnity costs”: Stewart v Atco Controls Pty Ltd (In Liquidation) (No 2) (2014) 252 CLR 331 at [4]. On the other hand, it is critical that litigants have ready access to justice and do not feel unreasonably constrained to compromise cases.

13. That was a case concerning a Calderbank offer rather than an offer of compromise under Pt 2.10. As the Court explained at [14], the issue in such a case is “whether it was unreasonable to reject the offer, considering all the circumstances of the case, including the apparent strength of each party’s case at the time that the offer was made”. Apparently by reference to that decision, the liquidator’s submissions proceeded to address why it was not unreasonable for them not to accept the first defendant’s offer of compromise.

14. While the reasonableness of the conduct of the party to whom the offer was made is not irrelevant, unreasonableness is not the test. As submitted (with respect, correctly) on behalf of Mr Andriolo, he has an entitlement under r 1012(2)(b)(i) to be awarded costs on a party and party basis on and from the day after the offer was made unless the court orders otherwise. It is not enough, to resist the usual application of that rule, to establish that it was not unreasonable not to accept the offer. The onus is on the party to whom the offer was made to demonstrate why the court should depart from the consequence of their non-acceptance of the offer: Ryan v Eastlake Football Club Limited (No 2) [2021] ACTSC 231 at [29] (Loukas-Karlsson J) and the authorities there cited.

15. Mr Andriolo further submitted that the prima facie position under the rule should only be departed from for proper reasons, “which in general arise only in exceptional circumstances”. The authority cited for that proposition was the decision of the NSW Court of Appeal in Leach v Nominal Defendant (QBE Insurance (Australia) Ltd) (No 2) [2014] NSWCA 391 at [47]. That case was concerned with the application of a NSW rule in terms similar to r 1012. The passage cited makes plain that, in adopting a test framed by reference to “exceptional circumstances”, it was not sought to put a judicial gloss on the language of the rule. Understood merely as a requirement to have “proper reasons” for departing from a default rule, the Court in Leach saw no difficulty with an approach framed in those terms. For my part, even noting that explication of the approach adopted in Leach, I prefer to avoid the language of “exceptional circumstances” as it is so often mistaken for a requirement superimposed on a rule or statute that does not include that language.

16. One circumstance in which the court might be persuaded that a proper reason exists for making an order other than that contemplated by r 1012 is where the offer does not involve a “genuine offer of compromise” and has instead been made only for the purpose of triggering the costs consequences under the Rules: Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [16] (Spigelman CJ; Beazley and McColl JJA). Absent satisfaction of the requirement for an element of genuine compromise, the cost consequence under the rule will not be achieved, either because the offer does not answer the description of an offer of compromise within the meaning of the rule or because, if the element of compromise is absent, the court will be more likely to exercise its discretion to order otherwise: Regency Media at [28].

17. Regency Media was described as an “all or nothing” case. The Court held at [30] that an offer of $10,000 made at an early stage of the proceedings, before a defence had been filed, was “an invitation to surrender, rather than any form of commercial compromise”.

18. The present case was not an “all or nothing” case. It is difficult to know what Mr Andriolo’s full exposure was, because Crowe AJ, having found there was no breach of any duty to the company, did not find it necessary to consider the relief available against the defendants: at [295].

19. It is apparent from the judgment that, had the issue arisen, it would have been a complex determination involving a range of possibilities. The company’s principal asset was the unexpired residue of the Crown lease over land at 78 Franklin Street. As at November 2005, the land was valued at $3,900,000. However, later valuations gave a lower value. In 2013, at a time when the company was experiencing financial difficulties and its ongoing viability was at stake, the directors considered a proposed put and call option in favour of Italo Financing, to which the company owed substantial debt. The liquidator’s principal case against Mr Andriolo concerned his involvement in causing the company to enter into the put and call option deed, from which he stood to benefit personally as a shareholder in Italo Financing.

20. One of the allegations against the directors was that they should have obtained a fresh valuation of the land at the time the put and call option was granted. No such valuation having been obtained, it is impossible to know what it might have said. Crowe AJ noted at [200] of the judgment that the issue of the true value of the land was “a complex one.”

21. However, another part of the case put by the plaintiffs, recorded in the judgment at [230], was that Mr Andriolo received an “unreasonable personal benefit” by voting in favour of the put and call proposal. The benefit was specified as being “firstly, the acquisition of an interest in the Club’s land and secondly, receipt of some of the proceeds from the sale of the land by [Italo Financing]”. Crowe AJ recorded at [133] of the judgment that part of the alleged “unreasonable personal benefit” was the sum of $200,000: In the meantime, at the end of March 2016 the contract for the sale of 78 Franklin Street was completed, and Financing received the balance of the purchase price. Exhibit “2” is a copy of the trust ledger of the solicitors who acted for Financing on the sale. According to that ledger just under $5.65M was received on 31 March 2016. On 8 April 2016 a total of $1,946,387 was paid in varying amounts to 29 payees. Presumably these were the holders of redeemable preference shares at that time. One of those was Mr Andriolo. He received $200,000.

22. Accordingly, Mr Andriolo’s minimum exposure in the proceedings (had any breach of statutory or fiduciary duty been established based on his involvement in the company’s grant of the put and call option) was $200,000.

23. Mr Andriolo gave no account of his reasons for causing the company to grant the put and call option. In his judgment at [170], Crowe AJ noted that the case was “overwhelmingly documentary.” His Honour noted that the relevant events had occurred many years earlier, but continued: Nevertheless the issues in the case involve questions of good faith and the motivations of the parties (particularly Messrs Andriolo and Cardone) at various material times. In the ordinary course it would be expected that each of these parties would have provided an affidavit setting out their recollections by reference to the relevant documents and explaining why they acted as they did.

24. The problem was that, by the time of the hearing, Mr Andriolo was 80 years old and lacked capacity to provide instructions. For that reason, Crowe AJ declined to draw a Jones v Dunkel inference in respect of his failure to give evidence, even though the other two conditions for drawing such an inference were met. His Honour was accordingly left to determine the plaintiffs’ claim primarily by reference to the documents.

25. The affidavit relied upon by the first defendant to support the claim for party and party costs does not address whether it was known at the time the offer of compromise was made that Mr Andriolo would not be able to give evidence. The judgment at [175]-[177] refers to medical evidence dated well before the date of the offer of compromise but there is no indication that the plaintiffs were aware of Mr Andriolo’s condition at the time they received the offer of compromise. Certainly, those potential difficulties for the plaintiffs (of being unable to cross-examine Mr Andriolo as to circumstances that on their face warranted an explanation and unable to rely on a Jones v Dunkel inference) were not referred to in the offer of compromise. The only substantive point made was the reference to the valuable contributions Mr Andriolo had made to the company in his capacity as a builder which, as already noted, was irrelevant to his duties as a director.

26. In the circumstances, I am not persuaded that the offer of compromise involved a genuine offer of compromise. Rather, an offer to pay the relatively small sum of $20,000 against a potential liability of at least $200,000 had the appearance of having been made for the purpose of triggering the costs consequences under the Rules.

27. For those reasons, I consider it appropriate to exercise the discretion to make an order other than that contemplated by r 1012 following failure to accept an offer of compromise.

28. Accordingly, I make the following orders (in effect reinstating the order first made by Crowe AJ but suspended upon the first defendant making his application for a different order as to costs): (1) The first defendant’s application for payment of his costs on a party and party basis from 28 April 2022 is dismissed. (2) The plaintiffs are to pay the first defendant’s costs as agreed or assessed.

I certify that the preceding twenty-eight [28] numbered paragraphs are a true copy of the Reasons for Judgment of her Honour Chief Justice McCallum Associate: Date: