[2005] NSWCA 133
Sentinel Orange Homemaker Pty Ltd v Davis Investment Group Holdings Pty Ltd (in liquidation) (2021) 20 BPR 41,497
[2021] NSWSC 550
Yu v Cao (2015) 91 NSWLR 190
Source
Original judgment source is linked above.
Catchwords
[2005] NSWCA 133
Sentinel Orange Homemaker Pty Ltd v Davis Investment Group Holdings Pty Ltd (in liquidation) (2021) 20 BPR 41,497[2021] NSWSC 550
Yu v Cao (2015) 91 NSWLR 190
Judgment (2 paragraphs)
[1]
Judgment - EX TEMPORE
The Plaintiff, Sentinel Orange Homemaker Pty Ltd, succeeded in its claim against the Defendant, Davis Investment Group Holdings Pty Limited (in liquidation) at the final hearing (see Sentinel Orange Homemaker Pty Ltd v Davis Investment Group Holdings Pty Ltd (in liquidation) (2021) 20 BPR 41,497; [2021] NSWSC 550). The Plaintiff obtained declaratory relief to the effect that, on 22 May 2020, it validly terminated a contract for the sale of land it had entered into with the Defendant, and an order that it was entitled to the deposit of $100,000 that had been paid by the Defendant together with interest earned on the deposit sum. The Plaintiff also obtained a costs order against the Defendant. The Plaintiff's claims were prosecuted pursuant to a grant of leave under s 500(2) of the Corporations Act 2001 (Cth). The Defendant had been placed in a creditors' voluntary liquidation on 17 April 2020 prior to the commencement of the proceedings. Mr Liam Bailey was appointed as the liquidator.
By an Amended Notice of Motion filed on 20 September 2021, the Plaintiff now seeks, by prayer 3 of the motion, orders for costs against Mr Bailey personally and against John Davis Motors Pty Ltd ("JDM"). JDM provided funding for the conduct of the Defendant's defence of the proceedings.
This application for "non-party" costs orders was heard today. The Court received into evidence a substantial Court Book that contains the affidavits and documents relied upon by the Plaintiff and by Mr Bailey. JDM did not itself read any affidavits or tender any documents. The Court Book also contains the written submissions provided by the Plaintiff, Mr Bailey and JDM, including the Plaintiff's submissions in reply. Each of the parties to the application made further oral submissions in Court today.
Before turning to the arguments raised by the parties, it is convenient to note some of the salient facts that emerge from the evidence before the Court.
First, the Defendant was incorporated on 26 July 2018, apparently for the purpose of entering into the contract for sale with the Plaintiff. The directors of the Defendant are Mr John Davis and his son, Mr Ben Davis. Ben Davis gave evidence in the Defendant's case at the hearing. The shareholding in the company is held equally by John Davis and Ben Davis. Each holds six of the twelve issued shares which are paid up to a total amount of $12.
Secondly, JDM was incorporated on 19 November 2009 with John Davis, Ben Davis and Ms Kay Davis as directors. They have remained as directors at all relevant times since. The shareholding in the company is, and at all relevant times has been, held by Kay Davis and John Davis (as to the Class A shares) and Ben Davis (as to the Class B shares). I should add that JDM, as the trustee of the John Davis Motors Unit Trust, is the registered owner of the business name, John Davis Motors.
Thirdly, at around the time the contract for sale was entered into in August 2018, the Defendant made two payments to a stakeholder totalling $100,000 for the initial deposit required under the contract. There is evidence, and I accept, that the funds used to pay the initial deposit had been lent to the Defendant by JDM. It was anticipated that, following completion of the purchase, JDM would operate a motor dealership on the land. At about the time of the liquidation, JDM as trustee of the John Davis Motors Unit Trust made a claim for $119,280 against the Defendant for the funds advanced and some other costs associated with the Defendant's purchase from the Plaintiff. It seems that JDM was, at that stage, the only recognised creditor of the Defendant, although there was the potential for the Plaintiff to make out a claim in relation to the contract which the Defendant had purported to terminate on 31 March 2020.
Fourthly, the proceedings were commenced by the Plaintiff on 17 April 2020, coincidentally, the same day that Mr Bailey was appointed as liquidator. At that stage the Plaintiff contended that the Defendant's purported termination of the contract was invalid, and sought specific performance. Later, on 22 May 2020, the Plaintiff itself terminated the contract on the basis of an alleged repudiation by the Defendant. The Plaintiff's claim thus became one for the forfeiture of the deposit, and loss of bargain damages. Amendments were consequently made to the pleadings. The grant of leave pursuant to s 500 (2) of the Corporations Act allowed the Plaintiff to pursue the claims that it had validly terminated the contract and was entitled to the deposit but not its claim for damages, which was left to be dealt with in the liquidation by means of a proof of debt.
Fifthly, it appears from the initial Report to Creditors that by 30 April 2020 Mr Bailey had retained Blackwell Short, solicitors of Orange, to act for the Defendant "in respect of the termination of the contract". That firm had been acting for the Defendant in relation to the contract prior to the commencement of the liquidation. On 30 April 2020, Blackwell Short sent a detailed letter to the Plaintiff's solicitors (Russells) in which it was stated that the Defendant's termination of the contract on 31 March 2020 was valid. Nevertheless, on 21 May 2020, Mr Bailey sent an email to Russells in the following terms:
I advise that I am not in a position to respond to the proceedings brought and do not intend to participate in the proceedings. I neither consent nor oppose the continuation of the proceedings and will abide by any order of the Court made in relation to same. This should not be construed to consent to any personal costs order against me in my capacity as liquidator of the Company.
On 29 May 2020, Mr Bailey sent an email to Russells that included the following:
As previously discussed, the Company does not intend to participate in the proceedings but will of course abide by any orders of the Court in relation to the deposit and damages owed by the Company for which your client is entitled to prove as a creditor. Please confirm you will notify the Court of the Company's liquidation and of the foregoing position.
The hitherto cordial nature of the communications did not last; that is shown by the emails that were exchanged on 25 June 2020, the day before the Plaintiff's application for leave to proceed was heard. I do not think it is necessary to go into the details in this regard, nor to seek to attribute responsibility for the deterioration in the tone of the communications. It is sufficient to note that Mr Bailey maintained that the position of the Defendant was that it neither consented to nor opposed orders that the Defendant's termination of the contract was invalid and that, as the Plaintiff had terminated the contract on that basis, it was entitled to claim the deposit.
Mr Bailey's emails of 25 June 2020 also touched upon the matter of funding. His email sent at 9.05am states that he was "unfunded" but also contains the suggestion that this position had or may have changed. Russells, by their email sent at 11.28am, sought clarification on the point. Mr Bailey's email, sent at 12.33pm, contained the following:
Upon my appointment, I understood the Company was to be funded to oppose your client's position in relation to the termination on the grounds that if it were successful, the company would be entitled to the deposit and your client would not be entitled to prove as a creditor of the Company. This was communicated to creditors in my report. Funding was not provided and as such your client's position is now uncontested in that it is neither consented to nor opposed. Any such ambiguity appears to be based around your understanding that I remain opposed to your client's position that it was the party to validly terminate the contract. As I have previously stated, the Company is not in a position to oppose your application to the Court as I am unfunded, but obviously I will comply with the Court's determination on this point.
Sixthly, the position concerning the funding of Mr Bailey had changed by early July 2020. On 3 July 2020, Pure Legal, acting for Mr Bailey sent a letter to Russells that included the following:
We act for Liam Bailey in the above named proceedings. Mr Bailey now wishes to defend the proceedings the subject of the Amended Statement of Claim filed 26 June 2020. Accordingly, our client wishes to withdraw his Submitting Appearance. The basis for our client's change in position is that he has now received sufficient funding to enable him to properly defend the claim.
I note in passing that no submitting appearance had actually been filed, but nothing turns upon that.
At that stage, the terms of the funding seem to have been contained within communications sent between Mr Bailey, Pure Legal and Blackwell Short. This may be gathered from the letter dated 9 July 2020 sent by Mr Carpenter of Blackwell Short to Mr Bailey which states that JDM would provide Pure Legal with $5,000 as a preliminary advance on their costs in acting for Mr Bailey and, further, that JDM was at that stage prepared to commit the sum of $50,000 to Pure Legal and to Blackwell Short to enable certain work to be undertaken. The letter went on to describe the various tasks that were envisaged to be undertaken by the respective firms of solicitors.
At some point, a Litigation Funding Agreement was executed by JDM, Mr Bailey as liquidator of the Plaintiff, and Jeddah Pty Limited (the company that traded as Pure Legal). On 2 October 2020, Black J made an order under s 477(2B) of the Corporations Act granting leave nunc pro tunc to Mr Bailey to enter into the agreement.
The Litigation Funding Agreement provided, inter alia, as follows:
D. If the Company successfully defends the Proceedings, the Plaintiff will no longer be a creditor of the Company and there will be no claim for damages and the deposit of $100,000.00 will be paid to the Company. If the Company does not successfully defend the Proceedings, there will be no dividend to creditors of the Company.
E. The Liquidator has formed the view that the Company has a valid defence to the Proceedings with reasonable prospects of success.
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3.1 The Litigation Funder will provide payment of the Company and/or Liquidator's legal costs and disbursements for conducting the Company's defence of the Proceedings during the term of this Funding Agreement up to the Funding Amount. The Funding Amount is to be utilised for payment of the Company's/Liquidator's legal costs and disbursements incurred with Pure Legal of Level 7, 23 Hunter Street, Sydney including any agent engaged by the Lawyer.
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3.4 The Parties otherwise agree that the Liquidator will have the sole discretion as to how and when the Proceedings are to be defended and any resolution of the Proceedings.
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3.6 The Parties agree that Duncan Brakell will be briefed to appear on the hearing of the Proceedings and that the Litigation Funder will also be liable for all costs incurred by Duncan Brakell and will pay all such amounts requested by the Lawyer on account of Duncan Brakell's fees as may be reasonably requested prior to the hearing and agrees to indemnify the Lawyer and Company/Liquidator in respect to all barrister's fees.
3.7 In the event of a successful defence of the Proceedings, the Liquidator will apply the refund of the deposit received towards payment of his disbursements, renumeration [sic] and expenses and payment of creditor's claims as admitted pursuant to section 556 of the Corporations Act 2001 subject to the approval of the Liquidator's remuneration by the creditors or any court.
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3.9 Save for the indemnity contemplated in clause 3.6 of this Agreement, the Liquidator and the Company acknowledge that the Litigation Funder has not agreed to reimburse the Company or the Liquidator for any costs orders made against the Liquidator or the Company.
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4.5 The Liquidator on behalf of the Company and the Lawyer shall provide to the Litigation Funder regular and accurate reports as the progress of the Proceedings but all decisions in respect to the advancement or the conduct of the Proceedings will be made solely by the Liquidator subject to either the termination of this Agreement or a failure on the part of the Litigation Funder to pay any costs and disbursements pursuant to the terms of this Agreement.
4.6 The Liquidator will be entitled to reach a resolution of the Proceedings on behalf of the Company at any time in any amount as he sees fit in his sole discretion.
It can be accepted that the ultimately unsuccessful defence of the Plaintiff's claim was funded in accordance with the terms of the Litigation Funding Agreement.
The Court has read and considered the detailed written submissions of the Plaintiff (of 21 February 2022 and 31 March 2022 in reply), Mr Bailey (of 28 February 2022) and JDM (of 25 March 2022). Little, if any, dispute exists between the parties as to the principles that apply when a Court is asked to make an order for costs against a non-party. However, I will briefly refer to some of the relevant authorities.
As to the general principles that apply, reference should be made to the decision of the Court of Appeal in Yu v Cao (2015) 91 NSWLR 190; [2015] NSWCA 276 at [136]-[140] and [156].
As to the case against JDM as a litigation funder, reference should be made to Knight v FP Special Assets Ltd (1992) 1974 CLR 178 at 192-3; Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd (2009) 239 CLR 75; [2009] HCA 43 at [32]; and, for recent examples, Jin Lian Group Pty Ltd (in liq) v ACapital Finance Pty Ltd (No 2) [2021] NSWSC 1202 at [23] per Stevenson J, and In the matter of Wetherill Park Holdings Pty Ltd (No 2) [2021] NSWSC 1397 at [4]-[15] per Rees J. As to the case against Mr Bailey as liquidator, reference should be made to Mead v Watson (2005) 23 ACLC 718; [2005] NSWCA 133 at [11]-[16]; and, for a recent example, In the matter of Azmac Pty Ltd (in liquidation) (No 2) (2020) 145 ACSR 443; [2020] NSWSC 363 at [5]-[7] per Rees J.
The Plaintiff seeks costs orders against both Mr Bailey and JDM, and says that they should be jointly and severally liable in respect of the costs. The Plaintiff contends that both should be regarded as real parties to the proceedings.
I propose to deal first with the case against Mr Bailey. The essence of the case is:
1. the case that succeeded at trial was "entirely documentary";
2. Mr Bailey was aware of that documentary case from an early stage, having engaged Blakwell Short to act;
3. Mr Bailey, himself a person with legal qualifications, formed his own view that the defence of the Plaintiff's claim had reasonable prospects of success;
4. that was unreasonable because a consideration of the documents and the applicable law would have led to the contrary conclusion;
5. it was also unreasonable for Mr Bailey to fail to obtain a "merits advice" including as to whether the Defendant had complied with its reasonable endeavours obligations;
6. there was in fact no basis for the Defendant to assert, as it did from 31 March 2020 onwards, that it had validly terminated the contract for sale; and
7. rather than simply accepting that position, Mr Bailey chose, with the aid of litigation funding from JDM, to defend the proceedings and, moreover, sought to benefit thereby by obtaining a fund out of which his costs and remuneration might be paid if the defence succeeded.
Mr Bailey's submissions in response included the following:
1. that the one case the Plaintiff succeeded upon (the reasonable endeavours case) rested at least in part upon findings based on evidence adduced in cross-examination;
2. that he received legal advice and formed the not unreasonable view that he had good prospects of successfully defending the proceedings;
3. that he had always endeavoured to, and in fact did, act reasonably throughout the proceedings - for example, did not oppose the grant of leave to proceed against the Defendant and made an offer of settlement at an early stage of the proceedings on 30 July 2020; and
4. that the defence of the proceedings was not unreasonable in the circumstances.
It was emphasised by counsel for Mr Bailey that the power to order costs against a non-party such as a liquidator is one that should be exercised with caution, and particularly so where the non-party is on the side of a defendant rather than that of a plaintiff.
I generally accept the submissions of Mr Bailey as referred to above. The case upon which the Plaintiff ultimately succeeded was that the Defendant could not terminate the contract in reliance upon the non-satisfaction of a condition precedent because the Defendant breached its obligation to use all reasonable endeavours to satisfy the condition precedent, and such breach relevantly caused the condition precedent to be unsatisfied.
The conclusion reached by the Court in that regard rested, at least in part, upon findings based on evidence adduced in cross-examination. That is apparent from at least paragraphs [78]-[79], [84] and [87] of the reasons for judgment. The specific references made by counsel for the Plaintiff to parts of the transcript of the cross-examination do not, in my view, suggest the contrary. It is therefore not the case that the successful claim was "entirely documentary". Moreover, I do not accept that it was unreasonable for Mr Bailey to defend the proceedings. He in fact obtained written legal advice from Pure Legal on 14 August 2020 and formed the view that there were good prospects of successfully defending the proceedings. Even if that might be considered an overly optimistic assessment (and I note that the Pure Legal advice barely touched upon the reasonable endeavours case), I am satisfied that this was a case where the Defendant's defence, including on the point that ultimately prevailed, was reasonably arguable and could be said to have reasonable prospects of success. I note further the affidavit evidence given by Mr Bailey as to his opinion as to prospects, and also the fact that the defence filed contained a certification by Mrs Perry of Pure Legal as to reasonable prospects.
It must be borne in mind that the Plaintiff had to show not only that the Defendant had breached its all reasonable endeavours obligation, but also that such breach relevantly caused or contributed to the non-satisfaction of the condition precedent. The outcome of the causation question, which required consideration of how quickly a council in the course of the initial response to the COVID-19 pandemic would have provided a signed Development Approval, was not at all obvious.
In all the circumstances, I do not think it can be said that the Defendant's defence of the proceedings was unreasonable. In my opinion, this was not a case where it can be said that the liquidator of the insolvent company, in conducting the defence of the proceedings, was acting unreasonably. Nor could it be said that his conduct was unnecessary. There was no suggestion of any dishonesty. I do not accept the suggestion that was made that Mr Bailey chose to defend the proceedings in order to benefit himself, or that he did so to obtain the additional benefit of shutting down potential claims of insolvent trading.
In accordance with the principles referred to earlier, the present case is not one where it would be appropriate to make a costs order against the liquidator personally. The interests of justice do not, in my view, require the making of such an order and I decline to do so in the exercise of the Court's discretion pursuant to s 98 of the Civil Procedure Act 2005 (NSW).
I turn then to the case against JDM. The essence of the case is:
1. that the underlying sale transaction was entered into by the Defendant for JDM's benefit;
2. that JDM, as the provider of the funds used by the Defendant to pay the deposit, stood to benefit commercially as the sole creditor of the Defendant if the Defendant succeeded in recovering the deposit;
3. that JDM provided the funding for the Defendant's defence of the Plaintiff's claim in accordance with the Litigation Funding Agreement;
4. that JDM otherwise assisted the defence by providing information and making available witnesses, including Ben Davis and Mr Basha, a consultant retained by JDM; and
5. that, without the funding and assistance provided by JDM, there would have been no opposition to the Plaintiff's ultimately successful claim.
I should add that the Plaintiff also relied upon the propositions that the case that succeeded at trial was "entirely documentary" and that JDM was aware of the documentary case at an early stage. That may be so but, as I have said, the successful claim was not "entirely documentary".
JDM did not specifically take issue with the particular matters that I have set forth at [31(a)]-[31(e)] above, but pointed to some aspects of the Litigation Funding Agreement, including clauses 3.4 and 4.5 which provided for the liquidator to have control over the way the proceedings were to be defended. JDM also noted that the Litigation Funding Agreement did not give it any priority in the event of a successful defence that resulted in the return of the deposit. JDM was thus not guaranteed any return in that event. JDM further noted that there was no agreement to indemnify the liquidator or the company against any adverse costs orders. It was noted that the Plaintiff was at all times aware of the Defendant's impecuniosity.
JDM submitted that it was not unreasonable to defend the proceedings, and submitted that the suggestion that the defence was undertaken to obtain the additional benefit of shutting down insolvent trading claims should be rejected. I agree with those submissions.
JDM then submitted that it would not be a proper exercise of the discretion under s 98 of the Civil Procedure Act to order costs against it because a fair characterisation of the circumstances is that it simply provided limited funding to the liquidator, some months after the commencement of the litigation, when the liquidator decided to change his stance and actively participate in the proceedings.
In that regard, reference should be made to Mr Bailey's 13 August 2021 affidavit at paragraphs 36, 37, 39 and 40 (paragraph 38 was not read), which are in the following terms:
36. By this time, I had no confidence that if Malisa Craig would conduct the proceedings on an ex parte basis to bring before the Court a balanced depiction of all relevant facts fairly pursuant to which I considered it may be necessary for the Company to actively participate in the proceedings.
37. I determined that if the proceedings were successful it would result in a recovery of the deposit of $100,000 and a costs order in favour of the Company which would provide a substantial return to creditors and would also assist me to determine whether or not the Plaintiff was a creditor of the Company.
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39. I sought and obtained limited funding from the then only creditor of the Company, John Davis Motors Pty Ltd on confidential terms to pay limited legal costs of the Company's defence of the proceedings (at that time the Plaintiff being only a contingent creditor and who had not filed any proof of debt).
40. On 3 July 2020, I formally retained Mrs Perry of Pure Legal to act for the Company to defend these proceedings.
JDM submitted that it did not instigate or urge that change of position; did not have control over the litigation; and, unlike a commercial litigation funder, could not make a profit out of the litigation. JDM submitted that, in circumstances where the case was simply lost and there was no unreasonable conduct in the defence of the proceedings, the interests of justice would not be served by the making of a costs order against it.
The evidence contained in paragraphs 36, 37, 39 and 40 of Mr Bailey's 13 August 2021 affidavit supports the notion that the liquidator's change of position was not instigated by JDM. However, the fact remains that, when Mr Bailey sought funding in respect of the defence of the proceedings it was JDM who was willing to provide it. The existence of that funding was plainly crucial to the liquidator in actually proceeding to prosecute a defence to the Plaintiff's claim. That is made clear by the letter sent by Pure Legal on 3 July 2020 to which I have earlier referred. I note in this context that, as already mentioned, JDM adduced no evidence on this application, including in relation to its involvement leading up to the making of the Litigation Funding Agreement. The terms of that agreement itself reveal the interest that JDM had in the pursuit of a defence to the Plaintiff's claim.
This is a case where the Defendant company is an insolvent "person of straw" and JDM has played an active part in the litigation by the provision of necessary funding for the defence. Moreover, JDM had an interest in the subject matter of the litigation in that it stood to benefit had the defence been successful. To my mind, the case falls within the general category of case recognised by Mason CJ and Deane J in Knight v FP Special Assets Ltd (supra) at 192-3. Further, it is my view that, in all the circumstances, it would be in the interests of justice for a costs order to be made against JDM. Whilst it is not a funder of litigation for profit, it had a substantial commercial interest in the Defendant successfully defeating the Plaintiff's claim. The funding it provided was crucial for the mounting of the defence to the claim. Ultimately, the defence failed and the Plaintiff has obtained an order for costs against an insolvent defendant. Even though that impecuniosity was always known to the Plaintiff, I consider that it would be against the interests of justice to allow JDM to fund the defence in the hope of gaining a benefit without having to bear the costs when the defence it supported ultimately failed.
In my opinion, the proper exercise of the discretion as to costs pursuant to s 98 of the Civil Procedure Act is to make an order that JDM be liable for the Plaintiff's costs of the proceedings from 3 July 2020 when the Plaintiff was informed of the change in position to the effect that there would henceforth be a defence to the claim as sufficient funding was available for that purpose. I will so order. As for the costs of the present application, I will make orders that costs follow the event.
[2]
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Decision last updated: 01 September 2022