Virgtel Ltd & Anor v Zabusky & Ors

Tucker & Cowen for the applicant first, second, third and fifth respondents

Boyd Legal for the respondent first and second applicants

[1] The respondents have applied for a stay of the enforcement of certain costs orders made in interlocutory proceedings in favour of the applicants.

[2] Costs orders were made against the respondents in each of the following interlocutory matters in this proceeding:

(a) Orders of the Chief Justice made on 6 April 2006 on the applicants' application, which was contested by the respondents, to commence and continue this proceeding as a derivative action on behalf of the sixth defendant, and to dismiss an application by the respondents for summary judgment;

(b) Order of McMurdo J made on 2 August 2006 on the applicants' application, by which the respondents were ordered to file and serve affidavits concerning alleged breaches of undertakings given by them to the Court;

(c) Order of the Chief Justice made on 1 September 2006 dismissing an application by the respondents to vary certain undertakings given by them to the Court;

(d) Order of the Chief Justice made on 29 June 2007 dismissing a further application by the respondents to vary undertakings they had given to the Court.

[3] Costs statements in respect of the costs being claimed by the applicants under each of those costs orders were delivered by the applicants and, in due course, the respondents delivered notices of objection to each costs statement. After the Chief Justice issued Practice Direction 7 of 2007 (and the notification regarding Practice Direction 7 of 2007 on 3 October 2007), and consequent upon amendments to the Uniform Procedure Civil Rules 1999 (Qld) which permitted the parties to agree to the appointment of a costs assessor, Mr Steven Hartwell, costs assessor, was appointed to assess these costs. The respondents filed Notices of Objection in relation to these assessments on 15 February 2008. The parties made submissions and put further material to Mr Hartwell in connection with his assessment. Mr Hartwell's appointment as costs assessor in respect of these assessments was formalised by an order made by the Deputy Registrar on 17 June 2008.

[4] On 19 June 2008, Mr Hartwell filed a costs assessor's certificate in respect of each of the four costs statements which had been assessed by him, as required by Rule 737.

[5] On 27 June 2008, the Deputy Registrar issued an order in respect of each of the certificates of assessment filed by Mr Hartwell. In that regard, Rule 740 provides:

(1) After a certificate of assessment is filed, the registrar of the court must make the appropriate order having regard to the certificate.

(2) The order takes effect as a judgment of the court.

(3) However, the order is not enforceable until at least 14 days after it is made and the court may stay enforcement pending review of the assessment on terms the court considers just.

(4) Unless the registrar orders otherwise, the costs assessor's fees -

(a) are payable to the cost assessor in the first instance by the party who applied for the assessment; and

(b) are to be included in that party's costs of the assessment.

(5) Amounts paid or payable under the order are charged with payment of the costs assessor's fees.'

[6] The orders made by the Deputy Registrar are in the following amounts:

(a) $154,408.22 under the costs orders made on 6 April 2006;

(b) $46,142.35 under the costs order made on 2 August 2006;

(c) $36,902.67 under the costs order made on 1 September 2006;

(d) $44,853.95 under the costs order made on 29 June 2007.

[7] On 4 September 2008, the respondents filed the application with which I am now concerned, seeking:

'1. Pursuant to Rule 800(1) of the Uniform Civil Procedure Rules and/or the Court's inherent jurisdiction, each of the four costs orders made by the Deputy Registrar in the proceedings on 27 June 2008 ('costs orders') ordering that the respondents pay the applicants' costs be stayed until the determination of the proceeding or earlier order.

1. The time for the respondents to apply for a review of the costs assessors' certificates of assessment dated 19 June 2008 on which the costs orders are based be extended until 14 days after the stay under order 1 is lifted.

2. The costs of the application be reserved until the trial of the proceeding.'

[8] It is clear that the application, by its terms, was not an application for a stay as under Rule 740(3) to permit reviews of the assessments to be carried out under Rule 742. Although it was mentioned in argument that the respondents were taking advice with respect to such reviews, in fact there has been no application made under Rule 742. The application was not for a stay under Rule 740(3), but rather was cast and argued as an application under Rule 800, or under the inherent jurisdiction, for a stay of enforcement of the money orders constituted by the orders made by the Registrar on 27 June 2008.

[9] The fundamental proposition urged on me on behalf of the respondents was that enforcement of an interlocutory costs order should be regulated in such a way as to render it not amenable to assessment, and hence payment, until the conclusion or determination of the principal proceeding in which the interlocutory order is made. In that regard, it was submitted that 'the relief for which the respondents contend is consistent with the regime which is statutorily imposed in the Federal Court of Australia with respect to interlocutory costs orders'. Order 62 Rule 3 of the Federal Court Rules relevantly provides:

'An order for costs of an interlocutory proceeding shall not, unless the Court otherwise orders, entitle a party to have a bill of costs taxed until the principal proceedings in which the interlocutory order was made is concluded or further ordered.'

[10] Significant reliance was placed on statements of principle in the Federal Court to the effect that leave to tax an interlocutory costs order made in that court will only be given when the demands of justice warrant that course.[1] Reference was also made to statements of principle made in judgments of the Supreme Court of New South Wales in connection with the application of Rule 9 of Part 52A of the New South Wales Rules of Court. That rule provides, in effect, that where costs orders are made before the conclusion of any proceeding, they shall not, unless the Court otherwise orders, be payable until the conclusion of the proceeding'.

[11] Queensland has no provision like those considered in either the Federal Court or the New South Wales authorities. The UCPR contain no such rule prohibiting assessment or payment of interlocutory costs orders pending the determination of the principal proceeding. Accordingly, the considerations dealt with in those courts when considering the application of their respective rules are of little assistance in Queensland, where no such rule applies.

[12] Nor do the respondents, in my view, gain any support for their position in either of the Queensland cases to which I was referred. Di Carlo v Dubois [2003] QCA 415 was very much a case on its own facts, in which the defendants had been ordered to pay the plaintiffs' costs of an interlocutory appeal fixed at $15,000. That appeal was in relation to the costs thrown away as a result of the necessity to adjourn the trial after the fourth day of hearing. However, the plaintiff then failed entirely against the defendants at the conclusion of the second trial, and the defendants anticipated costs orders being made in their favour (although costs orders had not yet been made). In those circumstances, Jerrard JA permitted a stay in respect of the fixed costs order which the plaintiff had the benefit of against the defendants, saying at [18]:

'I will [grant a stay] because I consider that the applicants/defendants have an arguable case for the grant of a stay in that it seems to be commonsense and just that if their costs orders far exceed what the plaintiff is to pay to them, that those two amounts should be set off against each other. And that commonsense result is made more apparently just, in this case, by the simple fact that the plaintiff [who had entered into a Part 10 arrangement under the Bankruptcy Act] is said to be unable, in any event, to pay them the sums he will be assessed as liable to pay them.'

[13] Team Dynamik Racing Pty Ltd v Longhurst Racing Pty Ltd [2008] QSC 36, to which I was also referred, was not an application for stay of an interlocutory costs order, but rather was an application by which the plaintiff sought an order that costs which it had been ordered to pay to the second defendants be set off against costs which the first defendant had been ordered to pay to the plaintiff. It was in the context of making such an order that Fryberg J, as a consequential order, allowed for the stay of the enforcement of a costs order against the second defendant.

[14] When a costs order is made in Queensland, then, absent any special order, the expectation is that the amount assessed and certified under the costs order will be paid when the Registrar makes an order under Rule 740 consequent upon the filing of a certificate of assessment. Rule 740 provides a specific regime under which there is a 14 day moratorium on the enforcement of that order, and permitting for a stay of enforcement of the order pending review of the assessment. Upon the expiration of the moratorium period, however, and in the absence of a stay pending review, the order under Rule 740 is efficacious.

[15] The fundamental difficulty, in point of principle, with the approach urged by the respondents is that, not only is it contrary to the costs regime established under the UCPR, but it effectively involves going behind the exercise of the discretion of each of the judges who made the costs orders in question. Had each of the judges intended to make orders which would have had the effect now sought by the respondents, i.e. being postponed until determination of the proceedings, the appropriate orders which the judges could (and undoubtedly, if so minded, would) have made would have been for the applicants' costs on each application to be the applicants' costs in any event. Such an order would have entitled the applicants to recover their costs in respect of each of those applications, regardless of the ultimate outcome of the proceeding, but, importantly, the applicants would not have been entitled to an immediate assessment of those costs orders and would have been required to wait until the ultimate assessment of costs in the proceeding[2].

[16] None of the costs orders in respect of which the respondents now seek stays were orders for costs 'in any event'. I would be loathe to accede to this application which would, as I have said, have the effect of going behind the exercise of discretion undertaken by each of the judges who made the relevant costs orders.

[17] The respondents pointed to a number of discretionary factors which, it was submitted on their behalf, would justify the grant of a stay in respect of these costs orders. In particular, it was asserted that:

(a) the respondents cannot pay the costs awarded primarily because of freezing orders obtained against them by the applicants which have severely compromised the respondents' ability to deal with their assets advantageously or at all. The complete answer to this objection is that the applicants have indicated their consent to the respondents disposing of such assets as may be required to enable them to meet the outstanding costs orders;

(b) execution of the orders 'would inevitably stifle the further prosecution of these proceedings which would be unjust to the respondents who have expended, and incurred, legal costs in excess of $1,500,000'. Given that the respondents do have assets, including a business, at their disposal, and that a regime is in place for the legal costs they are incurring to be secured, it is difficult to see how the 'inevitable stifling' to which reference is made would actually result;

(c) it is impossible for the Court to determine at this stage where the overall merits lie. I agree, but that is not the point for present purposes. Rather, the relevant point is that each of the judges who made the costs orders exercised the discretion vested in each of those judges to make the particular costs order with the particular consequences which flowed from each costs order.

[18] Other matters to which the respondents pointed do not, it seems to me, impact on the exercise of the discretion whether or not to grant a stay of execution on the four costs orders. In that regard:

(a) a submission that the precise monetary liability of either party to the other has not been finally determined does not, in my view, impact on a case such as this in which discrete costs orders on interlocutory applications were made;

(b) the fact that there are some 19 other orders reserving costs or making costs in the proceedings similarly does not affect the situation;

(c) the fact that the respondents are 'obtaining expert advice with a view to seeking a review of the four costs assessments' may be relevant to an application for a stay under Rule 740 but, as I have already observed above, that is not the application with which I am presently concerned.

[19] It is unnecessary for me to make any further observation on what might be perceived as a curiosity in the timing of the present application, namely it having been made only after the respondents participated (as they were entitled to do) in the assessment and objection process, including in relation to the appointment of the costs assessor, and only after the making of the order by the Registrar under Rule 740.

[20] In my view, the respondents have not demonstrated any basis for a stay of execution in respect of any of these costs orders. Nor is there any reason why I should go behind the exercises of discretion with respect to the costs orders made by de Jersey CJ and McMurdo J respectively.

[21] The application for a stay will be dismissed with costs.

[22] On 9 November 2005, Muir J (as he then was) made freezing orders in the nature of Mareva orders to restrain the respondents from dealing with their assets. The order, as made by Muir J, permitted the respondents to deal with their assets 'to enable them to pay and to continue to pay the reasonable legal expenses of defending these or any other legal proceedings and any appeal therefrom'.

[23] The freezing order has been varied since then on several occasions:

(a) On 25 July 2007, I ordered a variation to permit the registration of a $200,00 mortgage over the Riverwalk unit properties owned by the second respondent to the respondents' solicitors;

(b) On 15 November 2007, Byrne SJA increased the amount able to be secured under that mortgage to $400,000;

(c) On 26 February 2008, I made an order varying the amount secured under that mortgage to $500,000.

[24] As the respondents remind me, on 25 July 2007 I also ordered:

'The solicitors for the parties may agree on any further variations and upon such agreement will file a consent order to reflect the agreed variation, which variation shall not become operative until the consent order is filed.'

[25] Clearly enough, this permitted the parties to agree on variations to the Mareva regime without the necessity to incur the costs of a hearing.

[26] The respondents now apply for variations to the Mareva orders:

(a) removing the limit on the mortgage to the respondents' solicitors;

(b) alternatively increasing the limit on that mortgage to $700,000.

[27] The basis for seeking that the limit on the mortgage be removed altogether is that the respondents say that the applicants have effectively, if not actually, opposed every application to increase the limit under that mortgage in circumstances where the opposition is without substance and demonstrates an intention on the part of the applicants to stifle the respondents' defence of the litigation.

[28] The respondents seek their alternative relief, that is an increase of the limit on the mortgage to $700,000, on the basis that:

(a) It would be unfair to preserve the assets for the benefit of the applicants but deny the respondents the opportunity of defending the proceedings by precluding them from using their assets for legal expenses;

(b) The original Mareva order expressly contemplated that the respondents would have recourse to their assets for payment of their legal expenses;

(c) To deny them recourse to the assets by way of an increase in the limit on the mortgage is contrary to principle.[3]

(d) The respondents are otherwise without funds to pay legal expenses, and have no substantial source of income other than the rental income from these properties;

(e) The respondents' solicitors have addressed all of the substantive concerns raised by the applicants' solicitors about requests for information;

(f) The applicants' opposition to the application is unreasonable.

[29] The applicants referred to a number of matters arising on the evidence relied on by the respondents in support of the application which give one cause to suspect that the financial position of the respondents may not be as dire as they would seek to represent.

[30] The applicants pointed to the fact that Mr Harvey Zabusky and Mrs Amalia Zabusky, through the Zabusky Family Trust, effectively divert a sum in excess of $70,000 per year to their children, Heather and Erez. Heather is a 24 year old tertiary educated human resources professional, who was a full time employee of a prominent firm of Brisbane solicitors until July 2008. She earned $55,000 per annum (gross) plus superannuation in that position. She resigned from that job in July 2008, and since then, and while seeking full time employment, has been working part time for a human resources personnel outsourcing firm. In that employment, she has been earning about $840 per week net of tax. She lives with a partner who is self-employed and whose income, she says, is less than hers. She shares rental payments of the unit in which she and her partner live, which are $400 per week in total. She says she has everyday living expenses, personal loan repayments and car running expenses which absorb all of her net income. The income from her employment is supplemented by income she receives from the Zabusky Family Trust in the order of $2,000 per month. Erez is a 29 year old telecommunications engineer, who is presently a self-employed independent contractor who earns $575 gross per day performing contracting work to Optus. He says he works on average five days per week, and has a gross annual income in excess of $132,000 per year. He is married with three children, aged 12 years, 9 years, and 18 months. His wife is engaged full time in home duties. He claims to have living expenses which exceed his take home earnings. He owns a home at Tallai, which he purchased in 2002 for $430,000. He gives no evidence as to the present value of that home, but says that in July 2006 he borrowed $462,000 from the ANZ Bank, secured by a mortgage over his home, which he in turn advanced to the Commslogic business which the Zabusky family had established, and which has since failed. He says that since Commslogic went into liquidation in August 2007, the Zabusky Family Trust has been repaying the loan he took from the ANZ Bank to advance funds to Commslogic.

[31] It is, in my view, far from clear that either Heather or Erez are as impecunious as they would claim to be. The decision by Harvey Zabusky and Amalia Zabusky to divert money from the Zabusky Family Trust for the benefit of the children is clearly a matter of discretion, and undoubtedly one of parental support, but represents a conscious choice to divert funds to or for the benefit of independent adult children rather than for the payment of legal expenses in this case.

[32] The applicants also pointed to the fact that, on the material relied on by the respondents, there had been a 'double counting' in respect of the monies said to be paid by Harvey and Amalia Zabusky to Erez in respect of the mortgage repayments - for example, in his affidavit filed on 4 September 2008, Mr Harvey Zabusky speaks in paragraph 19(a) of having personal and family living expenses totalling about $16,000 per month, including payment of about $3,850 per month for 'Erez' mortgage repayments to the ANZ for his home', but in paragraph 24 of that same affidavit deposes to the monthly income of about $32,500 received from the Riverwalk units being applied, inter alia, to approximately $3,500 in repayments for Erez' mortgage, and 'approximately $16,000 towards our other personal and family expenses, as deposed to above'. If, as would appear to be the case, there has been a double counting in respect of the monies applied to Erez' mortgage, there is an amount of some $42,000 per annum available on that count alone.

[33] There was also some discrepancy pointed to in the material in relation to the amount of interest said to be payable to the ANZ Bank. Amalia Zabusky deposed to an interest only payment to the ANZ Bank of $3,500 on a debt of $700,000, whereas Harvey Zabusky deposed to an interest only payment to the ANZ Bank of $5,000 per month on a smaller debt of $600,000.

[34] The applicants also point to the fact that the respondents choose to continue to underwrite the ongoing SoftQuest business to the extent of some $81,000 per annum, notwithstanding that this business continues to operate at a loss (as confirmed in the affidavit of Harvey Zabusky).

[35] In Harrison Partners Constructions Pty Ltd v Jevena Pty Ltd [2006] NSWSC 317, Brereton J said:

'[10] Generally speaking, the proper legal costs of the defence should be exempted from the scope of an asset preservation order [Clark Equipment Credit of Australia Ltd v Conto Factors Pty Ltd (1988) 1 NSWLR 552 at 569; Glenwood Management Group Pty Ltd v Mayo [1991] VicRp 45; [1991] 2 VR 49; Frigo v Culhaci (NSWCA, 17 July 1998, BC9803225)]. It is a principle of "Mareva" relief that it should not be allowed to stultify the proper defence of the proceedings [Clark Equipment Credit of Australia ltd v Conto Factors Pty Ltd (1988) 1 NSWLR 552 at 569; Lewis v Nortex Pty Ltd (in liq) (NSWSC, Hamilton J, 16 February 2004, BC200400815].

[11] In this context, the proper legal costs of the defence should not be viewed in any narrow way, and are not limited to the bare essentials which might be allowed on a party/party assessment. The proper purpose of the Mareva jurisdiction is not to confer on a plaintiff any priority or security or anticipatory execution, nor to constrain the legitimate conduct of the defendant, but only to prevent an abuse by the defendant of its dispositive power in a manner calculated to produce the result of defeating an anticipated judgment in favour of the plaintiff. Generally, it is not an abuse of a defendant's dispositive power to fund its own defence, even on a lavish scale, so long as the expenditure is bona fide for that purpose. Courts should not deny such expenditure, even if the defence choses to engage the most expensive law firm and counsel, unless the expenditure is not bona fide for the purpose of defending the proceedings.

[12] Some cases suggest that where a defendant applies to vary a Mareva order to permit legitimate expenditure such as legal costs, at least where the order binds part only of the defendant's assets, the defendant bears some onus of showing that there are not other assets to which resort might be had to pay the legal costs, and that the proposed expenditure is reasonable [A v C (No 2) [1981] 2 All ER 126 (Goff J); Clout (Trustee) v Anskor Pty Ltd [2001] FCA 174, [19]-]20] (Drummond J); Goumas v McIntosh [2002] NSWSC 713, [22] (Barrett J). Others suggest that, at least where the order relates to the whole of the defendant's property, the order should be imposed in terms which exempt reasonable living and legal expenses, or be modified to do so at the first opportunity [Clark Equipment Credit of Australia Ltd v Conto Factors Pty Ltd (1988) 1 NSWLR 552 at 569; Frigo v Culhaci (NSWCA, 17 July 1998, BC9803225)].

[14] In the context of a variation of a Mareva order to release funds, demonstration that circumstances have sufficiently changed to warrant reconsideration of the matter will normally involve showing that there is a new need for expenditure, which cannot be satisfied other than by resort to the frozen assets. While that onus does not necessarily require the applicant to account for all its expenditure from its other assets and resources, how it has spent its other resources may well be relevant to the exercise of discretion. If resources that could have been used for the purpose proposed have been expended wantonly, that might well weigh against permitting access to the asset that has been the subject of the preservation order.'

[36] See also Brereton J's observations in Paris King Investments Pty Ltd v Rayhill [2006] NSWSC 578, in which his Honour said at [15]:

'In the context of an application to vary a Mareva order to release funds, demonstration that circumstances have sufficiently changed to warrant reconsideration of the matter will normally involve showing that there is a new need for expenditure which cannot be satisfied other than by resort to the frozen assets. While that onus does not necessarily require the applicant to account for all its expenditure from its other assets and resources, how it has spent its other resources may be relevant to the exercise of discretion, and if resources that could have been used for the purpose proposed have been expended wantonly, that may well weigh against permitting access to the asset that has been the subject of the preservation order.'

[37] In the present case, the respondents seek to have the cap removed, or at least the limit on the mortgage increased to $700,000, on the basis that the respondents' solicitors have now rendered bills totalling some $640,000. That is, it must be said on any view, a very significant expenditure on legal fees, given that the respondents' present solicitors have been engaged in the matter for something less than 18 months. I observe in that regard that the client agreement dated 27 June 2007 originally entered into between the respondents and their solicitors contained an estimate of between $50,000 and $500,000 to perform work in acting for the respondents in the proceedings and in respect of all matters arising out of the issues in this litigation. In an affidavit sworn by the respondents' solicitor on 19 July 2007, he estimated that the total costs for the respondents, including over four week trial, would be just less than $750,000. In October 2008, however, he deposed that the costs for the respondents will certainly exceed $1,000,000.

[38] One of the difficulties with which I am presently faced, however, is that, notwithstanding the entitlement of the respondents to engage such expensive legal representation as they consider appropriate, a balance needs to be performed with a view to ascertaining whether the legal fees are being properly incurred bona fide for the purpose of defending the proceedings, or whether they are profligate diminution of the assets which would otherwise be preserved by the Mareva order regime. One element which would have assisted me in making that assessment would be to have known some further detail of the work (or the sort of work) which the respondents' solicitors have undertaken over the last 16 months or so in accumulating legal costs approaching $650,000. The respondents' solicitors have not, however, provided that sort of detail, but rather have limited themselves simply to providing copies of the cover sheets of their various memoranda of professional fees. The solicitors claimed privilege in respect of the individual items of work performed for the respondents over the time. It seems to me, however, that it could have been possible, and would have been desirable, for the solicitors to give something more than the scant detail presently to hand about the work undertaken to accumulate this significant legal bill.

[39] Having regard to all of the matters that I have mentioned, it seems to me, in balancing the entitlement of the respondents to have access to assets for the purposes of defending the proceedings, on the one hand, and the need to ensure that there is no wanton dissipation of the respondents' assets on the other, to allow only the application to increase the limit of the mortgage to the respondents' solicitors to $700,000. It seems to me that, whilst there is some force in the applicants' submissions concerning the availability of funds to pay legal expenses, even taking the matters mentioned by the applicants into account, there would still clearly need to be recourse by the respondents to the frozen assets for the purposes of meeting their legal fees bona fide for the purpose of defending these very complicated proceedings.

[40] Consideration of the complexity of the proceedings also informs the present exercise of my discretion for the benefit of the respondents concerning the level of expenditure in a relatively short time.[4] The respondents should not, however, assume that they will not be required, in the event of any further application to increase the limit under the mortgage, to provide significantly more detail of the nature of the work which has been performed in incurring legal fees of this very high order.

[41] I will hear the parties as to the appropriate orders to enable an increase in the limit permitted under that mortgage to the respondents' solicitors to $700,000.

[42] The costs of this application will be reserved.

[1] Thunderdome Racing & Scoring Pty Ltd v Dorian Industries Pty Ltd [1992] FCA 291; (1992) 36 FCR 297.

[2] Allied Collection Agencies Ltd v Wood [1981] 3 All ER 176

[3] In that regard, reference was made to such well established authorities as Jackson v Stirling Industries [1987] HCA 23; (1987) 162 CLR 612 at 642.

[4] Some idea of the complexity of this litigation can be gleaned form the judgment of the Chief Justice at [2006] QSC 66, and my more recent judgment at [2008] QSC 213.