[1959] HCA 8
Knight v FP Special Assets Ltd (1992) 174 CLR 178
Source
Original judgment source is linked above.
Catchwords
[1959] HCA 8
Knight v FP Special Assets Ltd (1992) 174 CLR 178
Judgment (2 paragraphs)
[1]
Judgment
By an amended Notice of Motion dated 18 April 2016 the plaintiff, VMA Companies LLC trading as Corbis Global ("Corbis"), seeks an order that Mr Joshua Ridley ("Mr Ridley") and Ridley & Co Pty Ltd ("Ridley") neither of whom were originally parties to the proceedings, pay the costs of Corbis of these proceedings and on an indemnity basis. Mr J.T Johnson of Counsel appears for Corbis and Mr D. Studdy SC with Mr D. Barnett appears for Mr Ridley and Ridley.
In early 2012 Ridley Capital Holdings Pty Ltd ("RCH") engaged Corbis as a sub-contractor to provide services in relation to two projects in respect of which RCH had been contracted to perform services for Hassell & Co "Hassell," a firm of architects. The contracts related to two projects one known as the Old Treasury Building "Treasury" and one known as Midland Health Campus "Midland." There were additional contracts later entered into between these parties on a similar basis.
In September 2013 Corbis commenced proceedings in the District Court against RCH for $523,258 alleged to be due under the various contracts of engagement entered into between Corbis and RCH including Treasury and Midland. By an Amended Statement of Claim additional amounts for four other projects were added to make a total claim approximately of $660,000.
On 9 October 2013 RCH filed a defence and cross-claim. RCH by its cross-claim alleged that Corbis had repudiated the agreement and had published an injurious falsehood against RCH through two emails both of 1 March 2013 sent by Corbis to Hassell. I shall refer to those two emails as "the March emails."
RCH claimed that it had additional costs of completing the Treasury and Midlands projects following Corbis's alleged repudiation of the agreements between Corbis and RCH, and later it quantified that damage in excess of $700,000.
RCH claimed also that Hassell had, by reason of the March emails, not awarded RCH ten identified projects. Later RCH quantified the claim at $2 million based on expert evidence. This led to proceedings being transferred by consent from the District Court to the Supreme Court.
In November 2005 RCH terminated the retainer of its solicitors and barrister, its cross-claim was struck out, and on 18 November 2015 judgment was entered against it for $660,000. Soon thereafter, following a creditor's voluntary winding up, Mr Brian Copeland and Mr Robert Whitton were appointed as liquidators.
Mr Ridley was the sole director of RCH at all relevant times. The shareholder of RCH was Ridley Family Investment Pty Ltd ("RFI") (see p.44). Mr Ridley's wife Jayne Ridley was the sole director and shareholder of RFI.
RCH had originally (in 2011) been incorporated as Ridley & Co Pty Ltd. In 2012 it became RCH. Ridley was incorporated in June 2012 and it became the registered owner of the business name Ridley & Co. As at 2012 and beyond Mr Ridley was a director of Ridley and he was at all relevant times the major shareholder in Ridley.
The existence of the two Ridley named companies has caused some confusion, and indeed when Corbis made claims for payment it sent the claims to "Ridley & Co": see pp.478-488 and pp.490-492 Exhibit A1. When it commenced proceedings it did however name RCH as the defendant and that is the entity against whom Corbis later obtained judgment.
Corbis maintains that Mr Ridley and Ridley were funding RCH throughout the litigation and that in the circumstances to which I shall return, an order should be made against them to pay Corbis's costs of the proceedings. There was no dispute that the Court has power by virtue of s.98 of the Civil Procedure Act 2005 (NSW) ("CPA") to make an order against a non-party. The principles governing whether an order of that kind should be made have been explained in Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 182; [1992] HCA 28 ("Knight") per Mason CJ, Deane and see Gaudron J at p.205 and Dawson J at p.202, and in FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 at [198]-[219] per Basten JA with whom Beazley JA and, on this point, Giles JA concurred ("FPM") and Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 [26]-[33],[80],[81],[86] per Gleeson JA with whom Macfarlan JA and Leeming JA concurred.
There are some additional facts to which reference should be made:
1. On 22 May 2015 (the same day that Corbis's solicitors sent a demand to Ridley & Co) RCH made an application to ASIC to be deregistered: see Exhibit A1 pp.607-608. In that application Mr Ridley declared, inter alia, that RCH "is not carrying on business" and that RCH had assets worth "less than $1000." There is no dispute by Mr Studdy that the document was lodged by Mr Ridley but he submitted that it could not have been proceeded with subsequently by RCH because RCH was not in fact deregistered.
2. Mr Ridley signed a summary of assets and liabilities of RCH (on 20 November 2015) as part of the winding up and he referred to the judgment debt in favour of Corbis but also included an amount of $1.633 million said to be owed to him as an employee of RCH: see Exhibit A1 p.579. There are no other documents provided to the liquidator referring to this claim or to Mr Ridley being an employee of RCH, although according to Mr Johnson, and this was not disputed, records of RCH were subpoenaed and produced going back to 2012.
3. $380,000 of the legal costs of RCH in the litigation were paid by Mr Ridley. Approximately a further $100,000 was paid by Ridley but the amounts paid by Ridley were one amount prior to the litigation and the balance was paid after the litigation (see p.746 Exhibit A2 and see T22.11).
4. As at 26 February 2013 (i.e. before the March emails) Ridley (and not RCH) was involved with Hassell, on Melbourne Airport projects and numerous other projects in Sydney and Melbourne: see Exhibit A1 pp.425-428.
5. At least one of those projects referred to in pp.425-428 was claimed by RCH to have been lost to it as a result of the March emails, and Midland was described in a document of Ridley (see Exhibit A1 p.609) as being a Ridley project.
Mr Ridley has chosen not to put on any affidavit in opposition to Corbis's motion. Mr Johnson submits that an inference can be drawn, by reason of Mr Ridley's failure, that he could say nothing to assist his case: Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8. Mr Studdy points out that Mr Ridley had no need to put on any evidence since there was nothing (other than in relation to the funding by himself and Ridley) to answer.
It is apparent that Corbis believes that Mr Ridley has engineered the stripping of assets of RCH. Indeed Corbis has filed an application in the Corporations List to have the liquidators removed on the grounds that their investigations, as to the true asset position of RCH, have been inadequate. Mr Studdy submitted that even were there a basis for concern (which he did not concede) whether there has been any misconduct by Mr Ridley in the affairs of RCH is not relevant to the present application. Mr Studdy did however draw attention to the fact (as I have already mentioned) Ridley was unincorporated long before the dispute and was heavily involved with Hassell projects before the commencement of this litigation, and there is no evidence of RCH's 'goodwill' having been transferred to Ridley, or of projects or other assets then held by RCH being transferred to Ridley.
There are some general observations to be made about orders against third parties:
1. the prima facie general principle is that an order for costs is only made against a party to the litigation,
2. where the party to the litigation is insolvent or a "man of straw" and the non-party has played an active part in the conduct of the litigation and that person has an interest in the subject of the litigation "an order for costs should be made against the non-party if the interests of justice require that it be made" per Mason CJ and Deane J in Knight, with whom Gaudron J agreed at p.205 and see Dawson J at p. 204,
3. the fact that the "real driving force behind the proceedings" with the financial resources was the non-party and the actual plaintiff is a person of straw is a basis for an order,
4. the categories of cases in which the Court will order a non-party to pay costs is not closed.
5. In FPM Basten JA identified five criteria which, if met, will tend to satisfy the Court that an order should be made as:
"(a) the unsuccessful party to the proceedings was the moving party and not the defendant;
(b) the source of funds for the litigation was the non-party or its principal;
(c) the conduct of the litigation was unreasonable or improper;
(d) the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest, and
(e) the unsuccessful party was insolvent or could otherwise be described as a person of straw."
1. The FPM criteria "are not intended to be and cannot be exhaustive" and care must be taken "not to apply the criteria identified by Basten JA in FPM Constructions mechanically" (see Greenacre [80], [81]).
2. The Court should have regard to the unusual nature of such orders and be cautious in making them against non-parties.
Mr Johnson and Mr Studdy focused their attention on the FPM criteria, and I shall deal with these in turn. Mr Studdy accepted that unreasonable or improper conduct of litigation was not essential for an order against a non-party. I think this concession was correctly made: see obiter per Lander J with whom Doyle J agreed in Vestris v Cashman (1998) 72 SASR 449 at p.467, and see Olsson J at p.457, and Dal Pont's Law of Costs (3rd ed, 2013, Lexis Nexis) at [22.32] (although as Lander J makes clear if there has been any unreasonable or improper conduct that will be relevant to whether a third party costs order should be made). Mr Studdy did point out that no order for indemnity costs could be made in the absence of such conduct, and Mr Johnson did not seek to gainsay that proposition.
Corbis brought the proceedings against RCH. Mr Johnson asserted that because RCH mounted a defence of set off based on the cross-claim RCH should be viewed as the moving party. Mr Studdy contended that that did not alter the fact that RCH was not the moving party and the cross-claim was defensive in nature.
In the context of applications for security, consideration is often given to the question of whether the defendant in the case is in reality the moving party: see SP Hay Pty Ltd & Anor v Allcorp Pty Ltd & Ors [2004] WASC 77, Bevwizz Group Pty Ltd v Transport Solutions Pty Ltd [2008] NSWSC 1399 at [18] per Brereton J cited in Dal Pont supra at [28.55].
Mr Studdy submits that cases on security have no relevance here. Whilst the situation may not be not precisely analogous there is a similarity and I do not accept Mr Studdy's contention that the cross-claim was defensive only. By it RCH was seeking an amount of more than $2 million beyond the debt which Corbis was chasing.
In my view RCH was the moving party on the cross-claim and it was promoting a case with a claimed value of $2.7 million (only the smaller part of which would offset Corbis's claim).
In relation to the source of the funds for the litigation I think that it is clear that the bulk came from Mr Ridley and it appears that what did come from Ridley was not paid to maintain the defence and cross-claim whilst the proceedings were on foot.
In relation to the third criteria Mr Johnson eschewed any assertion that the conduct of the litigation was improper. Rather he submitted that the conduct was unreasonable. Unreasonableness was based, he said, on the following matters:
1. RCH asserted repudiation and injurious falsehood. It incurred considerable costs in maintaining these claims but then abandoned them in November 2015 and judgment was entered in effect by default.
2. Even if the March emails amounted to repudiation of existing incomplete contracts they could not affect the debts incurred by RCH on the contracts that had already been completed.
3. RCH claimed that it had, as a result of the March emails, lost contracts with Hassell but Corbis asserts that RCH had not lost any contracts because of those emails. Hassell continued its relationship with Mr Ridley albeit through Ridley rather than RCH, and indeed had started on that change in contracting partner before the March emails.
4. RCH by defending the Corbis claim with the assistance of Mr Ridley and Ridley was "buying time" within which to move projects out of RCH and into Ridley.
Mr Studdy submitted that:
1. It could not be inferred from the fact the RCH abandoned its defence and cross-claims in November 2015 that its defence and cross-claims had no merit.
2. RCH claimed that the March emails constituted a repudiation of any contracts still on foot and it had a credible case. It asserted that it had to expend money to deal with the end of its relationship with Corbis and it detailed through Mr Ridley's affidavit of June 2016 what it had to spend: see Exhibit A2 Tab 9.
3. In relation to the injurious falsehood claim RCH had evidence from an expert that it had losses of up to $2.1 million. The projects which it claimed to have lost were not (except perhaps for the Melbourne Airport contract) the same as the contracts with Ridley.
4. The question of whether there was substance in the repudiation point or the injurious falsehood claim never went to trial. It ought not be assumed that these claims were groundless or hopeless.
Whilst I suspect that RCH's claims that Hassell had not given particular jobs to RCH because of the March emails and that the repudiation in fact led to expenditure of more than $700,000 would have been difficult for RCH to establish, I am not in a position to say, on the evidence before me, that RCH had no prospect of establishing a set off at least to the extent of Corbis's claim and hence I am not able to conclude that RCH's conduct of the litigation was unreasonable. I do not think that it can be inferred solely from RCH's abandonment of the claims that they were hopeless or without merit.
In relation to whether Mr Ridley and Ridley had an interest in the outcome of the case, it is by no means clear to me what Ridley's interest was.
So far as Mr Ridley is concerned the interest which Mr Johnson relied on was Mr Ridley's position as a creditor of a company. Mr Johnson submits that since Mr Ridley has declared that he was a creditor for $1.6 million that should be taken to be an indication of a real interest in the outcome of the case since if RCH recovered on its cross-claim an amount beyond the Corbis claim of $660,000, that would put RCH in funds and enable Mr Ridley to recover from RCH some or all of his claimed $1.6 million. The fact that Mr Ridley paid $380,000 towards the RCH defence and cross-claim provides support for the inference that Mr Ridley saw himself obtaining a benefit by conduct of the litigation and I draw the inference that he saw himself as having an interest and did have an interest and that he would have benefited directly if RCH was successful. That is quite apart from any indirect benefit he would obtain because his wife was the ultimate shareholder in RCH via RFI.
Mr Studdy pointed out that there may have been difficulties in enforcing judgment against Corbis because it is based in Argentina. There is no evidence before me one way or the other as to whether a judgment against Corbis would have been enforceable or not and I do not think that the possibility that it might have been difficult affects the position. I infer that Mr Ridley did not see the expenditure on the proceedings by himself and Ridley (of which he was a director) as a waste of money from his view, or from Ridley's point of view.
The last FPM criteria is whether the unsuccessful party was insolvent or a person of straw.
In support of the conclusion that RCH was either insolvent or had no significant assets at any time during the conduct of the proceedings are the following items of evidence:
1. As at February 2013 Ridley, and not RCH, had embarked upon or was planning to embark upon numerous projects with Hassell: see Exhibit A1 pp.425-428 and see para 7 of Ms Thomson's affidavit of 30 August 2016 and Exhibit A1 pp.604-614.
2. As at 1 March 2013 Corbis had not been paid by RCH on contracts which it had completed (see Exhibit A2 p.1113 and see Exhibit A1 p.95, 487-488). By that stage RCH was facing at the very least a contingent liability for the debts which later became the subject of the proceedings and led to a judgment in the Supreme Court on 18 November 2015.
3. Mr Ridley's assertion on behalf of RCH that as at 22 May 2013 RCH had assets worth less than $1000 and was not trading: see Exhibit A1 pp.607-608.
4. As at 12 November 2015 RCH had a deficiency of liabilities over assets of $51,029: see Exhibit A1 p.963, and see p.961 Exhibit A1 showing the position as at June 2014. The position as at June 2013 showed a $33,000 surplus but that did not include liabilities to Corbis or Mr Ridley.
5. As at 20 November 2015 RCH had assets of $11,000 (cash at bank) but no other assets even of a contingent nature and debts of $2.3 million approximately: Exhibit A1 p.579 (document signed by Mr Ridley).
6. None of the bills of Sparke Helmore for the proceedings were paid by RCH. Sparke Helmore acted for RCH in the proceedings (and now act for Mr Ridley and Ridley).
I am persuaded on the basis of this material that RCH was by the time of commencement of proceedings in September 2013 a company without any financial substance. There may have been explanations or information which could have provided a different picture of the financial position of RCH but none was forthcoming from Mr Ridley. It appears that RCH's defence and cross-claim were possible only because of Mr Ridley's contributions.
Mr Studdy contended that Corbis took the risk that RCH had no funds to meet Corbis's claim or even to meet an order for Corbis's cost, and that that was a commonplace risk in litigation. I agree that it always behoves a plaintiff to be alive to the question of the financial wherewithal of a defendant against whom it has legitimate claims but the situation is taken out of the ordinary when an impoverished party is able to maintain its defence and cross-claim because of funding by someone with an interest in the outcome. As Olsson J. remarked in Vestris:
"Where proceedings are initiated and controlled by a person who, although not a party to the proceedings, has a direct personal financial interest in the result, it would rarely be just for such a person pursuing his own interests, to be able to do so with no risk to himself should the proceedings fail or be discontinued: see Carborundum Abrasives Pry Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757."
I am not satisfied that RCH's conduct of the defence and cross-claim was unreasonable or that any order should be made against Ridley but I am satisfied that RCH was not as and from September 2013 a company of any substance, that RCH's defence and cross-claim were being promoted for the benefit of Mr Ridley, and that it is in the interests of justice that Mr Ridley pay the costs of Corbis of the proceedings as agreed or assessed on the ordinary basis.
I will hear the parties on the issue of costs of this motion.
[2]
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Decision last updated: 04 November 2016