Supreme Court of NSW Dismisses Claims Without Ordering Costs

The Court dismissed both the claim and cross-claim without making an order as to costs, finding that neither party substantially succeeded in the proceedings. The decision was based on the principle that costs should be paid in a way that is fair, considering the responsibility of each party for the incurring of costs.

Supreme Court New South Wales

Medium Neutral Citation: In the matter of [NAME] & Son Pty Ltd [2020] NSWSC 878 Hearing dates: 30 April 2020, 5-7 May 2020; 13 May 2020, 19 May 2020. Decision date: 08 July 2020 Jurisdiction: Equity - Corporations List Before: Black J Decision: Second Further Amended Statement of Claim and Amended Cross-Claim dismissed. No order as to the costs of the proceedings. Catchwords: COSTS — Party/Party — Exceptions to general rule that costs follow the event — Company not wound up only because of Defendant's actions after proceedings commenced — Offers of compromise/[NAME] offers — Not unreasonable not to accept offer. Legislation Cited: - Civil Procedure Act 2005 (NSW), s 98 - Uniform Civil Procedure Rules 2005 (NSW), r 42.1, 42.15A Cases Cited: - [NAME] v [NAME] [1975] 3 All ER 333 - [COMPANY] v [COMPANY] (No 2) [2018] NSWCA 266 - Commonwealth of Australia v Gretton [2008] NSWCA 117 - Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 - Nu Line Construction Group Pty Ltd v Fowler (aka Grippaudo) [2012] NSWSC 816 - Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 - Re [COMPANY] atf [COMPANY] (in liq) [2016] NSWSC 575 - Re [NAME] & Son Pty Ltd [2020] NSWSC 711 - Re [COMPANY] and [COMPANY]; [COMPANY]; Foot Steps Orthotics Pty Limited [2019] NSWSC 174 - [NAME] v [COMPANY] (No 2) [2011] NSWCA 256 Category: Costs Parties: [NAME] (Plaintiff/Cross-Defendant) [NAME] & Son Pty Ltd (First Defendant) [NAME] (Second Defendant/Cross-Claimant) Representation: Counsel: [redacted] [NAME]/[NAME] (Second Defendant/Cross-Claimant)

Solicitors: [redacted] [NAME] (Second Defendant/Cross-Claimant) File Number(s): 2019/71348

Judgment

Background 1. On 9 June 2020, I delivered judgment in Re [NAME] & Son Pty Ltd [2020] NSWSC 711 ("Principal Judgment"), in respect of an oppression claim brought by the Plaintiff, [NAME], against the Second Defendant, [NAME], in respect of the affairs of the First Defendant, [NAME] & Son Pty Ltd ("Company"). I reached findings, inter alia, in respect of allegations made by [NAME] as to personal loans he had made to [NAME] (at [80]ff); the circumstances surrounding the removal of [NAME]'s access to information in September 2018 (at [85]ff); a complaint that [NAME] was not appointed a director of the Company (at [92]ff); a complaint regarding loans to another company (at [94]ff); issues as to dealings with cash receipts in the restaurant operated by the Company (at [98]ff); the manner of payment of expenses (at [102]ff); and a claim as to a declaration of trust over shares in a third company (at [106]ff).

2. In dealing with applications by each of [NAME] and [NAME] for orders requiring the other to sell his shares, I held (at [121]) that both [NAME] and [NAME] had been prepared to deal with cash in a way that led to non-compliance with the Company's tax obligations and probably also with employee tax obligations and that an order for compulsory purchase of the shares of one should not be made in favour of the other. In dealing with [NAME]'s application for a winding up order, I observed (at [135]) that: "It seems to me that it would not be in the public interest that the Company now be wound up, where it has self-reported the issues relating to taxation non-compliance to revenue authorities and assumed the consequential liability, and a liquidation would reduce the prospects that that liability will be met over time. It would plainly not be in the interests of employees of the Company that it now be wound up. There seems to me to be limited risk of the continuance of the conduct which was in issue in these proceedings, where the Company's affairs have been exposed to the Australian Taxation Office by self-reporting and in this Judgment, and where [NAME] would need to bear in mind the risk of a further winding up application by [NAME] if such conduct were to recur. For all these reasons, I am not satisfied that a winding up order should be made."

1. I also observed (at [136]) that: "In the result, the parties will be left within their existing relationship. Neither party has had had substantial success in the proceedings and my preliminary view is that there should be no order as to costs of the proceedings. I direct the parties to bring in agreed short minutes of order including as to costs within 7 days or, if there is no agreement, their respective short minutes of order and submissions not exceeding 6 pages in one and a half spacing as to the differences between them."

1. The parties were not able to reach agreement as to the orders made as to costs. Not surprisingly, [NAME] supported the preliminary view that I expressed in the Preliminary Judgment. [NAME] contended that [NAME] should be ordered to pay his costs of the proceedings.

Whether costs should "follow the event" 1. [NAME], in submissions as to costs, supported the preliminary view expressed in the Principal Judgment that there should be no order as to costs on the basis that each party is left to bear his own costs. [NAME] submits that the appropriate order is that he have his costs of both the claim and the cross-claim. He submits that he was entirely successful and costs should follow that event; and, to the extent that it might be suggested that he was unsuccessful in his cross-claim, that cross-claim was defensive in nature, and depended on whether [NAME] established any part of his claim.

2. The principle that costs will generally follow the event is, of course, well-established. Section 98 of the Civil Procedure Act 2005 (NSW) confers a discretionary power to determine costs on the Court ("UCPR"). Rule 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) in turn provides that: "Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs."

1. A successful party has a "reasonable expectation" of being awarded costs against an unsuccessful party, unless there is good reason for that presumption to be displaced: Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at [22], [134]. In Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121], Hodgson JA (with whom Mason P agreed) observed that: "… underlying both the general rule that costs follow the event, and the qualifications to that rule, is the idea that costs should be paid in a way that is fair, having regard to what the court considers to be the responsibility of each party for the incurring of the costs." That observation was cited, with apparent approval, by the Court of Appeal in Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [98]. 1. [COMPANY] v [COMPANY] (No 2) [2018] NSWCA 266 at [7]–[9], McColl JA in turn observed that: "Section 98 of the Civil Procedure Act 2005 (NSW) confers a wide discretion on the court with respect to costs. The "general rule" is that court costs follow the event unless the court makes "some other order" pursuant to the discretion conferred by Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 42.1. As Beazley JA explained in [NAME] v [NAME] [[2008] NSWCA 73; (2008) 39 Fam LR 323 at [11] ([NAME] agreeing)], in most litigation, UCPR r 42.1 "operates in a straightforward way, 'the event' being readily identifiable as a judgment for the plaintiff or the defendant on the claim. In that sense, 'the event' to which the rule refers is the result of the proceedings, so that the party who succeeds on the claim before the court is awarded costs, unless the court, pursuant to the discretion conferred by r 42.1, makes 'some other order'". Underlying both the general rule that costs follow the event, and qualifications to that rule, is the idea that costs should be paid in a way that is fair, having regard to what the court considers to be the responsibility of each party for the incurring of the costs." [footnotes omitted]

1. I have here drawn on my summary of the applicable principles in a somewhat similar context in Re [COMPANY] and [COMPANY]; [COMPANY]; Foot Steps Orthotics Pty Limited [2019] NSWSC 174 at [5]ff for the summary that appears above.

2. Turning now to the parties' submissions, [NAME], who appeared for [NAME], submitted that orders were not made as sought by [NAME] in the Second Further Amended Statement of Claim or by [NAME] in the Amended Cross-Claim. He also submitted that the proceedings were commenced when [NAME] excluded [NAME], who was at least a substantial shareholder of the Company, from involvement and oversight of its financial operations, in the course of negotiations for one shareholder to buy-out the shares of the other, and in circumstances that [NAME] had left for an overseas holiday. I referred to those matters in the Principal Judgment, although they seem to me to be relevant to this application only so far as they identify the circumstances that plainly contributed to the commencement of the proceedings. 3. [NAME] also referred, in submissions as to costs, to [NAME]'s evidence in cross-examination as to the circumstances of the non-payment of tax by the Company, to the findings which I had reached in respect of that issue (Principal Judgment [36]) and to my finding that cash had not been deposited by [NAME] into the Company's bank account "for significant periods" (Principal Judgment [101]). I should emphasise that I do not treat conduct of [NAME], or indeed [NAME], prior to the commencement of the proceedings as a matter that has relevance to the determination of costs, which should reflect the issues arising from the conduct of the proceedings, not the matters that are in issue in them. However, these findings are relevant here, because they would have supported the winding up order sought by [NAME] until [NAME] took steps, well into the conduct of the proceedings, to regularise the Company's taxation affairs and its dealings with cash. 4. [NAME] emphasises the fact that the relevant conduct in relation to cash receipts only ceased in the course of the proceedings (Principal Judgment [101]) and that that only occurred after [NAME] had led evidence of cash dealings of the Company that the amount of cash received by the Company exceeded the amount of cash deposited to its bank and the Company gave notice to the Australian Taxation Office that a voluntary disclosure would be made. [NAME] submits that: "The Company was not wound up in part on the basis that it would not be in the public interest to do so, and that employees would be adversely affected [135]. [ADDRESS] considered that it was also important that the Company had self-reported many of the taxation deficiencies – although as set out above this had not occurred until it became clear to [[NAME]] that [an employee's] records would demonstrate the receipt of unreported cash income." 1. [NAME] and [NAME], who appeared for [NAME], in turn referred to the relatively large amount of the costs claimed by [NAME]. I will assume the correctness of that figure, although no evidentiary reference was given for it and I accept that the amount involved is substantial. However, the applicable principles do not differ because the amount of costs incurred is moderate, large or very large. 2. [NAME] and [NAME] also rightly identified the elements of the relief sought by [NAME] as involving claims that the Company be wound up; alternatively, [NAME] purchase [NAME]'s shares at specified prices; and that [NAME] repay certain outstanding loan funds. [NAME] also rightly points out that [NAME] was unsuccessful in that claim and, in the ordinary course, costs would follow the event. While I recognise that the position for which [NAME] contends reflects the ordinary starting point for a costs order, it seems to me that such an order would be unfair, having regard to what the court considers to be the responsibility of each party for the incurring of the costs, and would not do justice between the parties.

3. First, at the time the proceedings were commenced and for much of the time they continued toward a hearing, on the facts as they then existed, it was inevitable that [NAME] would have succeeded in obtaining a winding up order on the just and equitable ground. [NAME] had fairly recognised the issues with the Company's treatment of cash in the course of oral submissions at the hearing before me, although pointing to subsequent developments in order to avert the winding up result at the hearing. The Company, initially under the operational management of [NAME] and largely the financial management of [NAME], and subsequently under [NAME]'s management, was dealing with cash in a manner that disregarded its obligations to the Australian Taxation Office and also put its employees at significant risk in respect of their tax affairs. That would have been amply sufficient to support a winding up on public interest grounds, and [NAME] would then have received his costs of the proceedings on the basis that costs followed the event. It seems to me that result would then have followed although the winding up would have been granted on public interest grounds, reflecting fault of both parties, rather than on the basis of oppression by [NAME]. A costs order is compensatory in nature and [NAME] would in that case have been put to the costs of obtaining a winding up order which he would then have obtained, albeit on different grounds. That only did not occur because of the further developments to which I refer below.

4. As [NAME] points out, it was only in the course of the proceedings and after [NAME] had moved for the appointment of a provisional liquidator to the Company on the basis of the manner in which it was dealing with cash, that a significant amount of cash then held in the Company's safe was deposited to the bank. It seems to me that the fact that [NAME]'s success in avoiding a winding up order was only obtained by reason of a change in the factual position, occurring in the course of the proceedings and after significant costs would have been incurred by [NAME] in pursuing a case that was then very likely to succeed, is a significant matter in determining whether costs should follow the event in the relevant circumstances. I note that neither party suggested that I should order costs in favour of [NAME] to that point and costs in favour of [NAME] from that point, where that result may be little different in practice from no order as to costs and would expose both parties to the additional costs of an assessment.

5. Second, [NAME] submits the question whether costs should follow the event is not affected by the fact that [NAME] filed a Cross-Claim seeking an order that [NAME] be required to sell his shares in the Company to [NAME], which failed. [NAME] and [NAME] submit that an order for costs should nonetheless be made in [NAME]'s favour, because the Cross-Claim was framed as contingent on [NAME]'s success in his claims, so that [NAME]'s success in his defence made his Cross-Claim redundant. [NAME] and [NAME] also point out that that Cross-Claim was only filed after [NAME] amended his pleadings to abandon an alternative claim that [NAME] buy out his shares, and that [NAME] was only permitted to file a Cross-Claim limited to the matters raised by [NAME]'s claim, given the lateness of his application to do so. [NAME] and [NAME] submit that the Cross-Claim was "defensive only" and did not rely on matters that were not already before the Court.

6. While I accept the accuracy of the history set out by [NAME] and [NAME]'s Cross-Claim sought affirmative relief, namely that [NAME] be required to sell his shares to [NAME]. That Cross-Claim did not fail because the factual basis for [NAME]'s claim was not established, because I had found (at [101]) that cash was not deposited to the Company's bank account for significant periods and that [NAME] had not established that that cash was wholly applied to cash payments of suppliers and other business expenses in those periods. Rather, I held that those matters did not warrant the relief sought by [NAME], where the Company had introduced a proper practice of depositing cash to its bank account in the course of the proceedings, and that relief sought by [NAME] would have the other adverse consequences set out in paragraphs [116]ff of the Principal Judgment, to which I have referred above. I also held (at [121]) that I was not satisfied that, relevantly, a buy-out order should be made in favour of [NAME] where he, like [NAME], had been prepared to deal with cash in a way that led to non-compliance with the Company's tax obligations and probably also with employee's tax obligations. In these circumstances, it seems to me that [NAME] failed in his Cross-Claim as a matter of substance, and that failure did not result from the failure of [NAME]'s claim. I therefore do not accept [NAME]' and [NAME]' submission that the Cross-Claim only failed because [NAME]'s case failed or because [NAME] was entirely successful in his defence of [NAME]'s claim. 7. [NAME] and [NAME] also submit that it is a matter for [NAME] to identify some relevant reason why costs should not follow the event in these circumstances, and that cannot be done. It seems to me that two such reasons exist, namely that [NAME]'s failure and [NAME]'s success arose only from steps which were taken by [NAME] well into the conduct of the proceedings, by which time substantial costs would have been incurred by [NAME], and neither party submitted that it would be appropriate for costs to be awarded to [NAME] until that time and to [NAME] after that time; and [NAME] failed in his Cross-Claim, not by reason of the failure of [NAME]'s case, but by reason of his own conduct in respect of the affairs of the restaurant. I also do not accept [NAME]' and [NAME]' further submission that [NAME] did not effectively invite the litigation, a relevant matter noted in [NAME] v [COMPANY] (No 2) [2011] NSWCA 256, where his conduct in denying [NAME] access to information concerning the restaurant until read-only access was restored plainly contributed to the commencement of the proceedings. 8. [NAME] and [NAME] raised the possibility that the Court could make an order that [NAME] pay all of the costs of his claim and [NAME] pay all of the costs of the Cross-Claim. Such an order should not be made, both because it would not fairly recognise that [NAME] would likely have succeeded until [NAME] made the changes noted above, and also would not fairly recognise that the costs of scrutiny of the cash dealings within the restaurant, which took up substantial parts of the hearing, and of the cross-examination of each of [NAME] and [NAME], were relevant to both [NAME]'s claim and [NAME]'s cross-claim and, in particular, to the basis on which [NAME] failed in his Cross-Claim.

[NAME]'s offer of compromise or [NAME] offer 1. [NAME] submits that he would be entitled to a special costs order under r 42.15A of the UCPR on an ordinary basis up to and including 21 February 2020 and on the indemnity basis from 22 February 2020 where he served an offer of compromise on 21 February 2020, which offered to purchase [NAME]'s shares for a specified amount and to pay [NAME]'s costs up to 21 February 2020 as agreed or as assessed. [NAME] and [NAME] submit that [NAME] has obtained an order or judgment on the claim which is no less favourable than the offer. [NAME] responds that the offer of compromise does not support an indemnity costs order, because it contemplated that [NAME] would sell his shares in the Company to [NAME] for amounts less than the price at which [NAME] had offered to purchase [NAME]'s shares; [NAME] has in any event retained his shares; and the Court cannot be satisfied that the offer provided a better outcome for [NAME] than the result in the proceedings, and there is therefore no basis on which an indemnity costs order could be made.

2. I do not accept that [NAME] has obtained an order or judgment on the claim which is no less favourable than the offer he made, where he has failed on his Cross-[NAME] has not been ordered to sell his shares to [NAME]. Instead, the parties will be left within their existing relationship on a basis that does not amount to either of them substantially succeeding in the proceedings. While I accept that offer was plainly sensibly made, it seems to me that the basis for a special costs order is not established, where the result that [NAME] achieved is not less favourable than that which [NAME] had offered.

3. The result would not differ if [NAME]'s offer were as an offer under the principles in [NAME] v [NAME] [1975] 3 All ER 333. Those principles were summarised by Ward J (as her Honour then was) in Nu Line Construction Group Pty Ltd v Fowler (aka Grippaudo) [2012] NSWSC 816 at [9]–[15] and, in Re [COMPANY] atf [COMPANY] (in liq) [2016] NSWSC 575 at [8], I summarised those principles as follows: "[T]he fact that a party ultimately achieves a worse result than he or she would have achieved if he or she had accepted a [NAME] offer does not itself establish that the other party should be awarded indemnity costs, unless it can be said that it was unreasonable for the first party not to accept that offer, so as to warrant a departure from the general rule as to costs: [COMPANY] v [NAME] (aka [NAME]) [above] at [9]–[15]; [COMPANY] v [NAME] (No 2) [2015] NSWCA 268 at [14], [16]. In [NAME] v [NAME]; Gunner v Lawrence [2015] NSWSC 1229 at [26], Stevenson J observed that: "If a [NAME] offer is made, but not accepted, the court's discretion to make a special order is enlivened. The court's discretion is an open one, but is commonly enlivened if (a) the party that made the offer achieves a better result than the amount offered, (b) the offer was a genuine offer of compromise, and (c) it was unreasonable of the offeree not to accept: for example [COMPANY] v [COMPANY] (No 2) [2011] NSWCA 344 at [7]–[8]."" 1. [NAME] would not be entitled to indemnity costs on a [NAME] basis where the result that [NAME] achieved is again not less favourable than that which [NAME] had offered.

Orders 1. I note, for completeness, that [NAME] sought to be heard orally on the application, including to address any other factors beyond those disclosed at paragraph 136 of the Principal Judgment which might be sought to bear upon the exercise of the Court's discretion. The relevant issues have been well addressed in written submissions and nothing would be gained by putting the parties to the additional costs of repeating them in oral submissions. It does not seem to me to be necessary to allow an oral hearing, where the parties have had procedural fairness in respect of the issues addressed in the Principal Judgment and as to the question of costs.

2.

Accordingly, I make the following orders:

1. The Second Further Amended Statement of Claim dated 23 April 2020 is dismissed.

2. The Amended Cross-Claim dated 7 April 2020 is dismissed.

3. There be no order as to the costs of the proceedings.

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