Supreme Court Refuses Costs Order for Interlocutory Hearings

The Court refused to make a costs order for interlocutory hearings, emphasising a robust approach to discourage satellite litigation. The Court held that where an interlocutory application is resolved without a hearing on the merits, it will not make a costs order unless one party acted unreasonably or it is clear that one party would have succeeded.

Supreme Court New South Wales

Medium Neutral Citation: In the matter of [COMPANY] (in liquidation) (No 2) [2019] NSWSC 1381 Hearing dates: 8 October 2019 Date of orders: 14 October 2019 Decision date: 14 October 2019 Before: Gleeson J Decision: No order for costs of the hearings on 2 and 4 October 2019. Catchwords: COSTS – where interlocutory application resolved without a hearing on the merits – where parties consented to final orders – where winding up order made – whether one party's conduct unreasonable or whether clear that one party would have succeeded on interlocutory application – need for robust approach to end satellite litigation as to costs Cases Cited: [NAME] v [NAME] [2018] NSWCA 84 Re Minister for Immigration and Ethnic Affairs (Cth); Ex [NAME] (1997) 186 CLR 622; [1997] HCA 6 Category: Costs Parties: [COMPANY] (Plaintiff) [COMPANY] 616830114 (First Defendant) [COMPANY] (Second Defendant) Representation: Counsel: [redacted] [NAME] (sol) (Second Defendant)

Solicitors: [redacted] [NAME] (Second Defendant) File Number(s): 2019/306832

Judgment 1. GLEESON J: On 8 October 2019, I delivered reasons for making orders by consent that the first defendant, [COMPANY] (the company), be wound up on the just and equitable ground and that liquidators be appointed to the company: In the matter of [COMPANY] [2019] NSWSC 1367. The plaintiff, [COMPANY] ([COMPANY]), then sought an order that the second defendant, [COMPANY] ([NAME]), pay the costs of the interlocutory hearings before Black J on 2 October 2019 and Rees J on 4 October 2019.

2. The company has two equal shareholders – [COMPANY] and [NAME]; and two directors – Mr [NAME] and Mr [NAME]. The company was a joint venture between [COMPANY] and [NAME] formed to carry on the business of importation, sale and distribution of heavy vehicle trailers and associated goods manufactured by an English company known as [COMPANY]. Under the terms of the director and shareholder agreement dated 27 July 2017, the parties agreed that [NAME] and [NAME] would perform the role of general manager of the company, and that all parties would be actively involved in the day-to-day management of the business of the company: cl 6. In my principal reasons, I explained why I was satisfied that there had been an irretrievable breakdown between both the directors and shareholders of the company, and that the affairs of the company were deadlocked.

3. The procedural background to the proceedings is as follows. On 2 October 2019, Black J made orders ex parte for short service of the originating process and supporting affidavit, which was made returnable on 4 October 2019. The originating process sought interim relief by way of the appointment of provisional liquidators to the Company. On 4 October 2019, [NAME] was successful in obtaining an adjournment of the hearing of that interlocutory application, which was stood over to 8 October 2019. Shortly prior to the commencement of the interlocutory hearing on that date, [NAME] agreed to the making of final orders, by consent, as indicated above.

4. The costs order now sought by [COMPANY] relates to the application for the appointment of provisional liquidators, which was overtaken by the consent of the parties to the winding up order made on 8 October 2019.

5. It is well established that where the Court has not determined an application on its merits, it will not ordinarily determine the substance of that application in order to deal with a question of costs: Re Minister for Immigration and Ethnic Affairs (Cth); Ex [NAME] (1997) 186 CLR 622 at 624-625 (McHugh J); [1997] HCA 6. There are exceptions to that proposition, relevantly, where one party has acted unreasonably or where the Court can be confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter was fully determined.

6. In [NAME] v [NAME] [2018] NSWCA 84, Basten JA observed at [2]-[4] (citations omitted): [2] Where the parties resolve their differences, except as to the costs already incurred in litigation, they should usually expect that the court will not award costs. That is because the general rule applicable in civil litigation in superior courts is that costs will "follow the event". That rule is frequently paraphrased by reference to its purpose, namely that the successful party should generally recover its costs from the unsuccessful party. But where there has been no trial there is no "event" because, except in unusual cases, it is not possible to say that one party has been successful and the other unsuccessful. The orders made by consent may or may not demonstrate capitulation by the "unsuccessful" party. [3] In unusual cases, it may be possible to identify success which is manifest on the face of the record. However, to manufacture a dispute in order to resolve that question is to disregard the statutory obligation imposed on the parties, their legal representatives and the court to conduct civil proceedings so as to facilitate the just, quick and cheap resolution of the "real issues in the proceedings." As explained in [COMPANY] v [NAME] and [COMPANY]: "That purpose may require a more robust and proactive approach on the part of the courts. Unduly technical and costly disputes about non-essential issues are clearly to be avoided. [ADDRESS] further stated: "It could hardly be suggested that the pursuit of satellite interlocutory proceedings of the kind here in question in any way fulfils the overriding purpose of the [Civil Procedure Act]. To the contrary, it is the very kind of conduct which should be avoided if those purposes are to be achieved." [4] Although these remarks were made with respect to an error in the production of a document subject to client legal privilege, they apply equally to satellite proceedings directed only to determining responsibility for costs. (Footnotes omitted)

1. In this case, [COMPANY] says that [NAME] acted unreasonably prior to the commencement of proceedings, that its conduct invited the application for the appointment of provisional liquidators to the company and that but for the adjournment granted on 4 October 2019, it is almost certain that [COMPANY] would have succeeded had the application for interim relief been determined. The particular pre-litigation conduct of [NAME] that was said to be unreasonable was the manner in which it had dealt with the potential roadworthiness or State compliance issues involving trailers supplied by the company to [NAME].

2. In support of this contention, [COMPANY] pointed to correspondence and emails between its solicitors and the solicitors for [NAME] commencing on 2 August 2019 giving notice of the foreshadowed application to wind up [NAME] on the just and equitable ground and for the appointment of a provisional liquidator to manage the day-to-day operations of the business on an interim basis pending the hearing of that application; a further letter to the solicitors of [NAME] dated 19 September 2019 requesting information from [NAME] and [NAME] concerning statements made by [NAME] to [NAME] concerning potential roadworthiness or State compliance issues with trailers supplied by the company to [NAME]; and a chain of subsequent emails between [NAME] of [COMPANY] in the [NAME] seeking clarification and further information with respect to that issue.

3. A perusal of the chain of emails reveals some brief responses by [NAME] to the request for information, including an indication in an email dated 25 September 2019 that he would call Mr [NAME] early Thursday morning UK time, but it seems that no follow up call was made by [NAME] to Mr [NAME].

4. Importantly, the written submissions served by [COMPANY] for the interlocutory hearing on 4 October 2019 make plain that the application for the appointment of provisional liquidators was advanced by reference to a variety of conduct, which was said to demonstrate irretrievable breakdown and deadlock between the directors and shareholders of the company. That conduct was not limited to the difficulties which [COMPANY] and its related companies in the United Kingdom had experienced in obtaining information from [NAME] and [NAME] concerning the potential roadworthiness or State compliance issues with respect to trailers supplied to [NAME].

5. The costs application invites the Court to engage in a review of the affidavits and exhibits with a view to attempting to assess whether one party has acted unreasonably, or assuming both parties have acted reasonably, whether one party was almost certain to have succeeded if the application for the appointment of provisional liquidators had been determined. Here, the exhibits to the affidavits relied upon by [COMPANY] extended over 900 pages.

6. The remarks of Basten JA in [NAME] v [NAME] at [8] are apposite in the present case: " … although it is possible to make an order for costs against one party if it can be shown that it has invited the litigation by its unreasonable behaviour, or has unreasonably pursued the litigation, such an order should only be made where that judgment is manifest by reference to known circumstances, not in dispute between the parties. If the question cannot be answered without reviewing large swathes of evidence and resolving, on a tentative basis, disputed questions of fact, the task should not be embarked upon."

1. Plainly, it is not appropriate to engage in a hypothetical trial of a hypothetical application with the view to attempting to assess whether that application for the appointment of provisional liquidators is likely to have succeeded had it been determined, and if so, on what basis. 2. [NAME] could have been more constructive and helpful in his responses to the request for information on a matter of concern to the other director and shareholder, I am not in a position on the materials alone to make a finding that this conduct, insofar as it is attributable to [NAME], was unreasonable.

3. As to the hearing on 4 October 2019, [NAME] says that it sought the adjournment of the hearing of the application for the appointment of provisional liquidators for a short period to enable it to consider the voluminous material served by [COMPANY]. I am not persuaded that it was unreasonable of [NAME] to do so.

4. Given that the interlocutory application was overtaken by the parties' consent to the making of a winding up order, the Court should take a robust approach to put an end to satellite litigation and stop the inquiry which the costs application invites the Court to undertake.

5. The application for costs is refused. The appropriate order is that there be no order for costs of the hearings on 2 and 4 October 2019. ***** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 October 2019