Plante v James[2011] QCA 109

SUPREME COURT OF QUEENSLAND

[1]  MARGARET McMURDO P:  This is an application for leave to appeal from a District Court judge's order that the non-party applicants, Geoffrey Plante and Damien Ferguson, directors of the plaintiff, Planpac International Pty Ltd, are jointly and severally liable to pay the respondent defendant, Bruce James, his costs of and incidental to the whole of the proceedings, including the application for the non-party costs order, on an indemnity basis.  There is no complaint about the indemnity costs order against the plaintiff company but the applicants contend the judge erred in ordering them to pay those costs.

[2] Under Uniform Civil Procedure Rules 1999 (Qld) (UCPR) r 681, although costs ordinarily follow the event, the court may make other orders.  As costs orders are discretionary, they will only be overturned on appeal if the judge has made some error, either in fact or law, in exercising that discretion: see House v The King.[1]

[3] There is no doubt that courts have a general discretion to award costs against non-parties.  So much is encompassed in the term "other orders" in UCPR r 681 and see Knight v FP Special Assets Ltd.[2]  Occasionally, non-party costs orders are made against directors of companies.  Examples include Tsui v Westpac Banking Corporation;[3] Togito Pty Ltd v Pioneer Investments (Aust) Pty Ltd & Ors (No 2);[4]  Beach Retreat Pty Ltd v Mooloolaba Yacht Club Marina Ltd;[5] and Naomi Marble &Granite Pty Ltd v FAI General Insurance Co Ltd (No 2).[6] 

[4] But non-party costs orders are exceptional, as the authorities cited above, and Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd;[7] Rushton (Qld) Pty Ltd v Rushton (NSW)[8] and the terms of r 681 recognise.  They are only made where the interests of justice clearly warrant such an order.  Directors of companies will not be subject to non-party costs orders simply because they have actively promoted the company's interests in pursuing litigation: Beach Retreat Pty Ltd v Mooloolaba Yacht Club Marina Ltd;[9] Babsari P/L v Wong & Ors;[10]  Rushton (Qld) Pty Ltd v Rushton (NSW);[11] FPM Constructions Pty Ltd v Council of the City of Blue Mountains;[12] and Taylor v Pace Developments Ltd.[13]

[5] In the present case, the respondent defendant did not warn the applicants prior to trial that he intended to seek a costs order against them personally.  Failure to give an early warning can be a factor militating against a third party costs order: Tsiu v Westpac Banking Corporation;[14] Yates v Boland;[15] and Symphony Group PLC v Hodgson.[16]  Where a non-party’s conduct amounts to an abuse of process, costs will often be awarded against them: Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd.[17]  But the applicants’ conduct in this litigation was not of that kind.  It is common ground that the judge was entitled to find the plaintiff company was either unable or unwilling to pay any costs order.[18]  That finding was concerning and reflected poorly on the plaintiff company and the applicants who controlled it but it did not amount to a finding that the plaintiff company was insolvent when it conducted the litigation, a common factor where non-party costs orders are made: Knight v FP Special Assets Ltd;[19] FPM Constructions Pty Ltd v Council of the City of Blue Mountains;[20] Beach Retreat Pty Ltd v Mooloolaba Yacht Club Marina Ltd;[21] and Symphony Group plc v Hodgson.[22]  There was no evidence here to support a finding that the plaintiff company was insolvent when it conducted the litigation or that the applicants had personally funded the plaintiff company's conduct of the litigation.

[6] The findings made by the primary judge in determining the claim and counterclaim between the plaintiff company and the respondent,[23] and those in his Honour's reasons for awarding non-party costs against the applicants,[24] even in combination, were not sufficient to bring this case within that exceptional category where a reasonable exercise of discretion may have resulted in a non-party costs order against the applicants.  It was impossible to conclude on the material before the primary judge that the applicants as directors of the plaintiff company did anything more in this litigation than to enthusiastically and imprudently pursue the company's interests.

[7] For these reasons, as well as those given by Muir JA, the application for leave to appeal must be granted and the appeal allowed so that the non-party costs order made against the applicants can be set aside.  I agree with the orders proposed by Muir JA.

[8]  MUIR JA:  Introduction

The applicants, Jeffrey Plante and Damien Ferguson, appeal against an order made in District Court proceeding TD101 of 2007 between the plaintiff, Planpac International Pty Ltd, and the respondent/defendant, Bruce James, ordering that they were jointly and severally liable with the plaintiff to pay to the respondent “his costs of and incidental to the whole of the proceedings including this application on the indemnity basis.”  It was also ordered that the respondent “is to pay to the plaintiff a proportion of its costs of and incidental to the proceedings namely 18.86% on the standard basis for judgments under $50,000.00.”

[9] Leave to appeal is required as the costs payable under the order appealed against are unlikely to exceed $150,000.[25]  The applicants also applied for leave to be joined as parties to the proceeding so as to enable them to apply for leave to appeal.  That application, which was unopposed, was granted at the commencement of the hearing of the application for leave to appeal.

[10]  The reasons for judgment were delivered on 18 November 2010.  No costs order was then made.  In a letter dated 12 April 2010 to the plaintiff’s solicitors, the respondent’s solicitors advised that the respondent intended to seek a costs order against the applicants.  The letter relevantly stated:

“Our client has expressed to us his concern that Planpac International Pty Ltd may not have the financial capacity to meet the judgment debt in this matter, and in particular any judgment in relation to his costs.

Our client informs us that his concerns arise from matters including the following:

1.Planpac International Pty Ltd does not appear to own any real property assets;

2.The establishment by Mr Plante and Mr Ferguson of Planpac Group Pty Ltd, which by all appearances carries on the same business that is or was carried on by Planpac International Pty Ltd;

3. The past conduct of Mr Plante and Mr Ferguson in their capacity as directors of Planpac International in unlawfully withholding monetary entitlements from our client.  In this regard we refer to the principal judgment in these proceedings.

…

In any event, we are instructed to now demand payment from your client of the amount of $45,157.49 from which our client will agree to set off the sum of $8,777.49 in conformity with the order of the Court made in these proceedings on 24 March 2010.”

[11]  The plaintiff’s solicitors, in a letter of 13 April 2010 to the respondent’s solicitors, noted that the time for making written submissions on interest and costs specified by the primary judge expired on 14 April 2010.  They suggested that, given that they had only received notice of the proposal to seek a costs order against the applicants the day before, the parties be excused from filing written submissions.  The respondent’s solicitors rejected that proposal, contending that the application against the plaintiffs should proceed separately. 

[12]  On 6 May 2010, the respondent’s solicitors wrote to the plaintiff’s solicitors stating that if payment of the sum of $36,380 was not made by 13 May 2010, the court would be invited to draw the inference that the plaintiff lacked the financial capacity to satisfy the judgment against it “or otherwise the directors have determined that [the plaintiff] will not satisfy the…judgment.”  The question of costs was argued before the primary judge on 17 May 2010 and reasons were delivered on 18 November 2010.

[13]  Costs were ordered to be paid on the indemnity basis primarily because, on 18 March 2008, the respondent had made an offer to settle the claim and counterclaim for the payment to him by the plaintiff of $5,000 plus his costs of and incidental to the claim and counterclaim to be agreed or, failing agreement, assessed.  The judgments on the claim and counterclaim were more favourable to the respondent than his offer and the applicants do not contend that, in these circumstances, the primary judge erred in ordering that the plaintiff pay indemnity costs.  The application for leave to appeal and the appeal are concerned only with the orders made against the applicants.

The proceedings at first instance

[14]  The plaintiff carried on business as a provider of architectural and design services.  Its directors, from the time of its incorporation on 7 April 2003, were the applicants and the respondent until the removal of the respondent as a director on 14 August 2006.  At all relevant times, the respondent and each of the applicants each held one of the three issued shares in the capital of the plaintiff.  The respondent was also employed by the plaintiff under a contract which was made on or about 1 July 2003.  The contract was terminated by the plaintiff without prior notice on 28 June 2006.

[15]  In its second amended statement of claim, the plaintiff claimed against the respondent:

(a) $16,574.94 damages for breach of the contract or, alternatively, for breach of fiduciary duty or, alternatively, on the basis of unjust enrichment arising from the unauthorised use of a credit card issued by the plaintiff in order to meet the respondent’s personal expenditure;

(b) $682.74 in respect of an alleged unauthorised use of a mobile phone.  The claim was advanced on the same basis as the credit card claim;

(c) $20,000 for a debt alleged to have arisen from a loan on 12 October 2005 by Mr Everett to the respondent of $20,000 (“the Everett loan”).  The debt was alleged to have been assigned by Mr Everett to the plaintiff on 23 November 2006;

(d) $8,458.31, being the price of office equipment allegedly purchased by the respondent from the plaintiff on or about 22 June 2006.

[16]  In his counterclaim, the respondent claimed:

(a) $62,500 damages for breach of contract on the basis that the respondent was entitled to reasonable notice of termination and that 12 months notice was reasonable in the circumstances;

(b) $14,423 on account of accrued but untaken annual leave;

(c) $7,733 on account of lost superannuation payments which would have accrued during the 12 months notice period;

(d) $7,500 being the amount of a loan made by him to the plaintiff.

The determination of the plaintiff’s claim and the respondent’s counterclaim

[17]  The primary judge rejected all of the plaintiff’s claims except for the claim in respect of the credit card.  It was found that the respondent was liable to pay the plaintiff $8,727.49 in that regard.  The respondent had admitted liability for $6,798.28 of that sum.

[18]  The pleading in respect of the Everett loan was to the following effect.  On 12 October 2005, Mr Everett lent $20,000 to the respondent on terms that the loan be repaid within two weeks.  The loan was not repaid.  On 23 November 2006, Mr Everett assigned “the whole of his legal right to recover the Everett Loan” to the plaintiff, who gave written notice of the assignment to the respondent on 29 November 2006.  The respondent demanded repayment by the plaintiff on 29 November 2006, but the monies remain unpaid.

[19]  The primary judge held that Mr Everett lent $20,000 to the respondent on or about 12 October 2005 but that the time for repayment was not stipulated and:

(a) Neither Mr Everett nor the respondent intended “that the advance would create a legally enforceable contract”;

(b) “There was no legally enforceable contract”;

(c) “The advance was not capable of assignment by Everett to the [respondent]”.

[20]  It was necessarily implicit in the primary judge’s findings that there was a loan made by Mr Everett rather than a gift.  The circumstances were not such as to give rise to a presumption of advancement and it was not contended by the respondent that the monies were not repayable.  Indeed, the respondent implicitly acknowledged in his oral evidence that the monies were repayable.  In the absence of express or implied agreement as to the time for repayment, it would normally be implicit that the monies were to be repaid within a reasonable time of a request for payment, if not on demand.[26]  In essence, a loan is a payment of money to or from someone on the condition that it will be repaid.[27]  On the face of it, the lending of $20,000 by Mr Everett to the respondent created a debt, which, being a chose in action, was assignable.[28]

[21]  The primary judge found against the plaintiff on the basis that the respondent and Mr Everett had not evinced an intention to enter into legal relations and that, consequently, no contract of loan had come into existence.  In my respectful opinion, the correctness of this finding is doubtful, but it is not necessary or appropriate to determine the point here.  It is sufficient for present purposes that, as the above discussion shows, the plaintiff’s case was well arguable.

[22]  In the primary judge’s lengthy discussion of the merits of the credit card claim, there is no suggestion that the claim was made or pursued in bad faith or that any part of it was spurious.  The same may be said of the mobile phone claim.  The reason for the failure of the office equipment claim was that the plaintiff based its claim on an oral agreement for the sale and purchase of the equipment.  The primary judge found that there was no such agreement, but that the respondent had taken possession of the subject equipment, which was leased by the plaintiff, upon the closure of the plaintiff’s Mona Vale office and had used it even though the plaintiff continued to pay the rental.  It may be inferred from the reasons that the plaintiff may well have succeeded against the respondent in a claim for conversion had one been pleaded.

[23]  The judge’s findings on liability were not challenged in the applicants’ grounds of appeal but the merits of the plaintiff’s claims are relevant for present purposes having regard to the primary judge’s findings that the applicants acted in bad faith in some respects.

[24]  The respondent was awarded on his counterclaim:

(a) $20,833.34 (on the basis that the respondent was entitled to four months notice of termination);

(b) $2,577.66 for lost superannuation;

(c) $14,246.55 on account of annual leave;

(d) $7,500 being the amount of a loan made by him to the plaintiff.

[25]  The primary judge gave judgment for the plaintiff against the respondent in the sum of $8,777.49 and judgment for the respondent against the plaintiff on the counterclaim in the sum of $45,157.55.

The primary judge’s reasons for awarding costs against the applicants

[26] The primary judge’s reasons for making the costs order against the applicants are summarised, to a degree, as follows:

“[72]I have previously referred to the four broad categories identified in Knight as being potentially relevant in this case: I am satisfied on the evidence that the plaintiff is either unable or unwilling to pay any costs order. The directors played a direct and significant role in the litigation. They made conscious decisions to defend matters in the counterclaim that they could not reasonably have expected to succeed upon. I have characterised their conduct as being capricious. I use that expression really as being analogous to bad faith. The dispute was essentially a private dispute, as I have observed. As the only shareholders (other than the defendant, whose status as a shareholder seemed to be ignored) they stood to benefit from any degree of success generated by the litigation. Finally, the circumstances of this case seem to me to warrant a robust view of the real status of the plaintiff and the directors standing behind it, in a commercial context, taking into account not only it and their conduct of the litigation but also the background circumstances in which the litigable issues arose. In my view the categories identified in Knight, and particularly the first and fourth categories, apply in this case.”

[27]  The reference to the categories in Knight appears to be a reference to the first and last examples identified in the following passage from the reasons of Mason CJ and Deane J in Knight v FP Special Assets Ltd:[29]

“For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.”

[28]  Other aspects of the primary judge’s reasoning are to be found in the paragraphs of the reasons under the heading “Conclusion”.  It is implicit in paragraph 82 that the primary judge found that the plaintiff lacked the capacity to meet a costs order.  Paragraphs 84 and 85 provide:

“[84]In my view the conduct of the directors was unreasonable and capricious and an order for costs on the indemnity basis against the non-parties (the directors) is justified in all the circumstances. Whilst such an order is exceptional, there are sufficient unusual and special circumstances to warrant a departure from the general principle. Indeed, the interests of justice are a compelling reason for the making of the order.

[85]Accordingly, my finding that an order for indemnity costs against the plaintiff is appropriate will be supplemented by an order that the directors be jointly and severally liable with the plaintiff for the defendant’s costs on an indemnity basis.”

[29]  The reference to the conduct of the applicants being “unreasonable and capricious” appears to relate to the finding that the applicants “…made conscious decisions to defend matters in the counterclaim that they could not reasonably have expected to succeed upon.”[30]  The primary judge explained that by “capricious” he meant something “analogous to bad faith”.  In that context the primary judge found that:

(a) The plaintiff was either “unable or unwilling to pay any costs order made against it”;[31]

(b) The directors played a direct and significant role in the litigation;

(c) The applicants, as the only shareholders (apart from the respondent whose rights appeared to be ignored), stood to benefit from any success in the litigation;

(d) Conduct “in respect of the employment matters in the counterclaim was … unlawful and in one respect, capricious”;

(e) The respondent’s submissions “about an ‘improper’ defence to the counterclaim (I might equally use the expression ‘a defence based on some ulterior motive’) are prima facie reasonable and are supported by reference to the course and substance of the evidence at the trial”;[32]

(f) The applicants had caused a new company to be registered to carry on the plaintiff’s business and to acquire “…the assets (such as they may have been), operations and financial resources of the plaintiff to protect them from the consequences of an adverse judgment or other order against the plaintiff.”[33]

[30]  The primary judge also took into account the fact that the applicants “were the directors of the plaintiff and were [its] controlling minds”.

Relevant Principles

[31]  Rules 680, 681 and 682 of the Uniform Civil Procedure Rules 1999 (Qld) provide:

“680Entitlement to recover costs

A party to a proceeding can not recover any costs of the proceeding from another party other than under these rules or an order of the court.

681  General rule about costs

(1) Costs of a proceeding, including an application in a proceeding, are in the discretion of the court but follow the event, unless the court orders otherwise.

(2) Subrule (1) applies unless these rules provide otherwise.

682 General provision about costs

(1) The costs a court may award –

(a)may be awarded at any stage of a proceeding or after the proceeding ends; and

(b)must be decided in accordance with this chapter.

(2)If the court awards the costs of an application in a proceeding, the court may order that the costs not be assessed until the proceeding ends.”

[32]  It was held in Knight & Anor v FP Special Assets Ltd that O 91 r 1 of the Rules of the Supreme Court (Qld) empowered the court to award costs in an appropriate case against a person who was not a party to the proceedings.  This court held in Burns v State of Queensland and Croton[34] that the principles stated in Knight in respect of O 91 r 1 applied equally to rr 689(1) and 766(1)(d) of the Uniform Civil Procedure Rules 1999 (Qld).  In Burns, Jerrard JA with whose reasons the other members of the Court agreed, said:

“[16]Dawson J in Knight v FP Special Assets Ltd described the power to award costs against a non-party a little differently, in these terms (at CLR 202):

‘The cases therefore establish a long asserted jurisdiction to award costs in appropriate cases against a person who is not a party to the proceedings where that person is the effective litigant standing behind an actual party or where there has been a contempt or abuse of the process of the court.’

His Honour went on to explain that the principle was that the real litigant rather than the nominal party might be made liable for costs, recognising that that would happen in exceptional cases.  In Kebaro Pty Ltd v Saunders (2003) FCAFC 5 (sic), the Full Federal Court, in a passage cited with apparent approval by Muir J in Rushton (Qld) Pty Ltd v Rushton (NSW) [2004] QSC 47, wrote as follows:

‘[103] In our opinion, the authorities established, on the foregoing analysis, the following propositions:

• A non-party costs order is exceptional relief, although some categories of factual situations are now recognised as within the discretion, for example, the situation described by Mason CJ and Deane in Knight at 192-193.  The width of the jurisdiction is illustrated by a recent English decision that there can be circumstances in which it would be appropriate to order costs in favour of a non-party against a party (see Individual Homes v MacBreams Investments, 23 October 2002, High Court of Justice Chancery Division at 8.
• While such an order is extraordinary, the categories of case are not closed, although an order warrant its exercise, a sufficiently close connection, or as Gobbo J expressed it, a ‘real and direct and…material’ connection with the principal litigation, must be demonstrated; in the words of Callinan J the non-party can fairly be liable if a judge by its conduct, to be a real party to the litigation, even if not the real party.’

[17]I agree with that analysis, which stresses the nature of such an order.  The decisions analysed in the judgment include Symphony Group PLC v Hodgson [1994] QB 179, in which Balcombe LJ in the UK Court of Appeal identified as relevant matters whether the non-party had some management of the action, had maintained or financed it, or had caused it.  Likewise in Murphy v Young & Co’s Brewery [1997] 1 WLR 1591, the UK Court of Appeal included as relevant factors whether the non-party had an interest in the outcome, whether the non-party initiated the litigation, had control over it, or had intermeddled in it.  In Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner for Taxation (2001) 179 ALR 406 Callinan J, when awarding costs against a non-party (in hopeless litigation it had backed) held the non-party was a real party to the litigation in very important and critical respects.”

[33]  It was not contended that the primary judge lacked the power to make an order against a non-party, nor that the above statements of principle were in any way erroneous.

Consideration

[34]  There are a number of aspects of the primary judge’s approach to the costs award which give rise to concern.  As mentioned earlier, the primary judge made no finding that the claims made by the plaintiff were made or pursued in bad faith or that the claims were unarguable.  The most substantial of the claims appeared to have substance.  Accordingly, an order making the applicants jointly and severally liable with the plaintiff for the costs of the claim would appear to lack justification.

[35]  There were four components of the counterclaim.  The primary judge found that the plaintiff had no arguable case in respect of three of them:  the claims for lost superannuation ($7,733 claimed and $2,577.66 awarded); annual leave ($14,423 claimed and $14,246.55 awarded); and $7,500 by way of repayment of a loan.  There was no such finding in respect of the claim for damages for breach of contract ($62,500 claimed and $20,833.34 awarded).

[36]  Although the primary judge may have been justified in concluding that there was no arguable defence for the relatively minor annual leave and loan claims, the quantum of the claim for lost superannuation was dependent on the length of notice to which the respondent was entitled and the plaintiff succeeded in having the amount claimed reduced by approximately two-thirds.  Plainly, the plaintiff was justified in defending this claim and the finding that the plaintiff had no arguable case in this regard was erroneous. 

[37]  Although the primary judge found against the plaintiff on the claim for damages for breach of contract, the plaintiff’s defence to that claim does not appear unarguable or spurious on its face.  It alleged repudiatory conduct on the part of the respondent.  That issue was determined against the plaintiff by the primary judge essentially as a matter of credit.  The evidence of the respondent was preferred to that of the applicants.  In arriving at his conclusion in this regard, the primary judge placed reliance on a finding that “serious misconduct” on which the plaintiff relied to justify termination had not been “referred to at all in [the plaintiff’s] letter of termination”.  That was literally correct, but the letter did allege conduct by the respondent which was plainly repudiatory.

[38]  As the plaintiff’s claims against the respondent were not unarguable and as the plaintiff sought to set off any monies payable by it under the counterclaim against monies payable by the respondent by virtue of the claim, there would not appear to be anything reprehensible in the plaintiff’s not conceding that some monies were payable to the respondent for damages for breach of contract and in respect of annual leave.  The reply admitted that the respondent had an accrued entitlement to 12 weeks annual leave, less 97.5 hours alleged to have been taken by the respondent.  Also, the judgment sum, without interest of $45,157.55, was under half the $92,156 claimed in the counterclaim.

[39]  The primary judge dismissed the applicants’ reliance on the fact that the respondent had failed to substantiate his claims for approximately half of the amount claimed in the counterclaim.  His Honour said in this regard:[35]

“That view is disingenuous – the defendant succeeded in the counterclaim:  the quantum was in a non-liquidated sum that called for an exercise of discretion by the court.  That the sum determined by the court was less than that particularised by the defendant is not a valid basis for the submission.  Indeed the conduct of the directors in respect of the employment matters in the counterclaim was found to have been unlawful and in one respect, capricious.”

[40]  No doubt the respondent did succeed in obtaining an order that he be paid approximately half his claim but the result showed that the plaintiff was vindicated by its defence of the claims for lost superannuation and damages for breach of contract.  The fact that the success may have resulted from an exercise of a discretion by the court would not appear to me to have any relevance, even if there was in fact an exercise of a discretion, which I greatly doubt, unless the word “discretion” is used to mean no more than a judgment of what is reasonable based on all relevant facts and circumstances.[36]  In my respectful opinion, the primary judge erred in failing to recognise and attribute due weight to the extent of the plaintiff’s success in defending the counterclaim.

[41]  The letters written by the solicitors for the respondent to the solicitors for the plaintiff and the applicants prior to the costs hearing were all concerned with the inability of the plaintiff to meet the judgment debt.  None of the letters alleged any impropriety or misconduct on the part of the applicants, apart from the applicants’ alleged conduct in “unlawfully withholding monetary entitlements from [the respondent]” as determined by the 24 March 2010 judgment.  Nevertheless, the primary judge made a finding of improper conduct on the part of the applicants, concluding, in effect, that they had stripped the plaintiff of assets to protect themselves from the consequences of an adverse judgment.

[42]  The reasons assumed that the plaintiff was unable to meet a judgment.  Counsel for the applicants properly conceded that this was an inference open on the evidence.  It was argued, however, that it was not open to the primary judge to find, implicitly, that the inability to pay was deliberately and wrongfully brought about by the applicants.  That finding was made in the absence of any evidence by the respondent, who, the primary judge found, was a director of the plaintiff until 14 August 2006, as to the plaintiff’s financial capacity.  It was also made in the absence of any allegation of deliberate wrongdoing against the applicants.

[43]  Counsel for the respondent submitted that it was open to the primary judge to so find.  He referred to his oral submissions at first instance in which he had taken the primary judge to the website of the plaintiff and of Planpac Group Pty Ltd.  The material on the websites appeared to show that each of Planpac Group and the plaintiff was claiming the same projects as its own.

[44]  Company searches in evidence at first instance showed that Planpac Group had been registered on 18 December 2007, with the applicants as its only directors and shareholders.  A search of the plaintiff showed that the respondent had ceased to be a director of the plaintiff on 9 November 2006, contrary to the primary judge’s implied finding that he was removed on 14 August 2006.  Nothing, however, turns on which of these dates is correct.

[45]  The primary judge was invited, by reference to these matters and by the plaintiff’s and the applicants’ failure to lead evidence explaining why the judgment debt had not been satisfied and demonstrating the plaintiff’s financial capacity to meet the judgment debt, to infer that the applicants “managed the litigation in their own interest…[and took] a hardline stance in relation to every element of the cross claim”.  Counsel for the respondent made the further submission at first instance that the monies found due and owing to the respondent were not retained for the benefit of shareholders but were retained for the benefit of the applicants.[37]

[46]  In his address, the solicitor who appeared for the applicants and the plaintiff complained that none of the letters from the respondent’s solicitors mentioned an “inference that the business has been moved sideways or transferred to … Planpac Group”.  He submitted, accurately enough, that “[t]he only inference that is said to have been drawn is one of lack of financial capacity to pay or an unwillingness to pay.”

[47]  The primary judge said in response to these submissions:

“Well, I suppose that’s a complaint.  There’s nothing I can do about it unless you want some – take some time to consider your position, but I’ve been asked to draw inferences.  It would be helpful to me to know what your response to that was.”

The applicants’ solicitor said that he did not have instructions on the point and did not request an adjournment.

[48]  Arguably, the applicants’ solicitor acted unwisely in not seeking an adjournment but he had not come to court prepared to meet an allegation that his clients had transferred assets fraudulently and in breach of fiduciary duty, and it was not obvious that the submissions of the respondent’s counsel made such an allegation.  If misconduct of that nature is to be alleged it must be done clearly and, hopefully, precisely.  Implicit in the primary judge’s findings was a finding that the applicants had deliberately acted to deprive the respondent, the holder of a third of the plaintiff’s shares, of his rights and entitlements as shareholder.  Yet the respondent made no such complaint to the applicants, unless the submission referred to in paragraph 38 above can be construed as such a complaint.

[49]  It is perhaps unlikely that the respondent only stumbled on the websites within days of the costs hearing.  He did not swear to the time at which he became aware of the existence of Planpac Group or to any matters connected with the financial affairs of the plaintiff, of which he remained a shareholder.  In particular, he made no allegation of oppression as a minority shareholder and gave no evidence of the financial capacity of the plaintiff at the time he ceased to be a director.  These matters are highly relevant to the applicants’ complaint that they were not given notice of the respondent’s intention to make a non-party costs application until well after the conclusion of the proceedings and three weeks after the substantive judgment.  The giving of timely notice is a “weighty consideration” in the exercise of the relevant discretion.[38]

[50]  The primary judge dealt with the applicants’ late notice argument in paragraph 67:

“Mr Kelly[39] submitted that the directors had not been given notice until the ‘eve’ of the application that a non-party costs order would be sought against them.  The implication was that had they been made aware earlier in time they may have conducted themselves differently or given timely consideration to the offer to settle.  He made an analogy with an ‘ambush’.  Applications of this nature arise infrequently and customarily after the determination of litigation, for obvious reasons.  Mr Kelly made no application for an adjournment of the application.  Indeed he specifically eschewed an invitation to take instructions about and to advise the court in regard to the issue about the two companies.  I do not consider there is any merit in this submission.”

[51]  The primary judge, in that paragraph and elsewhere in his reasons, did not appear to attribute much significance to the lateness of notice.  In my view, he erred in taking that approach in the absence of any evidence from the respondent explaining the late notice.  The respondent, by virtue of his previous directorship, could have been expected to have some knowledge of the normal state of the plaintiff’s financial affairs and, as has been pointed out, he remained a shareholder and had not at any stage made any allegation of oppression against the majority shareholders.

[52]  Counsel for the respondent submitted that the weight to be given to the failure to warn a non-party of an intention to claim a costs order against it depends on the circumstances of the case and may not always be great.[40]  In support of his argument, counsel relied on the failure on the part of the applicants to offer to settle the proceedings; the absence of evidence as to what course the applicants would have taken had they been given early notice by the respondent of his intention to seek a costs order against them; and the contention that the applicants “…had effectively conducted the litigation, knowing facts which suggested that the defences to the counterclaim were at best unlikely to succeed.”

[53]  The argument based on the alleged obvious weaknesses to the defences to the counterclaim has little merit for the reasons explained earlier.  If there was substance in the point it would tend to show that the respondent, acting reasonably, should have been alerted to the desirability of informing the applicants at an early date of his intention to seek a costs order against them.

[54]  It is relevant, as counsel for the applicants pointed out, that there was only one finding in the reasons given in the substantive proceedings concerning the plaintiff’s conduct in respect of the claims in the counterclaim.  In paragraph 165, the primary judge observed the following in respect of the termination of the respondent’s services:

“The termination nevertheless took effect immediately although the [respondent] was, somewhat capriciously in my view, not paid his accrued but untaken annual leave entitlements.”

[55]  The ground had shifted by the time of the delivery of the costs reasons.  The primary judge found[41] that the respondent’s submissions “about a ‘grossly improper’ defence to the counterclaim…‘a defence based on some ulterior motive’…[was] prima facie reasonable…”; it was “disingenuous” of the applicant’s solicitor to submit that the respondent had failed in about “half of the quantum”;[42] the applicants’ conduct in defending matters “they could not reasonably have expected to succeed upon” was “capricious…analogous to bad faith”; and the primary judge would have been disposed to make an award of indemnity costs “on the basis of unreasonable conduct and bad faith on the part of the plaintiff and the directors in respect to the conduct of the litigation, in the context of the background that led to the litigable issues.”[43]  It was said also that, “the conduct of the directors was unreasonable and capricious.”[44]  The findings of misconduct thus extend beyond mere capriciousness in the defence of one or two claims in the counterclaim.  I accept the force of the submission made by counsel for the applicants that the seriousness of the findings and their scope highlight the importance of an early notification of an intention to make an application for costs against non-parties.

[56]  I do not consider that the failure on the part of the applicants to swear to what they would have done had early notice been given to them is a matter of much weight.[45]  Evidence of this nature involves an opinion based on a reconstruction which is, in turn, dependent on various factors such as advice which the plaintiff may have been given on the prospects of success.

[57]  The respondent remained a shareholder of the plaintiff throughout and did not swear that he did not have access to financial information in respect of the plaintiff.  The primary judge appeared to have found[46] that the evidence on the trial indicated that the plaintiff did not own property and was “merely a shell company for [its] business operation”.  It was not found or suggested in either set of reasons that the respondent was ignorant of these matters prior to notifying the applicants of his intention to seek costs against them.

[58]  It also appears to me that the primary judge’s reasons displayed an impermissible readiness to ignore the separate legal personalities of the plaintiff, and its shareholders.  The applicants and the respondent chose a company as the vehicle for their business venture and were fixed with the consequences of their choice unless exceptional circumstances warranting the making of the costs order against the applicant directors were found to exist.[47]  The plaintiff was, in no sense, a nominal party.  Moreover, it was an unwilling party to the counterclaim and had considerable success in resisting it.  Plainly, the applicants bore no responsibility for the instigation and prosecution of the counterclaim.

[59]  Counsel for the respondent, in his written and oral submissions, emphasised the involvement of the applicants in the litigation.  As the plaintiff’s only directors they made all relevant decisions and both the applicants gave evidence.  It may be accepted that these were relevant considerations but it must also be appreciated that the plaintiff, being a corporation, could only act through agents.  The applicants, being the sole directors and the persons who had had the relevant dealings with the respondent, were required to give evidence if the plaintiff’s claims and defences were to be pursued.

[60]  It is apparent from the above discussion that the primary judge’s discretion to award costs against the applicants miscarried.  Although there is a general reluctance to interfere with costs orders on appeal having regard to the principle of finality in litigation and the unfettered nature of the discretion exercised in making a costs order,[48] this is an appropriate case in which to grant leave to appeal.  Not to do so would be unjust to the applicants and would leave errors of law uncorrected.

Conclusion

[61]  For the above reasons, I would order that:

(a)The applicants be granted leave to appeal;

(b)The appeal be allowed;

(c)Paragraph 1 of the order made on 18 November 2010 be varied so that it provide:

“The plaintiff pay the defendant’s costs of and incidental to the proceedings at first instance on the indemnity basis.”

(d)The respondent pay the applicants’ costs of and incidental to the hearing of 17 May 2010 and of the appeal.

[62]  WHITE JA:  I have read the reasons for judgment of Muir JA and agree with those reasons and with the orders proposed by his Honour.