Rushton (Qld) Pty Ltd v Rushton (NSW)
[2004] QSC 47
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- Rushton (Qld) Pty Ltd v Rushton (NSW)[2004] QSC 47
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Rushton (Qld) Pty Ltd v Rushton (NSW)[2004] QSC 47
Rushton (Qld) Pty Ltd v Rushton (NSW)[2004] QSC 47
SUPREME COURT OF QUEENSLAND
PARTIES: | |
FILE NO/S: | |
Civil jurisdiction | |
PROCEEDING: | Application for a costs order against a non-party |
ORIGINATING COURT: | |
DELIVERED ON: | 18 March 2004 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 8 March 2003 |
JUDGE: | Muir J |
ORDER: | Application dismissed |
CATCHWORDS: | APPLICATION FOR A COSTS ORDER AGAINST A NON-PARTY - discussion of principles – where the non-party is the sole director and shareholder of the defendant parties – relevance of a failure to give early notice of the application – whether impropriety needs to be established Babsara Pty Ltd v Long [2000] QSC 380 Forrest Pty Ltd v Keen Bay Pty Ltd (1991) 4 ACSR 107 Kebaro Pty Ltd v Saunders FCAFC 5 Knight v F.P. Special Assets (1992) 174 CLR 178 Metalla Supplies Ltd v M A (UK) Ltd (1997) 1 WLR 1613 at 1618 Solomon v Solomon & Co Ltd (1897) [AC] 22 Symphony Group plc v Hodgson (1994) QB 179 Taylor v Pace Developments Ltd (1991) TLR 228 (C.A.) Vestris v Cashman (1999) 72 SASR 449 |
COUNSEL: | R Derrington for the plaintiffs |
SOLICITORS: | Bennett & Philp for the plaintiffs |
[1] MUIR J: In this action the plaintiffs, which are companies controlled by Mr Holzberger, claimed against the defendant companies damages for breach of an agreement (“the Sale Agreement”). Under that agreement companies controlled by Mr Holzberger sold to companies controlled by Mr Rushton (who was the sole director and shareholder of the defendants until the appointment of administrators to those companies on 18/11/2004) the interests of the Holzberger companies in a valuation business in New South Wales. The terms of the agreement and the claims made in the action are discussed in my Reasons for Judgment delivered on 24 January 2003 after a trial limited to the question of liability.
[2] Liability was decided in favour of the plaintiffs and the quantum trial commenced on 17 November 2003. At the start of proceedings on the second morning of the trial counsel and solicitors for the defendants sought leave to withdraw on the basis that their instructions had been terminated by the appointment of administrators to the defendant companies. The administrators sought to have the trial adjourned but the application was refused. Judgment was given in favour of the first and third plaintiffs against the defendants on 27 November 2003 in the sum of $712,327.00.
[3] The plaintiffs now seek an order that Mr Rushton pay their costs of the proceedings on an indemnity basis.
The Plaintiff’s Contentions
[4] The following is a summary of the plaintiffs’ arguments.
Mr Rogan was the “effective party” to the litigation “with a real, direct and material connection with it and who directed, funded and controlled it and for whose benefit the defence was conducted.”
[5] Mr Rogan at material times was the sole director and shareholder of each defendant company. As such, he caused the defendants to commit the breaches of contract the subject of the litigation and controlled and directed the litigation. He also funded it, directly or indirectly. The defendants were used by Mr Rogan as “stalking horses” for the litigation.
[6] The facts of the case are analogous to those in Knight v F.P. Special Assets[1] in which –
(i) The actual defendants were made of straw;
(ii) Mr Rogan being the sole director and shareholder played an active and central role in the conduct of the litigation;
(iii) Mr Rogan has had an interest in the litigation, being the shareholder who benefited from the breaches of contract the subject of the action.
[7] The following features provide further justification for a costs order against Mr Rogan –
(a) It can be inferred that the conduct of the litigation by the defendants was designed to cause the maximum amount of cost to the plaintiffs;
(b) The defendants’ conduct of the litigation indicated that Mr Rogan intended to allow matters of fact which were not really in dispute to remain in issue;
(c) The manner of the sale by the defendants of their businesses justifies the view that Mr Rogan would do anything to keep his assets from becoming available to pay his just debts;
(d) The going into administration of the defendants in the course of the trial provides evidence of Mr Rogan’s improper intentions.
Relevant Principles of Law
[8] There was little debate on the hearing as to the correct principles to be applied. Mr Perry, who led Mr Beacham for Mr Rogan, placed emphasis on the lack of impropriety on the part of Mr Rogan and contended that, for a costs order to be made against a non-party, it was necessary for impropriety of some kind to be found. In that regard reliance was placed on Metalla Supplies Ltd v M A (UK) Ltd (1997) 1 WLR 1613 at 1618 and Babsara Pty Ltd v Long [2000] QSC 380 at para 24.
[9] The overwhelming weight of authority[2] however, does not support the proposition and it was not pressed in final addresses.
[10] The watershed case in Australia concerning the making of costs orders against non- parties is, Knight v F.P. Special Assets[3]. In it, Mason CJ and Deane J said at 192-3 -
“Obviously, the prima facie general principle is that an order for costs is only made against a party to the litigation. As our discussion of the earlier authorities indicates, there are, however, a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party. Thus, for example, there are several long-established categories of case in which equity recognized that it may be appropriate for such an order to be made.
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.”
Dawson J observed (at 202-203) –
“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. Even if the case were confined to ejectment proceedings (and clearly they are not), the principle lying behind the ejectment cases is that the real litigant rather than the nominal party may be made liable for costs. As Lord Campbell C.J. said in Hutchinson v. Greenwood (1854) 4 EL. & Bl., at p. 326 [119 E.R., at p. 126]:
‘The principle is that the individuals who order an appearance to be entered in ejectment, in the names of those not really defending the suit, abuse our process, and that, as they substantially are the suitors, we have jurisdiction to make them pay the costs.’
There is no compelling reason to my mind why that principle should be confined to cases of ejectment.
Order 91, r. 1 of the Queensland Rules of the Supreme Court places the costs of and incident(al) to all proceedings in the court in the discretion of the court or a judge. True it is that the rule does not expressly say that the discretion extends to determining who shall pay the costs as does the English Act of 1890. but no limit is imposed upon the discretion conferred and in the absence of any implied limit there is no justification for confining the jurisdiction with regard to the persons against whom costs may be awarded. I can see no more reason for implying such a limit in this case than there was in Aiden Shipping Co. Ltd. v. Interbulk Ltd. True it is that in general costs are not awarded against non-parties, but that is because it is generally inappropriate to do so. But I see nothing in the rule to prevent it being done in the exceptional case where it is appropriate to do so.”
[11] In Kebaro Pty Ltd v Saunders[4] the court, after an extensive review of authorities summarized the position as follows:
“[103]In our opinion, the authorities establish, 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 J 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.)
- Whilst such an order is extraordinary, the categories of case are not closed, although in order to 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 adjudged by its conduct, to be a real party to the litigation, even if not the real party.” (emphasis supplied)
[12] In my view the mere fact that a person is the sole director and shareholder of an unsuccessful litigant corporation will not, without more, suffice to justify a costs order against that person. And that is so even if the person was the corporation’s sole, principal or ultimate decision maker in relation to the litigation.
[13] To conclude otherwise would be to ignore the principle that costs orders against non-parties are “exceptional” and ought be made only if appropriate in the interest of justice. The control of a corporate litigant by a director who is also its sole or majority shareholder is an unremarkable occurrence. It is sanctioned by a long established legislative framework which recognises that a company has an independent legal personality distinct from that of its members and that neither members nor directors, as a general proposition, are personally liable for its acts and defaults[5].
[14] Since the enactment of the Joint Stock Companies Act 1856 (UK), and its subsequent Australian counterparts and successors, enterprises have been conducted through companies with a view, inter alia, to persons availing themselves of the protection from personal liability which the legislation provided. Each of Mr Holzberger and Mr Rushton conducted his business affairs through companies and trusts which he controlled.
[15] A reluctance to ground non-party costs orders merely on the circumstances of sole ownership and control of the defendant corporation is evident in Taylor v Pace Developments Ltd [6] in which it was observed that the controlling director of a one-man company was inevitably the person who caused the costs of the litigation to be incurred, by causing the company to defend the proceedings. In that context Lloyd LJ noted –
“But it could not be right that in every such case he should be made personally liable for costs, even if he knew that the company would not be able to meet the plaintiff’s costs should the company lose its case.
That would be far too great an inroad on the principle of limited liability. In the great majority of cases the directors of an insolvent company, which defended proceedings brought against it, should not be at personal risk for costs.”
Additional factors relied on by the plaintiffs to support a costs order
[16] Mr Derrington, who appeared for the plaintiffs, also contended orally that the defendants’ lack of success on both the liability and quantum issues was a factor which should be taken into account. But lack of success on the part of the defendants can hardly be a relevant factor as the occasion to exercise the costs discretion against defendants will only arise if the plaintiffs succeed. What may be relevant is the reason for the lack of success. That was raised in argument also.
[17] I was invited to conclude that the defendants’ cases on liability and quantum were threadbare. I decline to do so. Some of the points argued by the defendants on the liability trial were in no way spurious or unarguable.
[18] The concession by the defendants shortly prior to the commencement of the liability trial that the breaches alleged in the Scott Schedule had occurred was identified as misconduct. The defendants’ response to that contention was that the delay was at least in part explicable by the original form of the pleadings and by the late delivery of the Scott Schedule by the plaintiffs. In my view, the defendants’ concessions, late though they may have been, are more indicative of good faith than otherwise. Nor has it been established to my satisfaction that the challenges which the defendants proposed to make to the plaintiffs’ damages claims were entirely without substance.
[19] One of the major points made by Mr Derrington was that an inference should be drawn that the defendants were “used as stalking horse(s) for the litigation”. That contention received the following elaboration. On the last business day prior to the commencement of the damages trial, “at a whim”, Mr Rogan withdrew from the defendants the right to use the Rushton name thus rendering the defendants insolvent. He did this to cause financial harm to the plaintiffs who were competitors. It should be inferred that Mr Rogan intended to put the plaintiffs to as much trouble and expense as possible without actually engaging them in any real contest of fact. Knowing that the defendants would be put into administration Mr Rogan deliberately allowed the plaintiffs to expend money. The administrations were engineered for the purposes of allowing the defendant companies to avoid paying the judgment debt. That may be inferred, inter alia, from the evidence which discloses that Mr Rogan was contemplating as early as 8 October 2003 the possibility that the defendants may become insolvent.
Mr Rogan’s Evidence
[20] Mr Rogan, in an affidavit filed in the proceedings, gives this account of his conduct. He was contemplating the sale of his interests in the Rushton Group of Companies to OAMPS Ltd at the time of the hearing to determine liability. That was heard together with proceedings S 8439/02 in which the applicants were himself, Rushton (Vic) and Rushton (SA). The defendants were the plaintiff companies. In those proceedings the Rushton interests succeeded and obtained an order that the Holzberger interests execute a deed of consent under the agreement referred to earlier.
[21] The sale to OAMPS however, failed to proceed because of OAMPS’ concern about potential litigation with the plaintiffs. Mr Rogan then commenced negotiations with a Mr Rotar and reached “in principle” agreement with him for the sale of the subject businesses to Rotar Investments Pty Ltd, a company controlled by Mr Rotar. A deed of consent under the agreement in respect of this transaction, similar to the one the subject of proceedings S 8439/02 in respect of OAMPS, was submitted to the plaintiffs in February 2003. An application was then brought by Mr Holzberger and companies controlled by him to restrain Mr Rogan and his companies from transferring the Rogan name rights. That application was dismissed with costs on 5 March 2003 and the Holzberger interests then signed the deed of consent.
[22] Mr Rotar became a consultant to the defendant companies in about April 2003 in the expectation that the proposed acquisition would proceed without delay. He experienced difficulties however in obtaining the finance necessary to enable his company to complete the acquisition. Finance was obtained on 13 November and contracts were executed and transfers exchanged the next day. Payment of the sale price however could not be effected until 17 November 2003.
[23] There was no guarantee that the sale would be completed. and the fact that the sale of the assets of the defendants was in contemplation did not affect his “attitude to preparation for the trial of the quantum hearing.” Accountants, Grant Thornton, were engaged on 21 May 2001 as experts in the proceedings and accounts for their work were rendered for a total of $119,000. Junior and senior counsel were engaged and the matter was prepared for trial. Mr Rogan was of the view that the sums claimed by the plaintiffs were excessive and that the defendants should vigorously contest the claims.
[24] By October 2003 when “the prospect of completing a sale was becoming more realistic” Mr Rogan turned his mind to whether, in the event that the defendants lost the right to use the Rushton name, they might have to cease trading.
[25] Mr Rogan’s account of events receives some support from a letter from Middletons Lawyers to the solicitors for the defendants dated 24 November 2003. In it, it is stated that on 27 October 2003 there was a meeting between Mr Rogan, his accountant and two financial advisers including a Mr Carson and a Mr Hunter and that –
“At that meeting Mr Carson reviewed the balance sheets of the companies and explained to Mr Rogan the voluntary administration procedure. He told Mr Rogan that if he had traded the above companies whilst they were insolvent he could, if the companies were subsequently placed into litigation, be personally liable for debts incurred during that time. Mr Carson told Mr Rogan that he should obtain legal advice in relation to any potential insolvent trading liability he may have and also in relation to the proposed asset sale agreement. Mr Carson further advised that prior to him being able to accept an appointment as voluntary administrator of the companies the consent of the ANZ Bank would need to be obtained.”
It appears from that letter that on 8 October Mr Rogan had preliminary discussions with a financial adviser about the potential insolvency of the Rushton entities.
[26] Mr Rogan was given the final report of Grant Thornton on 13 November 2003. It expressed the opinion that the losses of the plaintiff companies were in the range of $108,508 to $229,032. Mr Rogan then made an offer to settle for an “all up” sum of $350,000. On 17 November 2003 he was advised that the settlement of the sale was complete. No settlement negotiations were then taking place and as the defendants were maintaining a claim which, if successful, was beyond the defendants’ capacity to pay, he decided that the appointment of administrators should proceed.
[27] Mr Rushton swears -
“In conclusion it was never my intention and I did not manipulate the circumstances regarding the sale of the Rogan interests, the conduct of the defence in the quantum hearing and the appointment of an ain a way to cause maximum harm to the plaintiffs. The Rogan interests also incurred substantial expenditure in the lead-up to the hearing and in fact significantly more with respect to expert fees. … I did seek to resolve the matter on a reasonable commercial basis having regard to the expert advice received. It was not to my benefit to delay the sale of the Rogan interests and I would have much preferred for that sale to have been completed earlier. As the circumstances unfolded the appointment of the administrator was an inevitable consequence of the sale.”
Corroboration of some aspects of Mr Rogan’s evidence and conclusions in relation to it
[28] Mr Rotar, the Managing Director of Rotar Investments Pty Ltd swears to the circumstances of his company’s purchase of the assets of the defendant companies and of the shares in Rushton Group Pty Ltd. His evidence is confirmatory of that given by Mr Rushton. Neither Mr Rotar nor Mr Rogan were required for cross-examination. In those circumstances it would be unreasonable not to accept Mr Rogan’s evidence, particularly as there is nothing particularly implausible about it.
[29] If Mr Rogan did not intend that the defendants mount a genuine challenge to the plaintiff’s quantum case it is remarkable that he would be prepared to cause the defendants to instruct solicitors, retain senior and junior counsel and spend large sums of money on expert evidence. The evidence does not support the conclusion that Mr Rogan had a motive or purpose of injuring the plaintiffs.
[30] Until the sale to Rotar went through it was in Mr Rogan’s interests to ensure either that no judgment was obtained against the defendants or that the amount of any judgment obtained be minimized. I consider it probable that if the Rotar sale had not proceeded, the defendants would have satisfied any judgment against them. Once settlement of the sale transaction took place however, the plaintiffs having rejected Mr Rogan’s offer of settlement, it was no longer in his commercial interests to maintain the defendants as trading entities.
[31] The plaintiffs allege that there is something sinister in the fact that other creditors of the defendants including the defendants’ solicitors appear to have been paid out. But that may simply be a reflection of the basis upon which other creditors dealt with the defendants or it may be that Mr Rogan was not prepared to permit persons other than the plaintiffs suffer financially as a result of the defendants’ financial difficulties. The fact that he would not be prepared to follow the same course in relation to the plaintiffs is hardly surprising. There is a long history of animosity between Mr Rogan and Mr Holzberger and they have vigorously pursued each other in various courts including the Supreme Court of Victoria, the District Court of Queensland and the Queensland Court of Appeal.
[32] Mr Rogan is perhaps open to criticism for not causing the defendants to concede those aspects of the plaintiffs’ quantum claims which were not to be contested on trial. Mr Rogan, however, received the final defendants’ expert report only a few days before trial. The evidence does not reveal whether it differed in any material respect from any prior version. Nor is it possible on the evidence to conclude that the making of appropriate and timely concessions based on the expert’s advice would have reduced the defendants’ costs materially.
The plaintiffs’ awareness of the possibility that a judgment might not be satisfied
[33] In action 10771/01 it was the plaintiffs which sued the defendants and the latter were involuntary parties to the litigation. There is a substantial difference between a person who causes a company without financial substance to prosecute proceedings against a successful defendant and a person who causes a company without financial substance to defend proceedings brought against it.
[34] The plaintiffs, in commencing the action, assumed a risk that, if the claim succeeded the defendants would not be able to meet any award of damages and costs. That is one of the normal exigencies of litigation and the defendants were well aware of it.
[35] In proceedings 1514 of 2003 in this court Mr Holzberger swore on 18 February 2003 that sale of the “Rogan Name Rights” to Rotar “would operate to completely frustrate … the damages claim which is yet to be heard in action 10771/01.” That was on the basis that “the real core” of the defendants’ businesses was their right to use the Rushton name, their other assets were modest and they had given security over their assets to the ANZ bank”. The plaintiffs’ solicitors wrote to the defendant’s solicitors on 1 April 2003 expressing concern about a proposed sale of the defendants’ business and the lack of ability on the part of the defendants to satisfy a judgment in favour of the plaintiffs should such a sale take place. The letter asked to the advised of “what other assets or monies” the defendants intended to set aside to meet orders against them in favour of the plaintiffs. The request was ignored. Mr Rogan was not put on notice that costs might be sought against him personally. That is a matter relevant to the exercise of my discretion[7].
Conclusion
[36] It is easy to see why this application was brought. The timing of the appointment of administrators to the defendant companies, particularly against the background of long standing animosity between the parties necessarily gave rise to a strong suspicion that Mr Rushton was acting in accordance with a plan to deprive the plaintiffs of the fruits of their judgment.
[37] The evidence however does not support any finding of misconduct, bad faith or improper motive against Mr Rushton. In the rather unusual circumstances of this case which are outlined above, including the lack of notice to Mr Rushton, I do not consider that it would be in the interests of justice to make the order sought.
[38] I propose to make no order as to costs on this application. Although the plaintiffs have not been successful, on the facts known to them, they were entitled to bring the application. Mr Rogan, if he wished to protect his position in relation to costs, could have disclosed all relevant facts to the plaintiffs at an early date. He did not.
Footnotes
[1] (1992) 174 CLR 178 at 192-3 and 205
[2] Forrest Pty Ltd v Keen Pty Ltd (1991) and Vestris v Cashman (1999) 72 SASR 449
[3] (1992) 174 CLR 178
[4] (2003) FCAFC 5
[5] See e.g., Solomon v Solomon & Co Ltd (1897) [A.C.] 22
[6] (1991) TLR 228 (C.A.)
[7] c.f. Vestris v Cashman (1999) 72 SASR 449 and Symphony Group plc v Hodgson (1994) QB 179