Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd
[2006] QSC 7
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- Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd[2006] QSC 7
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Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd[2006] QSC 7
Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd[2006] QSC 7
SUPREME COURT OF QUEENSLAND
CITATION: | Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd & Ors [2006] QSC 007 |
PARTIES: | SOUTHERN CROSS MINE MANAGEMENT PTY LTD |
FILE NO: | S9548 of 2002 |
DIVISION: | Trial |
PROCEEDING: | Application for costs |
ORIGINATING COURT: | Supreme Court of Queensland |
DELIVERED ON: | 3 February 2006 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 16 and 22 November 2005 |
JUDGE: | Chesterman J |
ORDER: | 1.That Ensham Resources Pty Ltd be granted leave to proceed against Kenneth John Foots pursuant to r 72 of the Uniform Civil Procedure Rules; 2.That Kenneth John Foots pay Ensham Resources Pty Ltd’s costs of and incidental to the counter-claim against him, including the costs of this application and all reserved costs, on the indemnity basis and assessed in accordance with paragraph 5 of the order made on 22 November 2005; 3.That there be no order as to the costs of the counter-claim brought by Ensham Resources Pty Ltd against Foots Pty Ltd; 4.That subject to order 5 Little Digger Mining Limited pay Ensham Resources Pty Ltd, Bligh Coal Limited, Idemitsu Queensland Pty Ltd, EPDC (Australia) Pty Ltd and LG International (Australlia) Pty Ltd’s costs of and incidental to the claim and counter-claim, including the costs of the application for costs and reserved costs, on the indemnity basis and assessed in accordance with paragraph 5 of the order made on 22 November 2005; 5.That Ensham Resources Pty Ltd, Bligh Coal Limited, Idemitsu Queensland Pty Ltd, EPDC (Australia) Pty Ltd and LG International (Australlia) Pty Ltd pay the costs assessed on the standard basis incurred by Little Digger Mining Pty Ltd with respect to its defence of claims which were advanced in their counter-claims but abandoned in the ninth amended counter-claim. |
CATCHWORDS: | BANKRUPTCY – PROCEEDINGS IN CONNECTION WITH SEQUESTRATION – EFFECT OF BANKRUPTCY ON PROPERTY AND PROCEEDINGS – where the first defendant added by counter-claim is bankrupt – where judgment was given before, but costs are ordered after, bankruptcy – whether the first defendant should be granted leave to proceed with its application for costs – whether an order for costs is admissible to proof in bankruptcy CORPORATIONS – WINDING UP – CONDUCT AND INCDIENTS OF LIQUIDATION – PROCEEDINGS BY OR AGAINST COMPANY – where the plaintiff is in liquidation – whether the first defendant should be granted leave to proceed with its application for costs – whether an order for costs is admissible to proof in winding up PROCEDURE – COSTS – DEPARTING FROM THE GENERAL RULE – CONDUCT OF PARTIES – whether the second and fourth defendants added by counter-claim were proper parties to the proceedings PROCEDURE – COSTS – DEPARTING FROM THE GENERAL RULE – ORDER FOR COSTS ON INDEMNITY BASIS – whether the defendants’ application for costs can be assessed on the indemnity basis PROCEDURE – COSTS – OTHER CASES – where the defendants abandoned part of their counter-claim against the fourth defendant added by counter-claim – whether the fourth defendant added by counter-claim is entitled to its costs in respect of the abandoned claims Bankruptcy Act 1966 (Cth), s 58(3) and s 82(1) Corporations Act 2001 (Cth), s 500(2) and s 553(1) Uniform Civil Procedure Rules 1999 (Qld), r 72 Baillieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359, cited In Re British Goldfields of West Africa Ltd [1899] 2 Ch 7, distinguished Degman Pty Ltd (in liq) v Wright (No. 2) [1983] 2 NSWLR 354, applied Emma Silver Mining Co v Grant (1879) 11 Ch D 918, cited Emma Silver Mining Co v Grant (1880) 17 Ch D 122, considered Fraser Property Developments Pty Ltd v Sommerfeld (No. 2) [2005] QCA 242, followed Glenister v Rowe [2000] Ch 76, considered Knight v FP Special Assets Ltd (1992) 174 CLR 178, applied Lee v Mavaddat [2005] WASC 68, considered Rouse v Shepherd (No. 2) (1994) 35 NSWLR 277, cited Re Talk Finance & Insurance Services Pty Ltd [1994] 1 Qd R 558, cited Yates Property Corporation Pty Ltd v Boland (No 2) (1997) 147 ALR 685, applied |
COUNSEL: | Mr D Butler (solicitor) for the plaintiff Mr W Sofronoff QC with Mr A Pomerenke for the first to fifth defendants Mr P Dunning SC for the first defendant added by counter-claim Mr S Lumb for the second defendant added by counter-claim Mr H Fraser QC with Mr G O'Sullivan for the fourth defendant added by counter-claim No appearance for the fifth defendant added by counter-claim or the third party to the counter-claim |
SOLICITORS: | Deacons for the plaintiff Allens Arthur Robinson Lawyers for the first to fifth defendants Minter Ellison Lawyers for the first and second defendants added by counterclaim and the fourth party to the counterclaim James Watt & Co for the fourth defendant added by counter-claim No appearance for the fifth defendant added by counter-claim or the third party to the counter-claim |
- I gave judgment in this action on 26 August 2005. It was not then possible to make orders with respect to all the issues which had arisen for determination in the course of the trial. I pronounced some orders and on 1 September 2005, after hearing further argument, I made further orders. Subsequently, on 16 and 22 November 2005, I heard submissions from the parties as to costs. On 22 November I pronounced some orders as to costs but otherwise reserved my decision. I gave no reasons for the orders I made but now do so, together with the reasons for the remaining orders which I propose to make.
- The action was a complicated one involving many parties who claimed and cross-claimed against each other. The defendants who may for convenience collectively be designated ‘Ensham’ were completely successful in the action. The plaintiff (‘Southern Cross’) and Mr Foots and his companies were unsuccessful.
- On 13 September 2005 Southern Cross went into voluntary administration and on 10 October 2005 its creditors resolved to wind it up. Meanwhile, on 15 September 2005, Mr Foots became bankrupt upon the presentation of his own petition.
- On 1 September 2005 I gave judgment for the first defendant against Southern Cross and Mr Foots for damages in the sum of $2,460,000 but ordered that execution of the judgment for any amount in excess of $1,460,000 be stayed. The stay was ordered because Southern Cross had applied $1,000,000 of its own money towards the acquisition of the dragline which I ordered to be transferred to Ensham. It appeared to me that Ensham might have to give credit to Southern Cross for the $1,000,000. The matter had not been the subject of detailed argument in the submissions and the stay was intended to preserve the status quo until the matter could be argued. It is now clear that the sum of $2,460,000 which represented the damage suffered by Ensham by reason of Southern Cross’s and Mr Foots’ misconduct reflected the value to Southern Cross of the $1,000,000 it had applied towards the purchase price of the dragline. The amount of damages was agreed by the respective chartered accountants engaged by the parties. It is clear from an affidavit sworn by Mr Van Homrigh that the manner in which the damages was computed took account of, and made allowance for, the payment of the $1,000,000 from Southern Cross’s own resources. It is clear that Ensham does not have to make a further allowance, and the damages awarded on 1 September 2005 is the appropriate sum, without any reduction or set-off.
- Accordingly on 22 November 2005 I set aside the stay of execution ordered on 1 September 2005.
- As well on 22 November 2005 I gave leave to Ensham (the defendants in the action) pursuant to s 500(2) of the Corporations Act 2001 to proceed against Southern Cross. Such leave was necessary because it was in liquidation. I also ordered that Southern Cross pay the first, second, third, fourth and fifth defendants’ costs of and incidental to the claim and counter-claim on the indemnity basis.
- Section 500(2) of the Corporations Act provides:
‘After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by the leave of the Court and subject to such terms as the Court imposes.’
- Ensham intends to lodge a proof of debt in the winding up and wishes to include in its proof the amount of any costs which Southern Cross is ordered to pay Ensham. It is, as will appear, entitled to an order for costs, subject to the impediments found in the Corporations Act which project the assets of companies in liquidation from the individual attacks of creditors. Without an order from the court that Ensham’s costs of the action be assessed and paid by Southern Cross it will not be entitled to include them in its proof of debt. On the basis that Ensham does not seek to enforce any order for costs made in its favour other than by proving in the liquidation it appeared to be appropriate to grant it leave to make its application for an order for costs. Without the order it could not prove for the costs in the winding up, and it is, having succeeded in the action, entitled to costs. Granting leave will not infringe the rule which requires that the assets of a company in liquidation be divided rateably amongst creditors.
- The only other matter of concern is whether costs if ordered and assessed would be admissible to proof against Southern Cross in the winding up. Section 553(1) of the Corporations Act provides:
‘… all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.’
- The relevant date is 13 September 2005. Any order for costs will, of course, be subsequent to that date. I think, however, Mr Sofranoff QC was probably right when he submitted that the circumstances giving rise to the liability to pay costs occurred prior to the relevant date. The circumstances were Southern Cross’s unsuccessful prosecution on its claim against Ensham and its unsuccessful defence of Ensham’s counter-claim. It is true that before the order for costs was made there was no liability to pay them, but the circumstances by reason of which it was appropriate to make the order had occurred earlier.
- Southern Cross had notice of the claim for costs, on the indemnity basis, and did not oppose it.
- It was for these reasons that I gave Ensham leave to proceed against Southern Cross to apply for costs.
- There is no question, apart from the Corporations Act, about the liability of Southern Cross to pay Ensham’s costs. Its claim against Ensham failed and it was found liable on Ensham’s counter-claim. As I pointed out in my reasons for judgment given on 26 August 2005 no distinction could be drawn between Mr Foots and Southern Cross. He was its alter ego and the case for Southern Cross was conducted expressly on the basis that Mr Foots represented it. His acts and omissions were Southern Cross’s. Those earlier reasons reveal that Mr Foots’ dealings with his employer, Ensham, concerning the dragline were thoroughly dishonest and that his testimony, by which he sought to secure success in the action for himself and Southern Cross, was untruthful. I do not intend to repeat what I said. A sufficient summary appears in paragraph 40 of Ensham’s submissions on costs of 16 November 2005. I also accept the conclusion which counsel for Ensham draw from those findings (set out in paragraph 41 of the submissions):
(a)Substantially the whole of Mr Foots’ evidence was a deliberate concoction.
(b)Mr Foots continued his defence of Ensham’s claim, and so prolonged the proceeding, in wilful disregard of the known facts.
(c)Mr Foots should have known that he had no chance of successfully defending the proceeding if the true facts were made manifest.
(d)Mr Foots should never have alleged that he obtained Ensham’s fully informed consent to Southern Cross’s acquisition of the dragline. This was a central issue in the case and the allegation was baseless. Southern Cross’s consent had been obtained by a combination of concealment and fraudulent misrepresentation. It was Mr Foots who concealed relevant facts and misrepresented others.
- It is clear that the court has power to order costs on the indemnity basis against unsuccessful defendants. Holland J made such an order in Degman Pty Ltd (in liq) v Wright (No. 2) [1983] 2 NSWLR 354 on the basis (expressed at 358):
‘It is sufficient to say that the allegations of fact she made as the basis of her defences and causes of action were … false and deliberately concocted … in an attempt to deny the plaintiff its rights …’
In Lee v Mavaddat [2005] WASC 68 Roberts-Smith J ordered a defendant to pay indemnity costs because (paragraph 23):
‘The defendant must, or ought to, have known at all material times that he had no chance of success in his defence of the claim or in his counter claim – this is not simply a case of the defendant’s evidence not being accepted. In the circumstances his defence of the case and prosecution of the counter-claim must be presumed to have been continued … in wilful disregard of the known facts and the established law.’
- To the same effect are Baillieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359 at 362; Rouse v Shepherd (No. 2) (1994) 35 NSWLR 277 and Re Talk Finance & Insurance Services Pty Ltd [1994] 1 Qd R 558. The prosecution by Southern Cross of its claim against Ensham and its resistance to the relief sought against it by Ensham were essentially dishonest. The claim and the defence to the counter-claim depended upon deliberately false testimony advanced to conceal the real basis on which Ensham gave its consent to Southern Cross’s acquisition of the dragline and to permit Southern Cross to retain profits earned by it from its own fraud.
- It was for these reasons that I ordered Southern Cross to pay costs assessed on the indemnity basis.
- The next matter to consider is Ensham’s application for costs, also on the indemnity basis, against Mr Foots. He was not represented on 16 November but, having heard that Ensham sought such an order against him, he appeared by counsel on
22 November to resist the order.
- It is clear from what I have already written that Mr Foots should pay Ensham’s costs, and on the indemnity basis. He was the architect and chief executive of the deception practised on Ensham. The only reason advanced against the making of the order is his bankruptcy which it is said precludes the order.
- UCPR 72(1) forbids a party to a proceeding taking any further step in the proceeding against another party who becomes bankrupt without the leave of the court. Ensham’s application for an order for costs against Mr Foots is clearly a further step in the proceeding for which leave is necessary, Mr Foots having become bankrupt.
- Section 58(3) of the Bankruptcy Act 1966 (Cth) provides that a creditor may not, without the leave of the Federal Court, commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding. The application for costs against Mr Foots is either a legal proceeding or a fresh step in a proceeding. The leave of the Federal Court will be required for the application if it is ‘in respect of a provable debt’.
- Section 82(1) of the Bankruptcy Act provides that:
‘… all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he … may become subject before his … discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his … bankruptcy.’
- The issue for determination is whether an order for costs made against Mr Foots would be a debt or liability, future or contingent, to which he was subject at the date of the bankruptcy, or to which he may later become subject by reason of an obligation incurred prior to the bankruptcy.
- In my opinion it is established by authority that an order for costs now made against Mr Foots will not be provable in his bankruptcy. The point most clearly appears in the decision of the English Court of Appeal, Glenister v Rowe [2000] Ch 76 in which the headnote accurately summarises the decision:
‘Notwithstanding the risk inherent in any legal proceedings of an order for costs, there is no certainty that the court will exercise its discretion to make an order, and, although for insolvency purposes a contingent liability can exist without an underlying obligation, the discretionary nature of the court’s power means that there is no liability, contingent or otherwise, in the absence of an order for costs. Accordingly, a person against whom a costs order may be made does not, before an order is actually made, have a “contingent liability” for such costs …’
- The facts of the case were that Mrs Rowe began proceedings against Mr Glenister, her solicitor, for breach of trust in June 1985. In June 1991 an order was made dismissing the action for want of prosecution. An appeal was lodged against that order but a year later, in June 1992, Mr Glenister became bankrupt. He was discharged from bankruptcy in June 1995 and the next month the Court of Appeal allowed Mrs Rowe’s appeal and ordered her costs to be paid by Mr Glenister. The ‘crucial question (was) whether the costs, which were the subject of the order made by the Court of Appeal … were a “contingent liability” of Mr Glenister at the date of his bankruptcy …’. The court held they were not. Mummery LJ, with whom Thorpe and Butler-Sloss LLJ agreed, concluded that (at 84):
‘(1)Costs of legal proceedings are in the discretion of the court. Until an order for payment of costs is made there is no obligation or liability to pay them and there is no right to recover them.
(2)Once legal proceedings have been commenced there is always a possibility or a risk that an order for costs may be made against a party and, in certain circumstances, even against a non-party … an order for costs is a “contingency” which may or may not happen at some stage during or at the conclusion of the proceedings.
(3)The fact that an order for costs (a) creates an obligation to pay money and (b) is a contingency in legal proceedings is not sufficient, however, to make a claim that the court should exercise its discretion to make such an order a “contingent liability” of the person against whom such an order may ultimately be made. It is accepted that before an order is made there is no present liability to pay. Nor can there be a future liability: there is no certainty that the court will exercise its discretion to make such an order.’
Thorpe LJ expressed his ‘complete agreement’ and said (at 85):
‘(The) endeavour to uphold the judge founders on (an) inability to distinguish between liability and risk of a liability. Of course when his client issued his strike-out application he exposed himself to the risk of a liability for costs contingent on the future exercise of the court’s discretion … The element of contingency is certainly satisfied but … the element of liability is not.’
- That case was referred to with approval by the Court of Appeal in Fraser Property Developments Pty Ltd v Sommerfeld (No. 2) [2005] QCA 242. The point of that case was whether the court could make an order for the costs of an appeal against the respondent who had become bankrupt after the institution of the appeal but before judgment and, of course, before any order for costs was made. The question in the case was identified as whether an application by one of the appellants for an order for its costs was ‘within the restriction imposed by s 58(3) (of the) (Bankruptcy Act).’
- McPherson JA who gave the leading judgment of the court quoted from the judgment of Mummery LJ in Glenister and went on (at [12]):
‘The principle applies in the present case. A potential or contingent liability for costs is not a provable debt unless an order for payment of those costs has been made before bankruptcy intervenes. As can be seen from Glenister … the underlying reason is that costs of legal proceedings are in the discretion of the court; and until an order is made there is no obligation or liability to pay them. On this footing the Council could not prove its debt or claim for its costs of the appeal in the present case or of the proceedings below. … Leave of the (Federal) Court … is not required under s 58(3)(b) because even if (the application for costs) is “a fresh step”, it is not in a proceeding “in respect of a provable debt”.’
- Neither of these cases involved a situation in which an order for costs was sought, or made, in an action in which the party against whom costs were ordered had also been ordered to pay a sum of money, by way of damages or otherwise. There are some remarks in the judgment of the Court of Appeal in In Re British Goldfields of West Africa Ltd [1899] 2 Ch 7 which suggest that, in some circumstances, where a debt, provable in bankruptcy, has been ordered to be paid by the bankrupt the costs of obtaining the order ‘should be added to the provable debt.’
- That case involved an application to rectify the register of a company by removing the applicants’ names. They had subscribed for shares on the basis of misrepresentations contained in the prospectus. Upon the removal of their names from the register the shareholders were entitled to the repayment of their subscription moneys. The application for rectification and repayment was made before the company was wound up but the order was obtained afterwards. The liquidator admitted that the subscription moneys which the company was obliged to repay were provable debts but objected to paying the shareholders’ costs.
- Lindley MR said that (at 12):
‘The register having been rectified, the sums paid by the applicants are clearly provable debts, and the costs of rectifying the register are costs of obtaining an order without which these debts cannot be recovered … The costs are therefore properly added to the debts provable.’
- The judgment does not make clear, at least to me, what are the circumstances in which an order for costs is to be regarded as an ‘incident’ of a money judgment. In particular the judgment does not explain when an order for costs is to be regarded as a debt provable in the bankruptcy because it is ‘properly to be added’ to a judgment debt which is provable. The answer is not to be found in s 35 of the Companies Act 1862 pursuant to which the applicants were entitled to an order that the register be rectified and that their subscription monies be refunded. That section merely provided:
‘If the Name of any Person is, without sufficient Cause, entered in … the Register of Members of any Company … the Person … may … by Motion in any of Her Majesty’s Superior Courts of Law or Equity … apply for an Order … that the Register may be rectified; and the Court may … make an Order for the Rectification of the Register, and may direct the Company to pay all the Costs of such Motion … and any Damages the Party … may have sustained …’
The section thus conferred on the court a discretion both to rectify the register (‘if satisfied of the Justice of the Case’) and to order the company to pay the costs of a successful application.
- But what of the situation in which judgment was given against a party before his bankruptcy but the costs were not ordered until afterwards? That is the question with which I am concerned. The question did not directly arise in British Goldfields. In that case it was only after the company had been wound up that the applicants sought leave to proceed with their applications for rectification and for liberty to prove for their subscription monies, and for costs. Their right to substantive relief was not contested; it was only the costs which the liquidator objected to paying. It was therefore one of those cases where, as an exception to the general rule, an action proceeds to judgment after bankruptcy. The costs were sought with respect to that judgment. (I have used the terms ‘winding up’ and ‘bankruptcy’ interchangeably because the relevant legislation to determine the applicant’s rights against the insolvent company was s 37 of the Bankruptcy Act 1883.) Lindley MR who wrote the judgment of the court expressed a number of propositions, going beyond the facts of the case, which would answer the question, for all cases, whether costs were provable in a bankruptcy. The opinions are, therefore, obiter dicta but, coming from such a great judge, cannot be ignored.
- Speaking of the situation with which I am concerned, the Master of the Rolls said (at 11):
‘If an action is brought against a person, who afterwards becomes bankrupt, for the recovery of a sum of money, and the action is successful, the costs are to be regarded as an addition to the sum recovered and to be provable if that is provable, but not otherwise.
If, therefore, what is recovered is unliquidated damages “arising otherwise than by reason of a contract, promise, or breach of trust,” that sum is not recoverable unless judgment … has been obtained before adjudication …; and if the sum recovered is not provable, neither are the costs of recovering it … On the other hand, if what is recovered is provable, so are the costs of recovering it …’
- Section 37 of the Bankruptcy Act provided that demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise, or breach of trust, should not be provable in bankruptcy. The passage just quoted appears to assert the proposition that if a money judgment is obtained in an action against a defendant who subsequently becomes bankrupt the costs of the action which resulted in judgment may be proved in the bankruptcy if the judgment debt is provable. An example was then given of a judgment debt which was not provable, ‘unliquidated damages arising otherwise than by reason of a contract … or breach of trust’. The example is surely inappropriate because the proposition in question has as its subject matter a judgment for the recovery of money, and the passage makes it clear that if a judgment on a claim for unliquidated damages is obtained before bankruptcy supervenes then the cost of obtaining that judgment may be proved in the bankruptcy. The proposition is concerned with judgment given before bankruptcy, and it would not seem to matter what was the nature of the claim which resulted in the money judgment.
- That difficulty apart, this part of the judgment comes down to the aphorism which appears in the last sentence:
‘… if what is recovered is provable, so are the costs of recovering it …’
The authority given for this statement is Emma Silver Mining Co v Grant (1880) 17 Ch D 122. That case was procedurally very complex and to understand it one must also look at the report of the proceedings in (1879) 11 Ch D 918. It is sufficient to say of the case that the order which was made (the terms of which one gleans from the summary of facts found at p 123 of 17 Ch D and the actual order at p 130-1) supports the aphorism but that was not the subject of argument and is not mentioned in the reasons.
- Taken at face value Lindley MR’s dictum asserts that an order for costs made against Mr Foots would be provable in his bankruptcy, because judgment in the action in respect of which the costs were incurred was given before bankruptcy and the judgment debt is provable. I do not think one can accept the dictum as accurate because it conflicts starkly with the reasoned principle set out in the judgments in Glenister and repeated in Sommerfeld. In Glenister, British Goldfields was regarded as deciding ‘that a claim for costs was not a contingent liability’ (see at 81). The passages I quoted earlier from the judgment of Mummery LJ assert unequivocally that there is no contingent liability for costs prior to the exercise of the court’s discretion to make the order. McPherson JA said unambiguously (at [12]) that ‘A potential or contingent liability for costs is not a provable debt unless an order for payment of those costs has been made before bankruptcy intervenes.’ The principle is not said to be subject to qualifications or exceptions. There is neither logic nor sense in the view that there is a contingent liability to pay costs, before the court exercises its discretion to make the order, but only in cases where judgment for a money sum has been given before bankruptcy. The rationale for the rule expressed in Glenister does not admit the exception. If British Goldfields expressed the contrary view, obiter dicta it should, I think, be disregarded in favour of the more modern, reasoned authority.
- Accordingly I give the first defendant leave pursuant to UCPR 72 to proceed against the first defendant added by counter-claim for an order for costs. I further order that the first defendant added by counter-claim pay the first defendant’s costs of and incidental to the counter-claim against him, including the costs of this application and all reserved costs, and that those costs be assessed on the indemnity basis. I further order that the costs be assessed on the basis set out in paragraph 5 of the orders made on 22 November 2005.
- Ensham also seeks an order for costs against Foots Pty Ltd on the basis that it ‘fought and lost all of the substantive issues in the case. Like Southern Cross it adopted the allegations made by Mr Foots in his defence. And like Southern Cross and Mr Foots it failed to make out a single ground of defence.’ For its part Foots Pty Ltd seeks an order that Ensham pay its costs of the action or, alternatively, that it pay its costs ‘of and resulting from the amendments to the counter-claim’.
- Foots Pty Ltd was Mr Foots’ private company. His interest in Southern Cross was represented by the shares which Foots Pty Ltd owned, initially in Southern Cross and later in Little Digger Pty Ltd (‘Little Digger’) which became the sole shareholder in Southern Cross. It was joined on the basis that it should account for the profits it derived from its shareholding in Southern Cross and/or Little Digger. There was also a claim for a declaration that its shareholding in Little Digger was held on a constructive trust for Ensham. In the result Ensham did not pursue its claim for relief against Foots Pty Ltd. It elected to recover damages rather than an account of profits and having sought, and obtained, an order for the transfer of the dragline there was no point in seeking orders with respect to the shares of the company which owned the dragline. Accordingly Ensham’s counter-claim against Foots Pty Ltd was dismissed by an order made on 1 September 2005. From these facts Foots Pty Ltd claims an entitlement to an order for costs in its favour.
- In my opinion the appropriate order is that there be no order as to the costs of the counter-claim brought by Ensham against Foots Pty Ltd. Its part in the litigation was insignificant. It was joined only to cover the contingency that Ensham elected to recover an account of profits rather than damages. Ensham did not have to make that election until it obtained a verdict in its favour. In fact it appears to have made the election in closing submissions. Be that as it may Foots Pty Ltd was a proper party until the election was made. Foots Pty Ltd’s victory in the litigation was Pyrrhic. It did not win because of any merit on its part but because Ensham chose another remedy. It is to be noted that Foots Pty Ltd stoutly resisted Ensham’s claim against it. It did not, as it could have, and should have if Mr Foots had been honest, admit liability to account for the profits it derived from its shareholding in Southern Cross if that remedy were chosen. Its resistance to Ensham’s claim against it which persisted, as I said, until closing submissions, was as flawed as Southern Cross’s defence. It is not entitled to an order for its costs.
- It would not, in my opinion, be just to order Foots Pty Ltd to pay Ensham’s costs of the action. In the end Ensham did not pursue its claim against Foots Pty Ltd, but more importantly Foots Pty Ltd was a minor player in the litigation. I accept Mr Lumb’s submissions that the costs claimed by Ensham against Foots Pty Ltd are wholly disproportionate to the quantum of Ensham’s potential claim against the company for account of profits. They amounted to no more than $153,000. The costs are likely to exceed $2,000,000.
- The last claim to consider is Ensham’s application for an order for costs against Little Digger. It, in turn, seeks an order that Ensham pay its costs of the action.
- Little Digger was joined on much the same basis as Foots Pty Ltd. It became the sole shareholder of Southern Cross. Ensham claimed against it an account of profits it received from its shareholders and an order that it transfer its shares in Southern Cross to Ensham. This remedy was to be pursued only if, for some reason, Ensham did not obtain an order for the transfer of the dragline but otherwise made out its case. One of the orders made on 1 September 2005 was that Ensham’s counter-claim against Little Digger be dismissed. This followed Ensham’s election to claim damages, not an account of profits, and the making of the order for the transfer of the dragline by Southern Cross to Ensham. The making of these orders left no scope for relief against Little Digger.
- Little Digger therefore claims it was a successful defendant and should have its costs. Moreover it submits that the claim against it was misconceived and was always bound to fail. The basis for this latter submission was that Ensham had elected as its remedy the transfer of the dragline and could not maintain a claim for a transfer of the shares in the company which owned the dragline. It was also submitted that Little Digger had not been engaged in any wrongful conduct prior to May 2001 when it became the sole shareholder of Southern Cross. The dragline agreement had been made years earlier. Moreover Mr Foots was not the only director or shareholder of Little Digger but he was the only one against whom findings of misconduct were made.
- These are more or less powerful arguments in support of an order that Ensham should pay Little Digger’s costs. However for the reasons given with respect to the position of Foots Pty Ltd it would, apart from the point to be considered next, be appropriate to make no order as to the costs on the counter claim against Little Digger. Ensham should not have its costs, because it got no remedy, but nor should Little Digger. It, too, defended the counter-claim and supported Southern Cross’s claim. Mr Foots, one of its directors, was at all times aware of the falsity of that stance. Mr Gilchrist, the other dominant director, was revealed by the evidence to be a close business associate of Mr Foots. He was to be a witness in support of Southern Cross’s case but the evidence which he was to give concerning an allegation that Ensham had acquiesced in Southern Cross’s acquisition of the dragline would have clearly been false, according to the findings of credit I made. Mr Gilchrist was not, in the end, called to give that critical evidence. Little Digger was a party against which an order would have been made but for the election to claim damages, not an account of profits. There was no merit in its defence of Ensham’s claim.
- Ensham puts its claims for costs against Little Digger on the principle expressed in Knight v FP Special Assets Ltd (1992) 174 CLR 178. That principle applies to persons who are not parties to litigation and Little Digger was, of course, a defendant added by counter-claim. That circumstance notwithstanding the principle appears to me to be applicable and its application requires, in my opinion, an order for costs against it.
- Southern Cross, Little Digger’s wholly owned subsidiary, is insolvent. It cannot pay the order for costs made against it. It commenced the proceedings, suing Ensham for moneys allegedly due under the dragline agreement, thus prompting Ensham’s counter-claim. Little Digger stood to gain financially from Southern Cross’s success in the action. The substantial sums claimed under the dragline agreement would have gone to Little Digger as dividends. Moreover Little Digger funded Southern Cross’s claim by lending it $2,000,000 which it raised by way of capital by issuing additional shares to its shareholders. Success in the action would have enabled Little Digger to recover its loan to Southern Cross as well, as I have mentioned, as any moneys recovered by Southern Cross from Ensham. Mr Foots was actively involved in Little Digger’s support for Southern Cross. He appears to have instigated a decision by Little Digger to raise funds by the issue of additional shares. As well he appears to have been the guiding mind behind Little Digger’s involvement in the litigation deciding, for example, that the company should oppose Ensham’s application for the separate trial of distinct issues in the action.
- There is nothing unusual in a holding company offering financial support to a subsidiary involved in litigation. When, however, the litigation is unsuccessful and the subsidiary is insolvent there is nothing unjust in requiring the holding company to be liable for the costs which it occasioned by its support of its subsidiary. The need for such an order is more apparent when, as here, the directing mind of the holding company knew of the falsity of the subsidiary’s position but encouraged it financially for personal gain. The position seems to be completely analogous with that in Yates Property Corporation Pty Ltd v Boland (No 2) (1997) 147 ALR 685 at 694-5. Unless an order for costs is made against Little Digger Ensham will go uncompensated for the costs of a case which it won and Little Digger will have maintained Southern Cross’s false case at no risk to itself. For the same reasons which existed with respect to Southern Cross and Mr Foots the costs should be assessed on the indemnity basis.
- I therefore make an order that Little Digger pay costs in the same terms as the order made against Southern Cross, with one exception. The exception is that Ensham should pay Little Digger’s costs thrown away by the amendments which Ensham made to its counter-claim which led to the abandonment of claims previously made in earlier versions of the counter-claim. I think Little Digger’s complaints in this regard are justified and that claims which Ensham abandoned as being untenable resistance to which put Little Digger to cost, should be reflected in an order for costs in favour of Little Digger.
- I order Little Digger, the fourth defendant added by counter-claim, to pay the first, second, third, fourth and fifth defendants’ costs of and incidental to the claim and counter-claim, including the costs of the application for costs and reserved costs on the indemnity basis and on the basis set out in paragraph 5 of the orders made on 22 November 2005.
- By way of exception to the previous order I order that the first, second, third, fourth and fifth defendants pay the costs incurred by the fourth defendant added by counter-claim with respect to its defence of claims which were advanced in the defendants’ counter-claims but were abandoned in the ninth amended counter-claim. These costs are to be assessed on the standard basis.