FEDERAL COURT OF AUSTRALIA

Sons of Gwalia Limited (Subject to Deed of Company Arrangement) v Margaretic [2006] FCAFC 92

Sons of Gwalia Limited (Subject to Deed of Company Arrangement) v Margaretic [2006] FCAFC 17, (2006) 56 ACSR 585 related

SONS OF GWALIA LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) v LUKA MARGARETIC and ING INVESTMENT MANAGEMENT LLC

NSD 1816 of 2005

ING INVESTMENT MANAGEMENT LLC v LUKA MARGARETIC and SONS OF GWALIA LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

NSD 1872 of 2005

FINKELSTEIN, GYLES and JACOBSON JJ

15 JUNE 2006

SYDNEY

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

THE COURT ORDERS THAT:

The appellant pay the costs of the first respondent Luka Margaretic.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

THE COURT ORDERS THAT:

The second respondent Sons of Gwalia Limited (Subject to Deed of Company Arrangement) pay the costs of the first respondent Luka Margaretic.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT

FINKELSTEIN J

1                     There is still outstanding the question of the costs of the appeals.  Sons of Gwalia Limited (subject to deed of company arrangement) (SOG) is the unsuccessful appellant in one appeal and does not seek costs.  ING Investment Management LLC is the unsuccessful appellant in the other appeal but it has an agreement with the administrators (made before action) that its costs be paid from the estate.  Margaretic, who was successful in defending the two appeals, had no prior agreement for his costs and seeks an order that they be paid by SOG.  I would make an order to that effect. 

2                     Now I turn to the administrators’ costs.  The administrators procured SOG to bring one appeal and defend the other but they are not themselves parties to either appeal.  So they seek no order for their costs.  They say they do not need an order because their right to recover their costs is to be found in the Deed of Company Arrangement.  Ordinarily that would be the end of the Court’s role.  In this case, however, I am satisfied that it is appropriate for something to be said about the administrators’ claimed right to rely on the Deed to recover their costs.  In the first place, unless some guidance is given, there may be no independent assessment of the administrators’ claim:  they will simply take their costs from the available assets.  In the second place, fairness has been observed as the administrators were put on notice that the Court might consider their right to recover costs and they took the opportunity to make detailed submissions in support of their claimed rights under the Deed.  Last but not least, the Court would be remiss if it turned a blind eye to what may be an improper claim by the administrators to recover their costs. 

3                     Clause 5.7(b) of the Deed provides that the administrators must be reimbursed in respect of all costs, fees and expenses incurred in connection with the performance of their duties under the Deed.  Clause 5.8(b) provides that the remuneration of the administrators may be fixed by resolution of the Consultative Creditors Committee.  It goes without saying that these provisions only entitle the administrators to recover properly incurred costs and properly claimed remuneration in relation to work that has been undertaken by them. 

4                     At this point in time the principal (if not the only) argument the administrators make to justify their claim for costs under cl 5.7(b) is that in procuring the bringing of the appeal and treating Margaretic as an adversary they acted in accordance with “high authority.”  This, they contend, permits them to recover in full all the expenses they have incurred in prosecuting one appeal and defending the other.  Presumably they will also seek to recover remuneration for their work.  In my view, however, there is a risk that the administrators have acted in breach of their obligations to Margaretic and are not entitled to recover their costs (or at least not all of their costs) because those costs were not properly incurred.  The same position may hold in respect of any remuneration the administrators may claim.

5                     The best place to begin is with some basic rules.  Re Buckton; Buckton v Buckton [1907] 2 Ch 406 contains a classic statement of the principles upon which costs are awarded in cases involving trustees.  There Kekewich J (who was a master of Chancery procedure) said that, broadly speaking, there are three kinds of disputes involving trustees.  The first is an action brought by trustees relating to the construction of the trust instrument or some other question arising in the course of an administration.  In Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220, 1223, Lightman J broadened this category by including within it “[every] dispute as to the trusts upon which [the trustees] hold the subject matter of the settlement.”  For convenience he labelled these cases as “trust disputes”.

6                     When a “trust dispute” has come about because there is a dispute between two beneficiaries concerning the construction of the trust instrument or their respective rights in the trust estate, the duty of the trustee as the trustee for all beneficiaries is to treat the beneficiaries impartially and remain neutral:  Australia and New Zealand Banking Group Limited v National Mutual Life Nominees Limited (1977) 137 CLR 252, 264-265, 270; Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220, 1225;  Re Patton (1971) 19 DLR (3d) 497; Jones v Heritage Pullman Bank Co,518 NE 2d 178, 182-184 (1988); Northern Trust Co v Heuer,560 NE 2d 961, 964 (1990).  Thus, unless the trust instrument itself provides otherwise, the trustees should bring the dispute into court for resolution but in the proceeding they are not entitled to favour one party over another by advocating a party’s cause:  In re Hughes’ Will,5 NW 2d 791 (1942); In re James’ Estate,86 NYS 2d 78, 89 (1948); In re Duke,702 A 2d 1008 (1995); Scott on Trusts (4th ed, 1987) § 183; Restatement (Second) of Trusts § 183.  To do otherwise would be a breach of the trustees’ duty to deal impartially with all beneficiaries and to protect their interests.  Of course, if the case is not properly presented by the beneficiaries the trustees may, indeed probably should, provide the court with their views.

7                     In a trust dispute the costs of all parties are treated as necessarily incurred for the benefit of the estate and are ordered to be paid out of the fund either on a solicitor and client or indemnity basis:  Daniell’s Chancery Practice (7th ed, 1901) vol 1, 953, 955-957, 987; In re Buckton [1907] 2 Ch 406, 414; McDonald v Horn [1995] 1 All ER 961, 970-971.  One possible exception is the case of a “timid trustee” who unnecessarily approaches the court for advice when the answer to the problem raised by the dispute is sufficiently clear.  Even then the trustee usually gets his (or her) costs.  Another exception is where the trustees breach their duty to act impartially, even if the breach is technical in nature, done in good faith, and causes no harm:  Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220, 1225; James v Heritage Pullman Bank Co,518 NE 2d 178 (1988); Northern Bank Trust Co v Heuer,560 NE 2d961 (1990).  At best the trustees will be entitled to the costs incurred in submitting to the court’s direction.  That may include the costs of a defence, discovery and an appearance:  Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220, 1225.  Interestingly, while it is proper and sometimes obligatory for trustees to bring a trust dispute to court, in the United States it is said that a trustee who is a party to a trust dispute has no standing to appeal from the judgment, except in limited circumstances:  Scott on Trusts (4th ed, 1987) § 183. 

8                     The second kind of dispute is a trust dispute in which the application is made by someone other than the trustee (usually a beneficiary) but raises the same kind of issue as in the first class and would have justified an application by the trustees.  Here the same rule in relation to costs applies because, as in the first class, the application is for the benefit of the estate.

9                     The third class identified by Kekewich J (which Lightman J refers to as a “beneficiaries dispute”) is where a beneficiary brings a hostile claim against the trustees (for example as to the propriety of any action taken or omitted to be taken) or another beneficiary.  As between the parties the costs in this kind of case are treated in the same way as in ordinary litigation, that is, they follow the event.  However, if the trustees properly (albeit not necessarily successfully) defend the claim for the benefit of the estate they will be entitled to their costs out of the estate to the extent they are not recovered from the other party. 

10                  Lightman J has identified a fourth class, which he labels “a third party dispute”.  This is a dispute between the trustees and persons, otherwise than in their capacity as beneficiaries, in respect of rights and obligations assumed or incurred by the trustees in the course of administering the trust.  Examples are actions in contract or tort.  Here again as between the parties the costs are borne by the unsuccessful party.  The trustees will be entitled to look to the estate for their costs (or any shortfall in their costs) only if the action is “properly brought or defended for the benefit of the trust estate”:  Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220, 1224.  Commonly, a cautious trustee will seek a Beddoe order (In re Beddoe; Downes v Cottam [1893] 1 Ch 547) authorising him to bring or defend an action.

11                  So much for the rules.  The question is how are they to be applied to the administrators.  The administrators contend that the litigation which they procured SOG to initiate was adversarial in nature; brought to defend the trust estate against the claims of Margaretic.  They also contend that, having regard to the nature of the dispute with Margaretic, if SOG’s arguments at trial were rejected they were entitled to procure SOG to bring the appeal and conduct it as if Margaretic were an adversary.  For these reasons they say they are entitled to recover their costs in relation to the original action and both appeals pursuant to cl 5.7(b) of the Deed.  The “high authority” upon which they rely is Tanning Research Laboratory Inc v O’Brien (1990) 169 CLR 332. 

12                  A moment’s reflection will show that Tanning Research does not assist the administrators.  The case concerned a proof of debt against a company in liquidation.  Since at least 1862, the process for establishing a right to be paid a dividend out of the assets of a company in liquidation is by proof.  A putative creditor submits (either formally or informally) a proof for a claim in debt or damages.  The liquidator, who is under a duty to ascertain what is owed by the company, must consider the proof and admit or reject it.  In performing this function the liquidator acts in a quasi-judicial capacity:  Ex parte James; In re Condon (1874) 9 Ch App 609, 614; Tanning Research Laboratories Inc v O’Brien (1987) 11 ACLR 778.  If the liquidator rejects the proof, the putative creditor may appeal to the court to reverse or vary the liquidator’s decision, although in some circumstances he may instead be permitted to institute proceedings against the company.  An appeal to the court is a hearing de novo:  In re Trepca Mines Limited [1960] 1 WLR 1273, 1276.  Tanning Research says that in the appeal the liquidator is “in the role of an adversary” although he is still required to act fairly in the conduct of the litigation.

13                  This piece of litigation is far removed from an appeal from the rejection of a proof of debt.  For one thing, the object of proving is to enable the liquidator, for the purposes of distributing the assets, to determine whether the claimant has a good claim against the company and, if he has, to calculate the quantum of that claim.  Here those issues did not arise.  Secondly, the administrators have proceeded on the basis that shareholders in the position of, and including, Margaretic most likely have good claims on SOG.  Thus, for the purposes of the action the judge was requested to answer the questions raised by SOG upon the assumption that Margaretic had a provable claim for an indefinite amount.  The judge was specifically asked not to assess the quantum of the claim.  The questions raised issues capable of answer (and were in fact answered) on that basis.  In other words, so far as the litigation was concerned Margaretic, SOG and the administrators were not at odds as regards Margaretic’s right to prove. 

14                  The action was brought because the administrators had a problem.  They had been working on a proposal for the restructure of the SOG group.  The restructure was likely to involve the sale (perhaps through a float) of key assets.  The administrators anticipated that the creditors would be asked to approve a scheme of arrangement to give effect to the restructure.  They contemplated that the scheme would provide for the proceeds of the sale of assets to be distributed to creditors in a manner similar to a winding up.  The administrators were uncertain how creditors in the position of Margaretic would be treated in a winding up.  That uncertainty needed to be resolved before any scheme could be put to creditors.  The administrators had other problems as well, but none that needed to be taken to court.  For example, they needed time to complete the work on the proposed restructure.  They also had to keep at bay all actions against the company.

15                  The problems which confronted the administrators were solved by the interim or temporary Deed of Company Arrangement.  The Deed was designed to put in place a moratorium in relation to all claims against SOG.  It was also designed to permit further investigations into the proposed restructure.  Importantly for present purposes, the Deed established a mechanism through which the administrators could test the rights of creditors such as Margaretic.  The mechanism was the creation of a trust of which the administrators are the trustees and all creditors of SOG are the beneficiaries.  The trust contains provisions for the distribution of the estate which mirror those in a winding up.  Accordingly, the administrators were in a position to test the claims of creditors who were also shareholders.  For this purpose they had to find a creditor shareholder willing to be the test claimant.  So they approached Mr Gentilli, a solicitor who acts for a group of shareholders who have claims against SOG.  He selected one of his clients, Margaretic, who in his words would “be a representative respondent in the proceedings.”  I do not know how ING Investment came to be chosen to represent non-shareholder creditors, but it was joined in the action to play that role.  No doubt SOG’s lawyers appreciated that the case would not be heard in the absence of a party to represent the interests of the non-shareholder creditors. 

16                  The facts as are presently known show this to be a friendly action to settle a question which has arisen in the administration of the trust.  To be sure, there are differences between the action and a typical trust dispute.  The first is that it was SOG (which pursuant to the Deed is under the control of the administrators) that approached the court.  This was an unusual choice of plaintiff because SOG has no real interest in the trust as there will never be any surplus funds.  It probably had a sufficient interest to bring the application, I suppose much like a settlor has standing to enforce a trust:  In re Rogers; Ex parte Holland & Hannen (1891) 8 Morr 243, 248; Quistclose Investments Ltd v Rolls Razor Ltd (in liq) [1970] AC 567, 580-582.  At least no-one has suggested otherwise.  The second difference is the absence of the administrators as parties.  I know of no other case where a court has ruled on the construction of a trust deed and not bound the trustees in the result. 

17                  Although the action was brought in the name of SOG, I do not think that this permits the administrators to escape from their obligation of neutrality.  Put another way, in a case where the administrators as trustees have concerns about the meaning of a trust instrument, they must bring the issue before the court and if there are competing beneficial interests they must not take sides.  They cannot escape their duty by bringing the action in the name of the company the subject of a deed of company arrangement, at least in a case where the company has no substantive interest in the dispute.  In other words, these proceedings cannot be dressed up as a dispute between SOG and Margaretic.  Anyway, if this was in truth adversarial litigation as the administrators contend, there was no reason for them to invite ING Investment to join in at SOG’s expense.

18                  Viewed in this light, there is at least the possibility that the administrators have acted in breach of their duty.  They attacked Margaretic’s claim at trial.  Then they brought the appeal.  On the appeal the administrators through SOG intended to continue their attack on Margaretic.  They were prevented from doing so only by the Court itself. 

19                  This is not to say that the administrators’ conduct may not be looked at in another light.  It may be that on facts not presently known a different conclusion could be reached.  Although the administrators were invited to make, and have made, submissions on costs it is possible that they have not brought forward all the facts. 

20                  In the circumstances I think that it would be appropriate for the administrators to approach the Court for a ruling before they recover their costs. 

Associate:

Dated:              15 June 2006

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT

GYLES J

21                  Costs were reserved at the time of judgment (Sons of Gwalia Limited (Subject to Deed of Company Arrangement) v Margaretic [2006] FCAFC 17, (2006) 56 ACSR 585).  The only order sought by the parties is that Sons of Gwalia Ltd (Subject to Deed of Company Arrangement) pay the costs of Luka Margaretic of each appeal.  In my opinion, that is appropriate and I would so order.

22                  The proceeding was brought by Sons of Gwalia against Margaretic as first respondent and ING Investment Management LLC as the second respondent.  The applicant sought:

‘1.        A declaration that the Claim is not provable in the deed of company arrangement in respect of the applicant …

2.         Alternatively, a declaration that payment of the Claim pursuant to the deed of company arrangement will be postponed until all debts owed to, or claims made by, persons otherwise than in their capacity as members of the applicant, have been satisfied.’

23                  Margaretic cross-claimed against each of Sons of Gwalia and ING seeking:

‘a declaration that he is a “creditor” of the firstcross-respondent within Part 5.3A of the Corporations Act 2001 (Cth) and is entitled to all the rights of a creditor under Part 5.3A including the right to:

(a)               attend meetings of creditors of the first cross-respondent;

(b)               vote at meetings of creditors of the first cross-respondent;

(c)        receive information and circulars sent by the first cross-respondent to creditors.’

24                  On 15 September 2005 Emmett J delivered reasons for judgment (Sons of Gwalia Limited Administrator Appointed) (ACN 008 994 287) v Margaretic [2005] FCA 1305, (2005) 55 ACSR 365) in which he said (at [50]):

‘It follows, from what I have said, that the application by the company [Sons of Gwalia] should be dismissed and that the cross-claim by the shareholder [Margaretic] should succeed.  However, before making any orders, and having regard to the possible effect of my conclusions on non-parties, I consider that it is appropriate to invite the parties, after consideration of my reasons, to bring in short minutes of orders that they contend are appropriate, including orders under O 6 r 13.  To the extent that any party who wishes to contend that costs should not follow the event, I will hear submissions as to that matter at a time convenient to the parties.’

25                  On 27 September 2005 the proceedings were disposed of by Emmett J in the following manner (omitting the schedule):

‘The Court declares that:

1.         in respect of the first respondent’s claim, as described in the Schedule hereto (“the claim”), the first respondent [Margaretic] is a creditor of the applicant [Sons of Gwalia] within the meaning of Part 5.3A of the Corporations Act 2001 (“the Act”) for such amount as the Deed Administrators of the applicant may admit or be ordered to admit to proof and is entitled to all the rights of a creditor under that Part; and

2.         the Claim is not postponed until all debts owed to, or claims made by, persons other than the first respondent have been satisfied, by reason of the inclusion of section 563A of the Act in the deed of company arrangement in respect of the applicant.

The Court orders that:

3.         The name of the applicant be amended as shown in this order.

4.         The applicant’s claim be dismissed.

5.         The applicant pay the first respondent’s costs of the proceeding.’

26                  Both Sons of Gwalia and ING appealed.  Sons of Gwalia sought reversal of the effect of the declarations and also an order that ‘the first respondent pay the appellant’s costs of the appeal and of the application dated 4 July 2005’.  ING sought the setting aside of the orders below and reversal of the effect of the declarations but made no mention of costs.  The appeals were dismissed but costs were reserved.

27                  The normal order for costs of the appeals would be that the unsuccessful appellant in each case pay the costs of the respondent Margaretic.  There would be no occasion to disturb the order for costs made below.  In the event, the parties consent to an order that the costs of Margaretic of both appeals be paid by Sons of Gwalia.  In my opinion, that is the only order for costs that can or should be made. 

28                  In the first place, I do not think that the Court should become involved in the source of the funds to which Sons of Gwalia will have recourse to meet the order for costs.  In the second place, I do not see any proper basis upon which this Court, in disposing of these appeals, can or should become involved in any issue as to the costs and disbursements of the losing parties.  Those are not issues on the appeal.  They are not raised by any application by any party. Dealing with a non issue involving non parties causes problems.  An issue is not properly defined.  There is no proper contradictor.  The facts are unlikely to be fully exposed.  Damage can be done to reputation without any redress.  What the Court says is protected by absolute privilege.  There can be no appeal by a non party on a non issue.

29                  In my respectful opinion, these appeals are not equivalent to an application to the Court by a trustee in relation to trust property and the administrators of Sons of Gwalia in their capacity as such are not the equivalent of the company for present purposes.  Sons of Gwalia sought relief on its part and opposed the relief sought by the cross-claim.  It lost.  Sons of Gwalia was an active litigant.  It was not seeking judicial advice.  Whatever the practical background may be, these appeals were adversary litigation and should be treated as such. 

30                  These appeals are not the appropriate vehicle for dealing with such questions as there may be concerning the costs of and expenses incurred by the administrator in these proceedings or, for that matter, any liability assumed by them for the costs of other parties.  Part 5.3A of the Corporations Act 2001 (Cth) deals with the conduct of the administration.  That Part contains various safeguards in relation to the conduct of administrators and the court has a role to play.  Indeed, the Supreme Court of Western Australia has apparently already made orders relating to remuneration of the administrators.  In my opinion, any live issue concerning the conduct of the administrators should be dealt with in a properly constituted proceeding brought pursuant to Pt 5.3A by any interested party including the administrators. 

Associate:

Dated:  15 June 2006

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT

Jacobson J

31                  I agree with Gyles J that the only order for costs that can be made is that the costs of Margaretic of both appeals be paid by Sons of Gwalia.

32                  I also agree with his Honour that, whatever the practical background, these appeals proceeded as adversary litigation between the named parties.

33                  Accordingly, it is not appropriate to embark upon the question of the costs of the administrators.  As Gyles J has said, it is open to the administrators to approach the Court should they wish to do so.

Associate:

Dated:              15 June 2006