FEDERAL COURT OF AUSTRALIA

Kazar (Liquidator) v Kargarian; In the Matter of Frontier Architects Pty Ltd (In Liq) [2011] FCAFC 136

IN THE MATTER OF FRONTIER ARCHITECTS PTY LTD (IN LIQ) (ACN 099 631 982)

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The order for costs made by the primary judge on 20 December 2010 in proceeding No ACD 51 of 2009 be set aside.

3.    In lieu of the order for costs referred to in Order 2 above, the plaintiff pay the defendants’ costs of and incidental to the whole of the proceeding.

4.    There be no orders as to the costs of the appeal to the intent that each party should bear his or her own costs of the appeal.

THE COURT NOTES THAT:

5.    In the opinion of the primary judge, approximately three quarters of the hearing time devoted by the Court to the trial of the proceeding below over the four days 13–16 September 2010 was taken up by the trial of this proceeding and approximately one quarter of that hearing time was taken up by the trial of proceeding No ACD 52 of 2009.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE MATTER OF TECHNO BUILD DEVELOPMENTS PTY LTD (IN LIQ) (RECEIVER AND MANAGER APPOINTED) (ACN 066 616 091)

THE COURT ORDERS THAT:

1.    Leave be granted to the appellant to amend Ground 1 in his Notice of Appeal in accordance with the draft amended Notice of Appeal provided to the Court at the hearing of the appeal on 1 August 2011.

2.    The appeal be allowed in part.

3.    The order for costs made by the primary judge on 20 December 2010 in proceeding No ACD 52 of 2009 be set aside.

4.    In lieu of the order for costs referred to in Order 3 above, the defendant pay the plaintiff’s costs of and incidental to the whole of the proceeding.

5.    The appeal otherwise be dismissed.

6.    There be no orders as to the costs of the appeal to the intent that each party should bear his or her own costs of the appeal.

THE COURT NOTES THAT:

7.    In the opinion of the primary judge, approximately one quarter of the hearing time devoted by the Court to the trial of the proceeding below over the four days 13–16 September 2010 was taken up by the trial of this proceeding and approximately three quarters of that hearing time was taken up by the trial of proceeding No ACD 51 of 2009.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE MATTER OF FRONTIER ARCHITECTS PTY LTD (IN LIQ) (ACN 099 631 982)

REASONS FOR JUDGMENT

GREENWOOD AND RARES JJ

1    We have had the benefit of reading the draft reasons for judgment of Foster J and the orders proposed by his Honour.

2    We agree with the proposed orders and generally agree with his Honour’s reasons for judgment subject to the following remarks concerning the question of the exercise by the primary judge of the discretion to award costs conferred by s 43(2) of the Federal Court of Australia Act 1976 (the “Federal Court Act”).

3    Section 43(2) of the Federal Court Act reflects one modern embodiment of the post Judicature Act (Supreme Court of Judicature Act (UK) 1873 and Rules of Procedure) conferral of power, by a broad unconfined discretion, to determine whether an order awarding costs of and incidental to a proceeding ought to be made and, if so, the content and burden of the order.

4    Although the discretion to award costs is unconfined or “absolute and unfettered” (Latoudis v Casey (1990) 170 CLR 534 per Dawson J at 557) the discretion must be exercised judicially, that is, according to relevant considerations, and take account of the contextual features and facts of the litigation. Although the discretion is unconfined or unfettered, the exposed reasoning explaining the factors informing the exercise of the discretion might reveal factors taken into account extraneous to the objects adopted by the legislature in conferring the statutory power and in that respect, plainly enough, the discretion is not “at large” (Water Conservation and Irrigation Commission (NSW) v Browning (1947) 74 CLR 492 at 505 per Dixon J).

5    Although the discretion is said to be unconfined, absolute and unfettered, the public interest in the quelling of controversies and the administration of justice is secured by recognising that the discretion ought to be exercised according to settled principle. Settled principle guides the exercise of the discretion and recognises that the modern embodiment of the post Judicature Act discretion as to costs has escaped “arterial hardening” (Oshlack v Richmond River Council (1998) 193 CLR 72 per Gaudron and Gummow JJ at [38]) and has avoided elevating guiding principles into narrow legal rules controlling the exercise of the discretion (Norbis v Norbis (1986) 161 CLR 513 at 537 per Brennan J at 537; Wilson and Dawson JJ at 533). Because settled principle merely guides the exercise of the discretion, there is no automatic or absolute rule controlling the exercise of the discretion to the effect that costs always follow the event. Nor is there an automatic or absolute rule that in the absence of disentitling conduct, a successful party is to be compensated by an unsuccessful party. Moreover, the jurisdiction conferred by s 43(1), exercised by reference to the broad discretion conferred by s 43(2), is not constrained by any rule that there is no jurisdiction to order a successful party to bear the costs of the unsuccessful party (Oshlack v Richmond River Council (supra) per Gaudron and Gummow JJ at [40] and [41]). As their Honours observe at [41] in Oshlack, there is nothing surprising or remarkable about the absence of hard arterial propositions in construing the scope of the discretion as the discretion must take account of the “… myriad circumstances presenting themselves in the institution and conduct of litigation, and to the very nature of litigation” within the scope of the Court’s jurisdiction. See also Probiotic Ltd and Others v University of Melbourne and Others [2008] FCAFC 5; (2008) 160 FCR 30 per Finn J at [1]; Rares J at [45] to [52] and Besanko J at [82] subject to the observations at [83] to [92].

6    Some of the important principles however which guide the exercise of the discretion are reflected in the unifying judgment of Gleeson CJ, Gummow, Hayne and Crennan JJ in Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52 at [25] to [34]. Their Honours observe at [25] that the award of costs is “… discretionary but generally that discretion is exercised in favour of the successful party” [emphasis added]. Of course, there are no automatic or absolute rules atrophying the true underlying scope of the discretion.

7    The operation of the pre-judicature system with respect to costs infuses the approach to the flexibility of the discretion in the post Judicature Act environment and particularly in the modern treatment of costs applications operating under rules which are the genetic descendents of the Judicature Act provisions (such as s 43 of the Federal Court Act). In reflecting upon the practice of the High Court of Chancery (as described in Daniell’s Practice of the High Court of Chancery, 5th Ed (1871), Vol 2, p 1239) and the discretionary nature of the award of costs in that court, Gleeson CJ, Gummow, Hayne and Crennan JJ observe at [34] in Foots that the discretion historically was not inflexibly constrained by the rule of awarding the costs of the suit to the successful party but that the Court would, in exercising the discretion to award costs, take into consideration the circumstances of the particular case before it or the situation or conduct of the parties.

8    The practice guiding the exercise of the discretion was that the Court of Chancery did not regard the awarding of costs as a penalty or punishment but merely a necessary consequence of a party having created litigation in which the party had failed. Daniell’s Practice also recognised that the Court was “… generally, governed by certain fixed principles which it [had] adopted upon the subject of costs, and [did] not, as was frequently supposed, act upon the mere caprice of the Judge before whom the [controversy happened] to be tried” (Foots at [34]). In other words, without subsuming the discretion within inflexible rules, the discretion would be exercised according to broad settled principle as described. Having observed these matters about the practice of the Chancery Court, their Honours concluded those remarks by observing at [34] that “[t]he similarity with the modern treatment of costs applications will be readily apparent”.

9    The exercise of the discretion takes account of all of the contextual circumstances of the litigation and the conduct of the parties. One aspect of the award of costs is a recognition that a party has been put to expense which, taking account of the merits as ultimately found on the trial of the action, might otherwise have been avoided. That consideration does not infuse the award of costs with any sense of penalty or punishment but simply recognises the compensatory nature of an award of costs, in context and according to principle. That is why an award of costs, although involving the exercise of a discretion, generally favours the successful party. As to the importance the community attaches to legal costs incurred of and incidental to the resolution of controversies before courts, see Clark v Commissioner of Taxation [2010] FCA 415 at [90]; Uniline Australia Ltd v SBriggs Pty Ltd (No. 2) [2009] FCA 920; (2009) 82 IPR 56 at [38]; and, Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd [2011] FCAFC 53 at [130] to [132].

10    The primary judge’s exercise of the discretion to award costs is said to have miscarried in the sense contemplated in the well-known passage from House v The King (1936) 55 CLR 499 at 505.

11    In our view, with respect to the primary judge, we are satisfied that the exercise of the discretion has miscarried for the reasons identified by Foster J and we agree with the orders his Honour proposes.

Associate:

Dated:    4 November 2011

IN THE MATTER OF FRONTIER ARCHITECTS PTY LTD (IN LIQ) (ACN 099 631 982)

REASONS FOR JUDGMENT

FOSTER J

12    There are two appeals before the Court. In these appeals, the appellant seeks orders varying two discretionary decisions made by the primary judge in respect of two sets of proceedings which his Honour heard and determined together. The first of these decisions is the order for costs made by the primary judge on 20 December 2010. The second is the order for the payment of pre-judgment interest pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act) which his Honour made on the same day in one of those proceedings.

13    There is no challenge in the appeals to the primary judge’s decisions in respect of the substantive claims for relief made in the proceedings below.

14    Given the nature of the orders which are sought to be varied on appeal, the appellant must demonstrate that the primary judge made one or more errors in exercising the discretions reposed in him in the sense discussed in House v The King (1936) 55 CLR 499 at 504–505.

15    The appellant is the liquidator of two corporations, Frontier Architects Pty Ltd (In Liq) (ACN 099 631 982) (Frontier Architects) and Techno Build Developments Pty Limited (In Liq) (Receiver and Manager Appointed) (ACN 066 616 091) (Techno Build).

16    The appellant was appointed liquidator of Frontier Architects on 15 August 2007. He had been appointed administrator of that corporation in July 2007.

17    The appellant was appointed liquidator of Techno Build on 20 September 2007. He had been appointed administrator of that corporation in June 2007.

18    At all times relevant to the transactions dealt with in the proceedings below, both Frontier Architects and Techno Build were controlled by Mr Amrollah Aghili (also known as “Roland Aghili”).

19    On 4 December 2009, the appellant commenced two sets of proceedings in this Court. In the first of those proceedings (proceeding ACD 51 of 2009), in his capacity as liquidator of Frontier Architects, the appellant sued Rouhollah Kargarian (Mr Kargarian) and Rouhiyeh Kargarian (also known as “Ruby Kargarian”) (Mrs Kargarian). Mrs Kargarian is Roland Aghili’s sister. In the second of those proceedings (proceeding ACD 52 of 2009), in his capacity as liquidator of Techno Build, the appellant sued Mrs Kargarian. She was the only defendant in that proceeding.

20    In the Frontier Architects proceeding, the appellant claimed $1,493,612 or, in the alternative, $1,080,000 plus interest from Mr and Mrs Kargarian. In that proceeding, the appellant alleged that various loan and property transactions between Mr and Mrs Kargarian, on the one hand, and Frontier Architects, on the other hand, constituted unfair preferences given by Frontier Architects in favour of Mr and Mrs Kargarian. He also alleged that those transactions were uncommercial transactions and insolvent transactions effected by Frontier Architects. Each cause of action relied upon by the appellant in the Frontier Architects proceeding was a statutory cause of action based upon a provision of the Corporations Act 2001 (Cth) (the Corporations Act). The particular sections relied upon were ss 588FA, 588FB, 588FC, 588FE(3), 588FE(5) and 588FF.

21    In the Techno Build proceeding, the appellant claimed that, during 2004 and 2005, Techno Build had constructed a residence on land owned by Mrs Kargarian at 4 McRitchie Circuit, Nicholls, ACT (the Nicholls property) for which Mrs Kargarian had not paid. The appellant contended that that transaction was an unreasonable director-related transaction within the meaning of s 588FDA of the Corporations Act and thus a voidable transaction within the meaning of s 588FE(6A) of that Act. For those reasons, in the Techno Build proceeding, the appellant claimed that he was entitled to recover from Mrs Kargarian the sum of $402,252.25 plus interest. The appellant also sought to advance a claim in the Techno Build proceeding to the effect that the same amount was recoverable as against Mrs Kargarian as a restitutionary claim based on quantum meruit.

22    The two sets of proceedings travelled together during the interlocutory stages and, in due course, were both fixed for final hearing before the primary judge. It was anticipated by all those involved that both sets of proceedings would be heard together or that the proceedings would be heard consecutively, one immediately after the other.

23    Ultimately, the two sets of proceedings were heard together, with evidence in each proceeding being evidence in the other. The hearing occupied four days of Court time (viz 13, 14, 15 and 16 September 2010 (the joint hearing).

24    In a judgment delivered on 10 December 2010 (Kazar (in the capacity as the liquidator of Frontier Architects Pty Ltd) (in liq) v Kargarian (2010) 81 ACSR 158) (the principal judgment), the primary judge decided that the appellant had failed to establish any entitlement to relief in the Frontier Architects proceeding but held that Mrs Kargarian was liable to pay $150,000.00 to the appellant in the Techno Build proceeding, that sum being his Honour’s assessment of the value of the building work carried out at the Nicholls property by Techno Build for Mrs Kargarian (viz $350,000.00) less the amount of $200,000.00 which his Honour held had been paid by Mrs Kargarian to Techno Build on 3 September 2004 as part-payment for that building work. That part-payment had been made long before the Techno Build proceeding was commenced. In the Techno Build proceeding, his Honour observed (without deciding) that Mrs Kargarian was also probably liable to Techno Build itself for the same building work in restitution in the sum of $150,000.00. He noted, however, that it was open to question whether the appellant was entitled to relief by way of restitution. His Honour suggested that the proper plaintiff in the postulated action for restitution would have been Techno Build itself, rather than its liquidator.

25    There is no challenge in the Techno Build appeal to his Honour’s conclusion that Mrs Kargarian should pay to the appellant the sum of $150,000.00 on the cause of action litigated in that proceeding by the appellant pursuant to s 588FDA and s 588FE(6A) of the Corporations Act.

26    Under the heading “CONCLUSIONS”, in the principal judgment, the primary judge said (at [170]–[174]):

170    It is concluded that the claim for relief advanced by the plaintiff liquidator in the Frontier Architects proceeding fails. The defendants should have their costs in respect to this proceeding.

171    It is concluded that the claim for relief advanced by the plaintiff liquidator in the Techno Build proceeding succeeds, but only to the extent of $150,000—being the $350,000 less the payment of $200,000. The plaintiff liquidator, it is considered, should have his costs of this proceeding.

172    Although both proceedings were heard together and a consequent difficulty arises in discretely allocating such time as was taken in both the hearing of evidence and submissions, it was the fact that the Techno Build proceeding occupied far less time than the Frontier Architect proceeding.

173    In such circumstances, it is presently considered that only one order should be made for costs being the costs of the joint hearing and that an appropriate order would be that the plaintiff liquidator should pay the defendants 75% of their costs.

174    Some orders may now be made which address procedural issues. But the parties are to prepare Short Minutes of Orders which give effect to the balance of these reasons. If there is an absence of agreement as to the manner in which costs should be ordered, the parties should file such submissions as they see fit in advance of orders being finally made.

27    On 17 December 2010, the primary judge heard argument concerning the way in which pre-judgment interest should be assessed pursuant to s 51A of the Federal Court Act on the amount of the judgment which his Honour proposed to order in the Techno Build proceeding. On the same occasion, he also heard argument as to the orders for costs which the parties contended he should make in both proceedings. On 20 December 2010, his Honour made final orders in both matters. On 24 December 2010, his Honour published his reasons for making the orders which he had made on 20 December 2010 (Kazar, in the matter of Frontier Architects Pty Limited (in liq) (No 2) [2010] FCA 1474) (the costs and interest judgment).

28    On 20 December 2010, his Honour dismissed the Frontier Architects proceeding. On the same day, in the Techno Build proceeding, his Honour made declarations giving effect to his reasons set out in the principal judgment. Having made those declarations, his Honour then made the following orders:

THE COURT ORDERS THAT:

…

3.    In proceedings ACD 52 of 2009:

(a)    pursuant to s588FF of the Act, that the Defendant pay to the Company the amount of $150,000.00 (‘the Judgment Sum’) in respect of the unpaid costs borne by the Company for constructing the residential house located on the land known as Nicholls Section 130 Block 2 in the Australian Capital Territory and the Company’s builders margin.

(b)    the Defendant pay pre-judgment interest on the Judgment Sum pursuant to s51A(1)(a) of the Federal Court of Australia Act 1976 (Cth) from 4 December 2009 to Judgment.

(c)    the Defendant pay interest on the Judgment Sum as may be outstanding from time to time pursuant to section 52 of the Federal Court of Australia Act 1976 (Cth).

4.    In proceedings ACD 51 and 52 of 2009, the Plaintiff pay the Defendants 75% of their costs, such costs to be taxed if not agreed.

29    The following observations may be made in respect of the orders which his Honour made on 20 December 2010:

(a)    Under the costs order made by the primary judge, the appellant was not going to receive any payment on account of costs of either proceeding, notwithstanding that he had been substantially successful in the Techno Build proceeding. He had, of course, been entirely unsuccessful in the Frontier Architects proceeding.

(b)    A discount off the prima facie amount of costs to be awarded in favour of Mr and Mrs Kargarian was put in place in favour of the appellant. The amount of that discount was 25%.

(c)    In the costs order made by the primary judge, no distinction was made between costs incurred prior to the commencement of the joint hearing and costs incurred in respect of the joint hearing.

(d)    The fact that the appellant had brought each proceeding as liquidator of a different corporation and had sued different defendants in each case (Mr and Mrs Kargarian in the case of Frontier Architects and Mrs Kargarian alone in the case of Techno Build) did not seem to be reflected in the costs order which the primary judge made.

(e)    Pre-judgment interest was awarded in the Techno Build proceeding in respect of the period commencing on the date when that proceeding was instituted (4 December 2009) and ending on the date when final orders were made (20 December 2010). The appellant’s claim that interest should commence to run from a much earlier date was rejected as being “unfair”.

30    In these appeals, the appellant contends that the primary judge should have distinguished between costs incurred in each proceeding prior to the joint hearing and costs incurred in respect of the joint hearing by making an order in favour of the successful party in each proceeding in respect of costs incurred prior to the commencement of the joint hearing and apportioning costs in an appropriate way for the joint hearing or, alternatively, by simply making an order for costs in each proceeding in favour of the successful party.

31    As far as the primary judge’s order for pre-judgment interest in the Techno Build proceeding is concerned, the appellant contends that his Honour should have ordered that interest be payable from a date much earlier than the date upon which that proceeding was commenced (viz 4 December 2009). The appellant advanced alternative dates as the appropriate date—10 March 2005 (the date when, according to the appellant, Techno Build first demanded of Mrs Kargarian that she pay for the building work carried out on the Nicholls property) and 20 September 2007 (the date when the appellant was appointed liquidator of Techno Build).

32    The questions which arise in the appeals are:

(a)    Did the primary judge’s discretion miscarry in respect of the order for costs referable to both proceedings which he made on 20 December 2010 and did his discretion miscarry in respect of his award of pre-judgment interest in the Techno Build proceeding? and

(b)    In the event that the primary judge’s discretion miscarried, what are the appropriate orders for costs and what is the appropriate order for interest?

The Costs and Interest Judgment of the Primary Judge

Costs

33    The primary judge’s reasoning in the costs and interest judgment in respect of the costs order which he made may be summarised as follows:

(a)    Costs should normally follow the event. In the present case, the application of that principle would have led to an order for costs in favour of Mr and Mrs Kargarian in the Frontier Architects proceeding and an order in favour of the appellant against Mrs Kargarian in the Techno Build proceeding ([5] of the primary judge’s Reasons);

(b)    But for the lack of success of Mrs Kargarian in the Techno Build proceeding, Mr and Mrs Kargarian would have obtained an order that they should be paid the entirety of their costs of both proceedings ([7] of the Reasons);

(c)    Instead of distinguishing between costs incurred prior to the joint hearing (which costs should follow the event) and the costs of the joint hearing itself (which costs should be apportioned) the appropriate course was to reduce the total amount of costs to which Mr and Mrs Kargarian would be entitled by 25% ([7] of the Reasons). At [7], his Honour went on to say:

To reduce [the defendants’] entitlement to 75% is a recognition of:

•    the success of the Plaintiff liquidator in the Techno Build proceeding; and

•    the fact that the Frontier Architects proceeding was, comparatively, by far the more factually and legally complex of the two proceedings and occupied the greater part of the hearing in Canberra in September 2010 both in evidence and submissions. Notwithstanding the success of the Plaintiff liquidator in the Techno Build proceeding, any apportionment of those costs to which he would have been entitled in respect to the hearing itself would have been minimal.

It is anticipated that the single order for costs made on 20 December 2010 may facilitate the taxation process in the event that agreement cannot be reached as to the quantum of costs that should be paid.

(d)    The wide power afforded to the Court in respect of costs by s 43 of the Federal Court Act allows the Court to apportion costs across particular issues in the one proceeding. By a process of analogous reasoning, it was open to the Court, in an appropriate case, to apportion costs across two proceedings (as distinct from doing so across separate issues within the one proceeding) ([8]–[10] and [12] of the Reasons);

(e)    Global orders for costs across more than one proceeding have been made in other proceedings ([11] of the Reasons) and

Where it is possible, as it is in the present proceedings, to form a view as to how an order or orders for costs should be apportioned between the parties, it is concluded that the discretion conferred by s 43 may be exercised to give effect to that view. It is considered that an order that the Defendants are entitled to 75% of their costs in respect to the two proceedings is a fair and just order giving effect to the comparative success of the parties. Such an apportionment remains a judicial exercise of power rather than an arbitrary exercise of the discretion, notwithstanding the fact that it may not be founded in “mathematical precision”: see Dodds Family Investments Pty Ltd (formerly Solar Tint Pty Ltd) v Lane Industries Pty Ltd (1993) 26 IPR 261 at 272. Nor is it a departure from the “general rule” that a successful party “should receive his costs”. The success of the Plaintiff liquidator, and his entitlement to costs in the Techno Build proceeding, is recognised and given effect to in the reduction of the costs payable to the Defendants from 100% to 75%.

    (At [13] of the Reasons.)

34    At [17] of the costs and interest judgment, his Honour appeared to say that he was adhering to the views concerning costs which he had tentatively expressed in the principal judgment. However, the order for costs which his Honour ultimately made differed in one very important respect from the order for costs which his Honour had in mind when he published the principal judgment. In the principal judgment, his Honour distinguished between costs incurred prior to the commencement of the joint hearing and costs incurred in respect of the joint hearing. In the case of the former category of costs, his Honour was minded to make orders which reflected the usual position ie that costs follow the event. In respect of the joint hearing, his Honour was minded to make an order in favour of Mr and Mrs Kargarian but only to the extent of 75% of their costs. The order for costs which his Honour ultimately made was a general order covering both the pre-trial period and the joint hearing in favour of Mr and Mrs Kargarian, but only to the extent of 75% of their costs.

Pre-Judgment Interest

35    The primary judge recited the terms of s 51A of the Federal Court Act and then, in the balance of his reasons (at [14]–[16]), gave the following reasons for awarding interest from the date upon which the Techno Build proceedings were commenced:

14.    …

Section 51A(1) has been described as a “facultative provision intended to confer power on the Court to do justice between parties in relation to pre-judgment interest; a matter of some importance in these days of high interest rates and extensive delays in finalising litigation”: State Bank of New South Wales Limited v Commissioner of Taxation (1995) 62 FCR 371 at 385 per Wilcox J.

15    In the Techno Build proceeding, it is considered that an order should be made for the payment of interest. There is no “good cause … shown to the contrary”.

16    That proceeding was one “for the recovery of … money” (cf. Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Telstra Corporation Ltd [2007] FCA 1515, 168 IR 353). But interest should only be ordered for “part of the period”, namely as from 4 December 2009. Although the sole Defendant to this proceeding, Mrs Kargarian, transferred the property on which the home was built in 2006, the Plaintiff liquidator did not commence the proceeding until 4 December 2009. He was appointed as liquidator on 20 September 2007. To order that interest be paid from an earlier date, it is considered, would work an unfairness to the Defendant.

The Orders Sought on Appeal

Costs

36    The appellant filed two separate Notices of Appeal, one for each of the proceedings below, in respect of the costs order made by the primary judge. In appeal ACD 1 of 2011 (the Frontier Architects appeal), the appellant seeks the following orders as to costs:

(i)    An order that the appellant pay the costs of Mr and Mrs Kargarian up to but excluding the joint hearing, as agreed or assessed; and

(ii)    The appellant pay 75% of the respondents’ costs of the joint hearing (excluding preparation time and written submissions) as agreed or assessed (or such other sum as the Court considers just).

37    In appeal ACD 2 of 2011 (the Techno Build appeal), the appellant seeks the following orders as to costs:

(i)    An order that Mrs Kargarian pay the appellant’s costs up to but excluding the joint hearing, as agreed or assessed; and

(ii)    An order that Mrs Kargarian pay 25% of the appellant’s costs of the joint hearing (excluding preparation time and written submissions) as agreed or assessed (or such other amount as the Court considers just).

38    The appellant also seeks his costs of both appeals.

Pre-Judgment Interest

39    At the hearing of the appeals, the appellant sought leave to amend Ground 1 of his grounds of appeal in his Notice of Appeal filed in the Techno Build appeal. Ground 1 is the only ground which deals with the question of pre-judgment interest. The proposed amended Ground 1 is in the following terms:

1.    The learned trial judge Flick J, erred by failing to order interest on the judgment sum referred to in order 3(a) (of the orders made on 20 December 2010) from 10 March 2005 or in the alternative from 20 September 2007 until 4 December 2009, in circumstances where no good cause was shown within the meaning of s 51A of the Federal Court of Australia Act 1976 (Cth), in that (a) in that circumstance, his Honour had no discretion not to order that interest be paid in respect of that period, or (b) in the alternative, if there was such a discretion, its exercise miscarried because (i) his Honour failed to take into account the relevant consideration of when the cause of action arose, and (ii) his Honour’s conclusion that to make an order for the payment of interest in respect of that period would be unfair to the second respondent was unreasonable or plainly unjust.

40    The material which is underlined in the above extract is the material which is sought to be inserted into Ground 1 of that Notice of Appeal by the appellant’s proposed amendment.

41    The respondent in the Techno Build appeal (Mrs Kargarian) opposed the appellant’s application for leave to amend his Notice of Appeal.

42    At the hearing, the Court reserved to its judgment in the appeals the question of whether leave to amend his Notice of Appeal filed in the Techno Build appeal should be granted to the appellant.

Consideration

Costs

43    Section 43(2) of the Federal Court Act provides that, in a matter such as the present, the award of costs is in the discretion of the Court or judge. Section 43(3) provides:

43    Costs

…

(3)    Without limiting the discretion of the Court or a Judge in relation to costs, the Court or Judge may do any of the following:

(a)    make an award of costs at any stage in a proceeding, whether before, during or after any hearing or trial;

(b)    make different awards of costs in relation to different parts of the proceeding;

(c)    order the parties to bear costs in specified proportions;

(d)    award a party costs in a specified sum;

(e)    award costs in favour of or against a party whether or not the party is successful in the proceeding;

(f)    order a party’s lawyer to bear costs personally;

(g)    order that costs awarded against a party are to be assessed on an indemnity basis or otherwise.

44    Section 43 confers a broad discretion on the Court to award costs. Costs do not automatically follow the event (Foots v Southern Cross Mine Management Pty Limited (2007) 234 CLR 52 at [26] (p 63) and at [34] (p 65) per Gleeson CJ, Gummow, Hayne and Crennan JJ; Oshlack v Richmond River Council (1998) 193 CLR 72 at [63] (p 95) per McHugh J). This is reinforced by the terms of s 43(3). The amplitude of the Court’s discretion to order costs is illustrated, but not constrained, by the specific instances listed in s 43(3).

45    This Court’s discretion as to costs must be exercised judicially and with due regard to precedent, established principle and factors directly connected with the litigation (Oshlack at [65] (p 96) per McHugh J). The discretion must not be exercised arbitrarily, capriciously or so as to frustrate the legislative intent (Oshlack at [22] (p 81) per Gaudron and Gummow JJ). As Gaudron and Gummow JJ went on to say in Oshlack at [22] (p 81):

… the discretion conferred is … unconfined except insofar as “the subject matter and the scope and purpose” of the legislation may enable an appellate court to pronounce the reasons given by the primary judge to be “definitely extraneous to any objects the legislature could have had in view” (Water Conservation and Irrigation Commission (NSW) v Browning (1947) 74 CLR 492 at 505).

(See also the observations of the plurality in Foots v Southern Cross Mine Management Pty Limited at [34] (p 65) where their Honours cited a passage from Daniell’s: Practice of the High Court of Chancery (5th ed, 1871) with apparent approval).

46    The successful party should, generally speaking, have the benefit of an order for costs in his or her favour (Foots v Southern Cross Mine Management Pty Limited at [25] (pp 62–63) per Gleeson CJ, Gummow, Hayne and Crennan JJ; Oshlack at [66]–[68] (pp 96–97) per McHugh J). Costs are awarded to indemnify the successful party to some extent against his or her outlays on costs, not by way of punishment of an unsuccessful party (Oshlack at [1] (p 75) per Brennan CJ and at [67] (p 97) per McHugh J).

47    At [134] (pp 120–121) in Oshlack, Kirby J made some general remarks concerning the way in which statutory provisions giving a court a broad discretion in respect of costs (such as s 43 of the Federal Court Act) should be interpreted and applied. The following propositions relevant to the present case may be extracted from his Honour’s observations at [134] (pp 120–121):

(a)    In civil non-jury trials, a successful party, in the absence of special circumstances, has a reasonable expectation of obtaining an order for costs in its favour unless for some reason connected with the case a special and different order is warranted (subpar (2) of [134] (p 120));

(b)    Notwithstanding that the statutory prescription gives to the Court a broad discretion, that discretion should be exercised in accordance with established guidelines referable to the considerations of which the Court should generally take account (subpar (3) of [134] (p 121)); and

(c)    Costs generally follow the event in order to give effect to the notion that orders for costs are intended to provide a partial indemnity for outlays made by the successful party (subpar (4) of [134] (p 121)).

These remarks may be compared with the observations of McHugh J in his dissenting judgment in Oshlack at [69]–[70] (pp 97–98). In those paragraphs, his Honour explained that the courts have, for some time, been quite firmly in favour of the proposition that the successful party should have his or her costs paid by the unsuccessful party and that the benefit of that “usual” order for costs would only be denied to the successful party if he or she was guilty of disentitling conduct or if some other exception to the usual order could be invoked. In the passages referred to, it may be that his Honour adopted an overly rigid view in favour of “the usual order for costs” when regard is had to the views of the majority in Oshlack and the plurality in Foots. Nonetheless, an order for costs in favour of the successful party will very often be a sound exercise of the Court’s discretion as to costs.

48    At [5] of the costs and interest judgment, the primary judge said that the “normal” rule was that costs should follow the event. At [6], his Honour referred to the appellant’s submissions on the question of costs and plainly took them into account when making his decision on costs. At [8]–[10] and [12], his Honour also correctly noted that the discretion as to costs reposed in the Court by s 43 of the Federal Court Act was a broad one which nonetheless had to be exercised judicially. At [10], [11] and [13], his Honour correctly observed that the Court had the power to make a global or single order for costs where two or more proceedings are heard together and to apportion costs amongst the parties to those proceedings according to their relative success.

49    The primary judge did not misstate or misunderstand the relevant principles. Nor did he purport to exercise a power in relation to costs which he did not have. If the primary judge erred at all, it was in the application of the relevant principles in the circumstances of the present case. Any error was in the exercise of the discretion reposed in him.

50    The essence of his Honour’s reasoning which underpinned the costs order which he made is to be found at [7] and [13] of the costs and interest judgment. I have extracted those paragraphs at [33(c)] and [33(e)] above.

51    In an appeal such as this, it is not enough that this Court might have made a different decision had it been in the position of the primary judge (House v The King at 504–505 per Dixon, Evatt and McTiernan JJ). As Dixon, Evatt and McTiernan JJ said in House v The King at 505:

If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred. Unlike courts of criminal appeal, this court has not been given a special or particular power to review sentences imposed upon convicted persons. Its authority to do so belongs to it only in virtue of its general appellate power. But even with respect to the particular jurisdiction conferred on courts of criminal appeal, limitations upon the manner in which it will be exercised have been formulated.

See also Norbis v Norbis (1986) 161 CLR 513 at 518–519 per Mason and Deane JJ.

52    In later cases, justices of the High Court have said that, in respect of appeals against decisions involving discretionary judgment, there is a strong presumption in favour of the correctness of the decision appealed from and that that decision should be affirmed unless the appeal court is satisfied that it is clearly wrong (see Australian Coal and Shale Employees’ Federation v The Commonwealth (1953) 94 CLR 621 at 627 per Kitto J; and Mallet v Mallet (1984) 156 CLR 605 at 634 per Wilson J).

53    Where the discretionary judgment under appeal is one which does not determine substantive rights (as is the case here), an appellate court should be very reluctant to interfere with the primary judge’s exercise of discretion.

54    Nonetheless, if error of the requisite kind is shown, the appeal court is obliged to correct it.

55    The appellant submitted that the primary judge made three errors when he made the costs order which he made on 20 December 2010. The errors identified by the appellant were:

(a)    The making of a single costs order in respect of the whole of both proceedings;

(b)    Apportioning costs as to 75% across the whole of both proceedings; and

(c)    Treating the two sets of proceedings as one, for the purposes of costs, when they were truly separate with no real overlap of issues or facts.

56    The appellant submitted that these errors were substantial, had been arrived at because the primary judge failed to consider a number of material considerations and were of such significance as to justify this Court setting aside the primary judge’s costs order.

57    Senior Counsel for Mrs Kargarian relied upon House v The King. She submitted that his Honour’s exercise of discretion in respect of costs was well within the bounds of what would have been an appropriate exercise of discretion in respect of costs in the present case. She also argued that the costs order made by the primary judge more adequately met the exigencies of s 37M of the Federal Court Act and the obvious public interest in the expeditious and efficient determination of disputes than conventional costs orders would have done because his Honour’s order would streamline the taxation process.

58    I think that, in the present case, the primary judge failed to take into account the following material considerations, namely that:

(a)    Each of the two sets of proceedings was prepared separately with no real overlap between the facts to be litigated in each proceeding. The transactions which were the subject of the Frontier Architects proceeding were different transactions from the transaction under consideration in the Techno Build proceeding.

(b)    The defendant parties in each proceeding were different. In the Frontier Architects proceeding, the defendants were Mr and Mrs Kargarian whereas, in the Techno Build proceeding, the only defendant was Mrs Kargarian.

(c)    Although the appellant was the plaintiff in both sets of proceedings, the appellant brought the Frontier Architects proceeding as liquidator of Frontier Architects and thus for the benefit of the creditors and contributories of that corporation whereas he brought the Techno Build proceeding as liquidator of Techno Build and thus for the benefit of the creditors and contributories of that corporation.

59    The primary judge’s failure to take into account these considerations constituted error on his part. That being so, the discretion falls to be re-exercised by this Court.

60    In my view, the appropriate orders for the costs of the proceedings below are:

(a)    In the Frontier Architects proceeding:

(1)    Order that the plaintiff (Mr Kazar) pay the defendants’ costs of and incidental to the proceeding.

(b)    In the Techno Build proceeding:

(1)    Order that the defendant (Mrs Kargarian) pay the plaintiff’s costs of and incidental to the proceeding.

61    For the benefit of the taxing officer, I think that the Court should note in the formal orders which it will make that, in the view of the primary judge, approximately three-quarters of the joint hearing was taken up in dealing with the Frontier Architects proceeding and approximately one-quarter of that hearing was occupied in dealing with the Techno Build proceeding. The taxing officer should take into account that opinion of the primary judge but cannot and ought not be compelled to give effect to that opinion when taxing the costs of the successful party in each proceeding. The time which each of the proceedings occupied during the joint hearing is a matter to be determined by the taxing officer.

62    My reasons for making the orders which I propose are:

(a)    An order that costs should follow the event should generally be made unless there is some disentitling conduct on the part of the successful party or unless there is some other circumstance associated with the litigation justifying a departure from that usual order. There is no disentitling conduct on the part of the successful party in the present cases nor is there any other reason not to make an order for costs in favour of the successful party in each case.

(b)    Whilst the plaintiff in each of the two sets of proceedings with which the Court is concerned is the same person, he brought each proceeding in an entirely different capacity for the benefit of a different group of persons in each case. The obligation to pay the costs of the Frontier Architects proceeding will most likely fall upon those who would have stood to benefit from any success which the appellant had in that proceeding whereas the fruits of the judgment and any costs order in the Techno Build proceeding will inure for the benefit of an entirely different group of persons. The substance of the matter is that each proceeding was brought for the benefit of a different group of persons.

(c)    Whilst Mrs Kargarian is a defendant in both proceedings, Mr Kargarian is a defendant only in the Frontier Architects proceeding. It is inappropriate to regard Mr Kargarian and Mrs Kargarian as the one person and thus to ignore the fact that each has a separate legal personality and the fact that each was brought to the present litigation as a result of transactions which were entirely separate.

(d)    The transactions which were the subject of each of the proceedings were separate, each from the other.

(e)    Whilst it may have been convenient to have both proceedings heard and determined at the one time, the adoption of that course should not be seen as the primary consideration in working out the appropriate orders for costs.

(f)    A global costs order which is then discounted and apportioned according to the way in which the joint hearing unfolded does not give sufficient recognition to all of the above considerations. In addition, an apportionment along the lines of the apportionment which the primary judge put in place fails to pay appropriate regard to the relative contributions to the total amount of the pre-trial costs incurred by the parties in each of the proceedings.

63    For all of the above reasons, I am of the opinion that the Court should make the orders which I have set out at [60] above.

Pre-Judgment Interest

64    The decision of the primary judge in respect of pre-judgment interest to be awarded to the appellant pursuant to s 51A of the Federal Court Act on the amount of the judgment ordered by the primary judge in favour of the appellant in the Techno Build proceeding was also a discretionary decision which must be reviewed on appeal in accordance with the same principles which are to be applied to the review on appeal of the primary judge’s costs decision (as to which see [51]–[54] above).

65    The primary judge was satisfied that pre-judgment interest should be awarded and ordered that pre-judgment interest pursuant to s 51A should commence to run from the date when the Techno Build proceeding was commenced (viz 4 December 2009). The primary judge considered that awarding interest from an earlier date would be unfair to Mrs Kargarian. He seemed to be of that opinion because the appellant had taken a little over two years after his appointment as liquidator of Techno Build to institute the Techno Build proceeding notwithstanding that the building works on the Nicholls property had been completed in 2005 and notwithstanding that the property had been sold in February 2006 with the sale proceeds going to Mrs Kargarian or as she may have directed. His Honour seemed to be of the view that there had been unreasonable delay on the part of the appellant in seeking to vindicate his statutory rights.

66    Section 51A(1) of the Federal Court Act is in the following terms:

51A     Interest up to judgment

(1)    In any proceedings for the recovery of any money (including any debt or damages or the value of any goods) in respect of a cause of action that arises after the commencement of this section, the Court or a Judge shall, upon application, unless good cause is shown to the contrary, either:

(a)    order that there be included in the sum for which judgment is given interest at such rate as the Court or the Judge, as the case may be, thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which judgment is entered; or

(b)    without proceeding to calculate interest in accordance with paragraph (a), order that there be included in the sum for which judgment is given a lump sum in lieu of any such interest.

67    The primary judge was not referred to Ferrier and Knight (As Liquidators of Compass Airlines Pty Ltd) v Civil Aviation Authority (1994) 55 FCR 28. Nor was he referred to several subsequent decisions both in this Court and in Courts of Appeal of the States in which the reasoning underpinning the decision in that case in respect of pre-judgment interest was approved.

68    The claim by the liquidators in Ferrier and Knight v Civil Aviation Authority was a claim for approximately $10 million being the total of various amounts paid by Compass Airlines Pty Ltd to the Civil Aviation Authority which the liquidators in that case asserted were void as against them as undue preferences. At 91C–F, the Full Court referred to and discussed two authorities in which the nature of an undue preference claim by a liquidator was explained. The Full Court then observed that the claim in the case before it for pre-judgment interest pursuant to s 51A(1) of the Federal Court Act had to be considered in light of the nature of the substantive claim in respect of which interest was being sought.

69    The Full Court then noted that, upon the correct interpretation of s 51A(1) of the Federal Court Act, the earliest point in time when pre-judgment interest pursuant to s 51A(1) might commence to run is “… the date when the cause of action arose …”. The Full Court then referred to the decision of McLelland J in Spedley Securities Ltd (In liq) v Western United Ltd (In liq) (No 2) (1992) 10 ACLC 887 at 887–888. In that case, McLelland J held that a preference is void only as against the liquidator with the consequence that, until a liquidator has been appointed, there can be no cause of action for the recovery of an undue preference. In Spedley Securities Ltd (In liq), McLelland J also held that it would ordinarily not be appropriate to allow any amount for interest in respect of a period prior to the date when the demand was made for the recovery of the preference. At 888, his Honour said:

I am not proposing any inflexible rule, but in the ordinary run of cases, and particularly in the present case, it seems to me that it would not be proper to allow interest in respect of any period prior to a demand by the liquidator that any particular payment was in fact recoverable as a preference.

70    In Ferrier and Knight v Civil Aviation Authority, the Full Court held that interest should not run before the date upon which Compass Airlines Pty Ltd had been ordered to be wound up, notwithstanding that provisional liquidators had been appointed at an earlier point in time. The Full Court went on to hold that, in the particular circumstances of that case, interest should run from the date when the liquidators made demand upon the Civil Aviation Authority. At 93A–E, the Full Court said:

We also accept that in the ordinary course interest should be allowed only from the date of demand by the Liquidators. However, CAA submits that, as a matter of discretion, there should be no award of interest. This would, it is submitted, reflect the circumstance that it was the making of preferential payments by Compass to CAA which induced CAA further to extend the provision of services to Compass: cf Re Carr (unreported, Morling J, 17 December 1987) at pp 12–13. That, in our view, rather over-simplifies the present facts.

In all the circumstances, we find nothing to displace the ordinary proposition that the period should run from the date of the demand, that is, 30 July 1992. If necessary, we will hear the parties on the rate of interest to be allowed.

We add a reference to the position in the United States, where a result has been reached which is broadly the same as that which commends itself to us. There has been no specific provision in the federal bankruptcy statutes to provide for the award of interest upon an amount recovered as a preference. The bankruptcy court has relied upon its equitable powers to make such an award. There is no right to interest, but if the court decides to award interest it usually does so from the date of demand for return of the preference, or, if there be no earlier demand, from the institution of the suit, this itself being a demand (see 9A Am Jur 2d §1779). Interest is awarded from the date of the transfer only in exceptional cases, for instance where the transfer was made with actual intent to hinder, delay or defraud creditors or the transferee is guilty of culpable misconduct. Authority for these propositions is found in Re Roco Corp 37 BR 770 at 774 (D RI 1984), and Re Art Shirt Ltd Inc 93 BR 333 at 341-342 (ED Pa 1988).

The rationale for the general rule applied in the United States is that until the trustee exercises his election and makes demand for repayment or retransfer, the preferred creditor cannot be said to hold the property wrongfully: Smith v Mark Twain National Bank 805 F 2d 278 at 291 (8th Cir 1986).

71    In Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83, the Full Court applied the reasoning of the Full Court in Ferrier and Knight v Civil Aviation Authority to a claim by a liquidator to avoid undue preferences and also to avoid uncommercial transactions pursuant to s 588FB(1) of the Corporations Act. In that case, at [1] (p 85), Heerey J agreed with the orders proposed by Gordon J for the reasons given by her Honour. Lindgren J, at [84] (p 99), said:

84.    It follows from what I have said above that I would allow the appeal. In these circumstances, the cross-appeal would become moot, but I note that I agree with all that Gordon J has said on the cross-appeal at [143]–[153] of her Honour's Reasons. In the present respect there is no relevant distinction between the unfair preference and the uncommercial transaction claim, and the discussion by the Full Court in Ferrier and Knight (as liquidators of Compass Airlines Pty Ltd) v Civil Aviation Authority (1994) 55 FCR 28 at 91–93 applies to the latter as well as the former. There were no special circumstances in the present case, such as concealment from the liquidator, that would take the case out of the ordinary approach of awarding interest as from the time of the liquidator's demand (that is, at 19 September 2001).

72    At [143]–[153] (pp 113–114), Gordon J applied the reasoning of the Full Court in Ferrier and Knight v Civil Aviation Authority. At [148] (p 113), her Honour observed that, at the time the transaction under challenge in Capital Finance Australia Ltd v Tolcher took place, there was nothing inherently wrong with it. It was only the fact that a liquidator had been appointed to Lloyd Scott Enterprises Pty Ltd that rendered the transaction void at the suit of the liquidator. At [149]–[152], her Honour said:

149     The liquidator’s alternative submission, that there should be an order for interest from the date of appointment of the liquidator, was also considered and rejected by both the Full Court of the Federal Court in Ferrier 55 FCR at 91–93 and by the New South Wales Court of Appeal in Star 40 NSWLR at 706 (per Cole JA) and 707 (per Beazley JA). Those decisions are not plainly wrong.

150     In the ordinary course, interest is and should only be allowed from the date of demand. That proposition is self-evident. As noted by both the Full Federal Court and the New South Wales Court of Appeal in the context of a preference, until a demand is made, it cannot be said that the payments made were a preference or, in the present case, the transaction was uncommercial. As Cole JA said in Star (40 NSWLR at 706):

“[t]o select as the date of commencement for the payment of interest the date of appointment of the liquidator presumes that demand for recovery will successfully be made.”

No presumption can be or should be made that there will be a demand and that the demand will be successful.

151     If, in any case, the facts suggested that the conduct of the parties was exceptional in the manner described by the Full Court in Ferrier 55 FCR at 93 (for example there were attempts by one or more of the parties the subject of the uncommercial transaction to conceal the true nature of the transaction that delayed the liquidator making the demand) then it would be open to the Court to consider departing from the usual rule: see Ferrier 55 FCR at 93. In the present appeal, it was not submitted that there was any particular fact or matter which justified such a departure.

152     Finally, in support of his contention that he was entitled to interest from the date the cause of action accrued (the appointment of the liquidator), the liquidator referred to the decision in Alati v Kruger (1955) 94 CLR 216. That decision may be put to one side. It concerned an action to rescind a contract for misrepresentation for fraud where interest was awarded from the date the cause of action accrued, namely the date of payment.

73    Both Lindgren J and Gordon J were careful to confine their consideration of the relevant principles to the liquidator’s claim for the repayment of an undue preference and for monies paid as a result of an uncommercial transaction.

74    In the present case, no demand for the value of the work done by Techno Build on the Nicholls property was made by the appellant after his appointment as liquidator of Techno Build in his capacity as liquidator of that corporation until 4 December 2009 when the Techno Build proceeding was commenced. It may be accepted that the institution of that proceeding constituted a relevant demand.

75    Before the primary judge, the appellant submitted that he should be awarded pre-judgment interest from the date in March 2005 when the corporation made a demand for payment of the costs of construction of the house on the Nicholls property. That contention was based upon the proposition that, by a facsimile transmission dated 10 March 2005, Techno Build had made demand upon Mrs Kargarian requiring her to pay $350,000 as reasonable remuneration for Techno Build’s work in constructing a house on the Nicholls property. His Honour rejected that claim and awarded interest from the date of the commencement of the Techno Build proceeding (viz 4 December 2009).

76    The appellant did not argue before the primary judge that interest should be awarded from 20 September 2007, the date when Techno Build was wound up and the date when he was appointed as its liquidator. As mentioned at [39] above, the appellant sought leave at the hearing of the appeal to include a claim that interest should commence to run from 20 September 2007. The first time that the appellant made that claim was during the course of oral argument at the hearing of the Techno Build appeal on 2 August 2011.

77    If the reasoning of the Full Court in Ferrier and Knight v Civil Aviation Authority is correct, there can be no doubt that 20 September 2007 is the date upon which the cause of action relied upon by the appellant as against Mrs Kargarian in the Techno Build proceeding arose. It follows that the earliest date from which pre-judgment interest pursuant to s 51A(1)(a) of the Federal Court Act could run is 20 September 2007 (see Ferrier and Knight v Civil Aviation Authority at 92A–E and s 51A(1)(a)).

78    Delay (without more) in the commencement of proceedings will rarely disentitle an applicant from an award of pre-judgment interest pursuant to s 51A of the Federal Court Act (Kalls Enterprises Pty Limited (In Liq) v Baloglow (No 3) [2007] NSWCA 298 at [10]–[11]). It may be relevant to the exercise of the discretion to award interest although some reasonable time needs to be afforded to an applicant to allow him or her to investigate whether an action can and should be brought. This is especially so when the claim is brought by a liquidator.

79    In the present case, the primary judge appears to have based his decision not to award pre-judgment interest in respect of a period prior to the date upon which the Techno Build proceeding was commenced purely on the basis of delay. This was an error. Further, his Honour did not consider the principles explained in Ferrier and Knight v Civil Aviation Authority. This too was an error.

80    In the circumstances, his Honour’s decision in respect of interest was infected by error and should be set aside. The question of the award of pre-judgment interest pursuant to s 51A of the Federal Court Act on the amount of the judgment ordered by the primary judge in the Techno Build proceeding now falls to be considered afresh by this Court.

81    Before considering the appropriate award, it is necessary to determine the appellant’s application for leave to amend his Notice of Appeal in the Techno Build appeal. It will be recalled that, in that matter, the appellant sought leave to amend his Notice of Appeal in order to include within Ground 1 of his Notice of Appeal a claim in the alternative that pre-judgment interest pursuant to s 51A of the Federal Court Act should be awarded in respect of a period commencing on the date of his appointment as liquidator viz 20 September 2007.

82    The respondent to that appeal opposed leave to amend.

83    The appellant submitted that, when regard is had to the history of the dealings between Roland Aghili, on the one hand, and Mr and Mrs Kargarian, on the other hand, in respect of the Nicholls property (including the fact that demands for payment for the building work carried out on that property were made in March, August and December 2005 by Techno Build and on 21 August 2007 by lawyers acting for the appellant, in his capacity as administrator of Techno Build), it must have been obvious to Mrs Kargarian that, when the appellant became the liquidator of Techno Build on 20 September 2007, he would pursue her for the costs incurred by Techno Build in constructing the house on the Nicholls property. He had, after all, only a month before, written to her about this very matter. Also, at all relevant times, Techno Build had a good restitutionary claim against Mrs Kargarian for those costs. For these reasons, the appellant contended that pre-judgment interest should commence to run from 20 September 2007.

84    Senior Counsel for Mrs Kargarian submitted that the amendment sought by the appellant was futile because none of the demands now relied upon were made by the appellant in his capacity as liquidator of Techno Build nor did those demands anchor the appellant’s claims in the statutory cause of action ultimately relied upon by him. Senior Counsel also submitted that the letter dated 21 August 2007 did not constitute a demand in any event. She also argued that Mrs Kargarian would be prejudiced if the proposed amendment were allowed. She said that the appellant had not alerted Mrs Kargarian at any time before 2 August 2011 that the letter dated 21 August 2007 would be relied upon by the appellant as a demand for payment of the construction costs of the house on the Nicholls property and that Mrs Kargarian may have wanted to adduce additional evidence in order to clarify or explain the context in which the letter dated 21 August 2007 had been sent.

85    I think that leave to amend should be granted to the appellant. No real prejudice is likely to be sustained by the respondent if leave to amend is granted. The letter dated 21 August 2007 was in evidence before the primary judge as was the response dated 10 September 2007 from Mr and Mrs Kargarian.

86    As I have already mentioned, the appellant submitted that Techno Build had demanded of Mrs Kargarian that she pay the reasonable costs of the construction of the house on the Nicholls property as early as March 2005 and had made further demands later than year. He also relied upon a letter dated 21 August 2007 sent by his lawyers on his behalf in his capacity as administrator of Techno Build to Mr and Mrs Kargarian. Omitting formal parts, that letter was in the following terms:

TECHNO BUILD DEVELOPMENTS PTY LTD (IN ADMINISTRATION) – (“TBD”)

We act for Mr. Henry Kazar of Sims Partners, the Administrator appointed to Techno Build Developments Pty Ltd (In Administration) (“the Company”).

We are instructed by our client that the Company performed and completed construction of a residence in 2005 on 4 McRitchie Circuit, Nicholls in the Australian Capital Territory (“the Nicholls Residence”), a property which you owned at the time.

We have been instructed by our client that Mr. Roland Aghili believes that the constructions works for the Nicholls Residence would to be carried out in consideration for “costs plus 8%”.

We are further instructed that an invoice, dated 12 December 2005, for work completed was issued to you by the Company (copy enclosed). Our client has also produced a List of Expenses that was incurred whilst constructing the Nicholls Residence which totals $372,455.79. On this List of Expenses (copy enclosed) it also indicates that there was an agreement between yourselves and the Company with regards to the final price to be paid, namely:

‘TBD Margin of 8% of Total Cost $29,796.46 (As Agreed)’

This brings the total cost payable to the Company for construction services rendered to $402,252.52.

We are seeking information from you on the construction agreement for the Nicholls Residence that was entered into between yourselves and the Company. Namely, what are the grounds upon which you rely to establish:

(a)    that you have paid the Company for the works; or

(b)    that you should not be required to pay?

If so, please can you give us full particulars so that we might obtain further instructions from Mr Aghili.

If liability is admitted, then please make payment to “Techno Build Developers Pty Ltd (In Administration)” and deliver your payment by return. You may contact us and arrange to make a deposit to our trust account if you wish.

If we do not hear from you promptly, we shall rely on this letter in respect of costs for applications required to Court.

Should you wish to discuss any aspect of this matter, please contact our office on (02) 6263 9900.

87    Mr and Mrs Kargarian responded to the appellant’s lawyers’ letter by letter dated 10 September 2007. They denied liability to Techno Build in respect of its claim. They said that they had provided more than adequate consideration for the construction of the house on the Nicholls property through a number of other transactions which they had provided for the benefit of Techno Build. They also argued that the claim was inflated. In addition, they suggested that the work had been done, not at their request, but rather by Roland Aghili on his own account. Their response constituted an emphatic denial of any responsibility to pay for the house constructed on the Nicholls property.

88    The sole basis upon which the appellant made his claim in the Techno Build proceeding was that the transaction pursuant to which the house was constructed on the Nicholls property was an unreasonable director-related transaction and was thus voidable as against the appellant. This claim was sourced in ss 588FDA, 588FE(6A) and 588FF of the Corporations Act. When a transaction is voidable, in order to render it void, the party against whom it is voidable must elect to avoid the transaction and must communicate that election to the other party or parties to the transaction. Unless and until the party entitled to avoid the transaction takes those steps, the transaction remains effective.

89    In the present case, in light of the primary judge’s findings in his principal judgment, there was good reason to think that Techno Build itself always had a valid claim in restitution for payment of the amount which his Honour found should be paid by Mrs Kargarian to the appellant pursuant to the statutory cause of action relied upon by the appellant against her. The restitutionary claim and the statutory cause of action reposed in the liquidator are different causes of action. However, unlike the facts in Ferrier and Knight v Civil Aviation Authority and in Capital Finance Australia Ltd v Tolcher, it cannot be said that there was nothing inherently wrong with the underlying transaction in the present case prior to the liquidation of Techno Build. The substance of his Honour’s reasoning in awarding the amount which he did to the appellant in the Techno Build proceeding would equally have justified an award of a similar amount in restitution for the benefit of Techno Build itself.

90    The question which then arises is: Is this distinction sufficient, in all the circumstances, to justify an award of pre-judgment interest pursuant to s 51A(1)(a) of the Federal Court Act from the date when the liquidator was appointed rather than from the date of the commencement of the Techno Build proceeding? It must be remembered that the appellant only relied upon subpar 1(a) of s 51A as the basis upon which pre-judgment interest should be awarded in the present case. He did not rely upon subpar 1(b) of s 51A.

91    The commencement of the winding up of Techno Build is taken to have begun or commenced on the day when Techno Build was placed under administration (ss 513A(b), s 513B(b) and s 513C(b) of the Corporations Act). This does not mean, however, that the cause of action which the appellant maintained in the Techno Build proceeding arose on that day. The Full Court in Ferrier and Knight v Civil Aviation Authority expressly rejected that approach in favour of the proposition that the relevant cause of action in that case arose only when the liquidators were appointed, not at an earlier point in time when the corporation was placed into provisional liquidation. By parity of reasoning, the cause of action in the present case arose on 20 September 2007, the date when the appellant was appointed liquidator of Techno Build.

92    I think that the letter from the appellant’s lawyers dated 21 August 2007, when fairly read as a whole, constituted a demand made by the appellant of Mr and Mrs Kargarian that they pay to Techno Build the reasonable cost of construction of the house on the Nicholls property plus the builder’s margin of 8%. That demand was made on behalf of the appellant, in his capacity as administrator of Techno Build. That letter appears to have been regarded by Mr and Mrs Kargarian as a demand that they pay that sum for the work done by Techno Build in constructing the house on the Nicholls property. That letter was sent just one month before the appellant was appointed as liquidator of Techno Build.

93    But the letter dated 21 August 2007 was not a demand made by the appellant in his capacity as liquidator of Techno Build nor did it anchor his entitlement to the money referred to in the letter in the statutory cause of action which he ultimately litigated in the Techno Build proceeding. The general rule explained in Ferrier and Knight v Civil Aviation Authority, to the effect that interest should run from the date upon which the relevant demand is made by the liquidator, is sound. In the present case, the statutory cause of action which the liquidator had to recover monies from Mrs Kargarian for the construction work carried out by Techno Build for her benefit at the Nicholls property is conceptually quite different from any restitutionary claim which the corporate entity itself might have had. The putative defendant to the liquidator’s statutory cause of action is entitled to know whether any particular action by the liquidator will, in fact, be pursued and is entitled to know the basis upon which that cause of action will be pursued. That defendant is also entitled to know the quantum of the claim to be made against him or her. There is no inevitability about a liquidator pursuing his or her statutory cause of action even where the corporate entity itself has previously claimed an entitlement to substantially the same monies in respect of substantially the same transaction.

94    For these reasons, I am of the opinion that pre-judgment interest pursuant to s 51A(1)(a) of the Federal Court Act should commence to run in the present case from 4 December 2009, the date when the Techno Build proceeding was commenced. I have fixed upon that date because that is the date when the appellant first demanded from Mrs Kargarian payment of the construction costs of the house built by Techno Build on the Nicholls property in his capacity as liquidator of Techno Build. As this is the same date which the primary judge ordered as the commencement date for such interest, the appellant’s appeal in respect of pre-judgment interest awarded by the primary judge pursuant to s 51A of the Federal Court Act must fail.

95    The appellant’s appeal in respect of pre-judgment interest fails for reasons which are quite different from those which the primary judge gave for the decision which he made.

96    In support of his contention that pre-judgment interest should commence to run from 20 September 2007, the appellant put the following argument as to the correct interpretation of s 51A(1)(a) of the Federal Court Act:

(a)    The phrase in the chapeau to subparas (a) and (b) of s 51A(1) “… unless good cause is shown to the contrary …” operates as a threshold requirement or gateway to the engaging of the discretion to award pre-judgment interest pursuant to s 51A(1)(a).

(b)    Once an applicant has satisfied that threshold requirement and passed through that gateway (as happened in the present case), subpar (1)(a) gives to the Court a discretion as to the interest rate or rates to be applied but not as to the period in respect of which interest is to be awarded. Once the gateway is successfully negotiated, interest must be awarded for the whole of the period between the date when the cause of action arose and the date when judgment is ordered. This is because, by the time subpar (1)(a) comes into play, the Court will already have decided that “… good cause to the contrary …” had not been shown. Were the Court not to award interest for part of the period between the date when the cause of action arose and the date of judgment, there would be days (perhaps hours and minutes) when no interest was awarded. This would be inconsistent with a conclusion that the threshold requirement in the chapeau had been satisfied.

97    This argument is unsound and should be rejected. It strains the language of s 51A(1)(a). I think that s 51A(1)(a) should be interpreted as follows:

(a)    Pre-judgment interest should be awarded on money claims “… unless good cause is shown to the contrary …”. Such “… good cause …” would rarely be shown. It would be shown only in exceptional circumstances. The section is designed to compensate a successful applicant for the fact that he or she has been kept out of his or her due monetary entitlements (Haines v Bendall (1991) 172 CLR 60 at 66) while his or her claims are made, litigated and determined.

(b)    Once the Court has decided that pre-judgment interest should be payable, it has a discretion to award interest at such rate or rates as it thinks fit for such period or periods as it thinks fit on the whole or on part of the monetary award. The only constraint imposed upon the exercise of that discretion by the language of s 51A(1)(a) itself is that the period in respect of which interest may be awarded must begin no earlier than the date when the relevant cause of action arose and must end no later than the date of judgment.

Conclusions

98    The appellant has been successful in his appeal against the primary judge’s decision on costs but has failed in his appeal from the primary judge’s decision in respect of interest. Further, as is apparent from my reasons, the appellant did not argue his claim for pre-judgment interest before the primary judge in the same way as he has argued that claim on appeal. In particular, the appellant did not draw to the attention of the primary judge the line of authority exemplified by Ferrier and Knight v Civil Aviation Authority.

99    Approximately half of the oral argument on appeal was taken up by each of the matters under consideration (costs and interest). I also consider that approximately half of the pre-hearing preparation for the appeal (including the drafting of written submissions) was allocated to each of those matters. In those circumstances, I am of the view that there should be no orders as to the costs of either appeal to the intent that each party should bear his or her own costs of both appeals.

Associate:

Dated:    4 November 2011