Federal Court of Australia

McMillan Investment Holdings Pty Ltd v Morgan (No 2) [2023] FCAFC 41

ORDERS

THE COURT ORDERS THAT:

1.    Orders 4 and 5 made in proceeding NSD 75 of 2021 (the proceeding below) on 2 December 2021 be set aside.

2.    The respondents pay 50% of the appellant’s costs of the proceeding below.

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

REASONS FOR JUDGMENT

THE COURT:

Introduction

1    On 16 February 2023, the Full Court allowed the appellant’s appeal against the making of a pooling order under s 579E(1) of the Corporations Act 2001 (Cth) (the Act). There remains a question as to the appropriate order to be made in relation to the costs of the proceeding before the primary judge.

2    On 2 December 2021, the primary judge ordered the appellant to pay the respondents’ costs occasioned by its application to be joined as a defendant and its joinder: Order 4. The primary judge otherwise ordered that the respondents’ costs of the proceeding up to and including 2 December 2021 be costs in the pooled winding up of the second and third respondents (respectively, SAP and SAM): Order 5.

3    As part of the proceeding below, the first respondent, Mr Morgan (who is the liquidator of SAP and SAM) sought an order under s 601AH of the Act that SAM’s registration as a company be reinstated and that he be re-appointed as its liquidator. The primary judge granted that relief at the same time as he made the pooling order. The reinstatement of SAM’s registration and Mr Morgan’s re-appointment as its liquidator were necessary steps towards making the pooling order in respect of SAP and SAM.

4    In the proceeding below, the position was advanced that all the relief that was sought should be granted, or none should be granted. However, following the giving of judgment by the primary judge, circumstances changed. Mr Morgan, SAP and SAM commenced proceedings in the Supreme Court of New South Wales against the appellant and other parties. The desire to commence the Supreme Court proceedings was the reason why Mr Morgan was seeking a pooling order in the first place. The commencement of those proceedings, following the giving of judgment by the primary judge, was an event which made it inappropriate to set aside the primary judge’s orders reinstating SAM’s registration and re-appointing Mr Morgan as its liquidator regardless of whether the appellant was successful in its appeal against the making of the pooling order.

5    Although, in its notice of appeal, the appellant claimed an order setting aside all the relief granted by the primary judge, during the hearing of the appeal the appellant accepted that it may not be appropriate to grant that relief if it succeeded in the appeal. We note, in this regard, that the appellant did not advance any ground of appeal which challenged the primary judge’s orders reinstating SAM’s registration or re-appointing Mr Morgan as its liquidator. Its grounds of appeal focused on the preconditions to granting a pooling order.

The parties’ submissions

Appellant’s submissions

6    The appellant contends that, given its success in the appeal, the respondents should pay its costs of the proceeding below. It submits that the respondents’ failure to establish a jurisdictional “gateway” for making a pooling order was fundamental to the respondents’ application, and that their failure to establish a “gateway” had the inevitable consequence that the application for a pooling order would fail. Ultimately, the question whether it was just and equitable to make a pooling order did not require a judicial determination by the primary judge.

7    More fundamentally, the appellant submits that the primary judge’s reasons make it abundantly clear that his decision to make the pooling order was “embedded” in his decision to reinstate SAM’s registration and re-appoint Mr Morgan as its liquidator. Put another way, the appellant submits that had the primary judge reached the conclusion (as he should have) that a pooling order could not be made, SAM’s registration would not have been reinstated, and Mr Morgan would not have been re-appointed as its liquidator. The appellant submits that, in those circumstances, the primary judge would have dismissed the proceeding before him and the appellant would have enjoyed “real practical success”.

8    The appellant submits that the subsequent commencement of the Supreme Court proceeding is not relevant to the exercise of the discretion to award costs of the proceeding below. The appellant submits, further, that it would be an incorrect exercise of discretion to even entertain assessment of the costs below by way of apportionment having regard to the parties’ relative success or failure on particular issues.

Respondents’ submissions

9    The respondents contend that the appellant should pay 80% of their costs below. They submit that the “gateway” issue was of “short compass and occupied a minimal amount of time at trial”. The respondents point to the “factual and legal breadth of the case” advanced by the appellant below. This case involved an unsuccessful challenge to Mr Morgan’s estimate of potential recoveries (J[51] – [62]), an unsuccessful allegation of potential conflict (at J[63] – [78]), and an unsuccessful contention that the affairs of SAP and SAM were not intermingled (at J[100] – [104]), an argument which the primary judge found to be of “no substance”.

10    The respondents also point to the fact that the appellant relied on a lengthy expert report by Mr Donnelly (billed at $100,000).

11    The respondents submit that the resolution of the issues on which the appellant failed required cross-examination and argument occupying most of the three day hearing before the primary judge. They submit:

The absurdity of the proposition advanced by the appellant is demonstrated thus: if the orders for which it contends were made, then the respondents would have to bear the cost of a lengthy and extraordinarily expensive expert report which did not feature in the appeal. It was deployed in aid of an attack on the liquidator, which attack failed. Not only should the respondents not bear those costs, they should recover the costs entailed in dealing with the issues addressed in that report. Nor should the respondents be saddled with their own costs (let alone pay the appellant’s costs) of the myriad other issues on which the appellant failed below, and which were not the subject of the appeal.

Consideration

12    We do not accept the parties’ competing positions.

13    The proceeding before the primary judge was directed to obtaining the pooling order. This is clear from a number of passages in the primary judge’s reasons for judgment.

14    For example, when identifying (what the primary judge described as) the “conflict issue”—namely, whether there was any real or sensible possibility of a conflict of interest or other reason why Mr Morgan should not be re-appointed as liquidator of SAM— the primary judge said (at J[11]):

The conflict issue arises in the context that Mr Morgan does not seek the reinstatement of SAM under s 601AH of the Act unless, first, he is made the liquidator, and, secondly, a pooling order is made.

15    In addressing Mr Donnelly’s evidence, the primary judge said (at J[55]):

Mr Donnelly addressed considerable parts of his evidence to the situation in which SAM’s liquidation would be pursued by a liquidator other than Mr Morgan. Since Mr Morgan does not seek an order that SAM be reinstated unless he is appointed liquidator and a pooling order is made, it is not necessary to deal with that evidence.

16    At J[85] the primary judge stated that, “subject to determining that a pooling order should be made”, he was satisfied that it was just that SAM’s registration be reinstated and that Mr Morgan be re-appointed as its liquidator.

17    These parts of the primary judge’s reasons (as well as other passages) exemplify the centrality of the making of a pooling order to the determination of all the other issues that were agitated on the application.

18    Two observations should be made. First, the fact that the preconditions to making a pooling order could not be established means that the respondents’ application was doomed from the outset. Secondly, if a pooling order could not be made (because the preconditions to making a pooling order could not be established), then it was neither necessary nor efficient for the appellant to raise the various subsidiary issues on which it clearly failed and in respect of which it did not raise any ground of appeal.

19    The first observation leads us to conclude that an order should not be made that would require the appellant to pay any of the respondents’ costs of the proceeding below. To the contrary, we are persuaded that an order for the costs of the proceeding below should be made in the appellant’s favour, given that its resistance to making a pooling order was soundly based to the extent that the “gateway” conditions for making such an order could not be satisfied.

20    The second observation, however, leads us to conclude that the appellant should not be awarded all its costs. In our view, its costs should be discounted to recognise that it was unnecessary and inefficient for it to run a multitude of issues (on which it failed) when its success should have been achieved by focussing on the real issue in the proceeding—whether a pooling order could be made. Doing the best we can, we think that the appellant’s costs should be discounted by 50%.

Conclusion

21    Orders 4 and 5 made by the primary judge on 2 December 2021 will be set aside and an order made that the respondents pay 50% of the appellant’s costs of the proceeding below.

Associate:

Dated:    17 March 2023

SCHEDULE OF PARTIES