FEDERAL COURT OF AUSTRALIA

Meadow Springs Fairway Resort Ltd (In Liq) (ACN 084 358 592) v Balanced Securities Limited (ACN 083 514 685) (No 3) [2008] FCA 861

CORPORATIONS ‑ legal costs incurred by a liquidator in impugning the validity of a charge of a secured creditor ‑ whether liquidator entitled to a priority in respect of legal costs under s 512 of the Corporations Act 2001 (Cth) ‑ whether liquidator entitled to an equitable lien in respect of the legal costs

Corporations Act 2001 (Cth) s 512

Meadow Springs Fairway Resort Ltd (In Liq) (ACN 084 358 592) v Balanced Securities Limited (ACN 083 514 685) (No 2) [2008] FCA 471

Crawford v Australian & New Zealand Banking Group Ltd (1994) 14 ACSR 310

In re Universal Distributing Company Limited (In Liquidation) (1933) 48 CLR 171

Shirlaw v Taylor (1991) 31 FCR 222

Re Berkeley Applegate (Investment Consultants) Ltd (In Liq); Harris v Conway [1989] Ch 32

Rumball v Mortimore [2000] WASC 126

MEADOW SPRINGS FAIRWAY RESORT LTD (IN LIQ) (ACN 084 358 592) v BALANCED SECURITIES LIMITED (ACN 083 514 685), WESTRALIAN CAPITAL HOLDINGS PTY LTD (IN LIQ) (ACN 083 526 630), KNIGHTSBRIDGE MANAGED FUNDS LIMITED (IN LIQ) (ACN 089 532 169) AND KNIGHTSBRIDGE FINANCE PTY LTD (IN LIQ) (ACN 008 716 872), HURLY INVESTMENTS PTY LTD (ACN 082 972 067) AND TIMOTHY JOSEPH CASEY and IMF (AUSTRALIA) LTD (ACN 067 298 088)

WAD 150 of 2007

SIOPIS J

10 JUNE 2008

PERTH

THE COURT ORDERS THAT:

1.                  The orders made on 29 May 2008 are to be supplemented by the orders set out below.

2.                  It is declared that the parties’ respective claims on the sums held by Meadow Springs’ liquidator, representing the balance of settlement proceeds of Federal Court Action WAD 126 of 2004, rank in the following priority:

2.1              first, $115,000 payable by Meadow Springs and its liquidator, jointly and severally, to IMF under the terms of a litigation funding agreement dated in or about August 2004 (“the IMF Agreement”);

2.2              second:

(a)               the sum of $3,611,029.83 payable to Balanced under the Balanced Charge (in accordance with Order 5 of the orders of 29 May (the 29 May orders)) together with Balanced’s costs of this proceeding assessed under Order 4, that amount assessed under Order 6 of the 29 May orders (if any) and any amount found due to Balanced in relation to Additional Interest Rate Charges referred to in Order 7 of the 29 May orders; and

(b)               the sum assessed to be due and payable to KMF under the WCH Charge under Order 15 of the 29 May orders and KMF’s costs of this proceeding assessed under Order 4

pari passu;

2.3              third, the sum of $2,199,750 payable by Meadow Springs, and its liquidator, jointly and severally, to IMF under the terms of the IMF agreement;

2.4              fourth, all sums secured by a charge (the Hurly and Casey Charge) granted on 24 September 1999 by Meadow Springs in favour of the third defendants;

2.5              fifth, the sums payable to Meadow Springs’ unsecured creditors in accordance with section 555 and section 556 of the Corporations Act 2001 (Cth).

3.                  Meadow Springs’ claim and IMF’s cross‑claim are otherwise dismissed.

4.                  Meadow Springs is to pay:

4.1              Balanced’s costs of the proceeding to date, and KMF’s costs of the proceeding to date, including any reserved costs, on an indemnity basis such that Balanced and KMF are entitled to their costs save those costs which have been incurred unreasonably or are of an unreasonable amount; and

4.2              the costs of the third defendants of the proceeding to date.

5.                  IMF is to pay:

5.1              Balanced’s costs including any reserved costs, of Balanced’s cross‑claim and IMF’s cross‑claim; and

5.2              KMF’s costs, including any reserved costs, of KMF’s cross‑claim and IMF’s cross‑claim.

6.                  Order 5 be stayed until further order.

7.                  By 4 pm on 29 June 2008, the third defendants are to file and serve a minute of proposed directions for the disposition of the declaration sought in their cross‑claim.

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

REASONS FOR JUDGMENT

1                     On 29 May 2008, I made a number of orders giving effect to the reasons I delivered in this matter on 9 April 2008 (Meadow Springs Fairway Resort Ltd (In Liq) (ACN 084 358 592) v Balanced Securities Limited (ACN 083 514 685) (No 2) [2008] FCA 471).  The orders which I made reflected a minute which had been agreed between the parties.  However, the parties were not able to agree on a number of questions relating to costs.

2                     At that hearing on 29 May 2008, I heard some argument on the question of costs and I directed that each of the parties file written submissions on the question of costs.

3                     There are four questions which arise.

Whether the plaintiff’s costs of the proceeding to date should be paid in priority to the amounts due to the secured creditors

4                     The first issue is whether I should order that the legal costs of the plaintiff (Meadow Springs) to date be paid in priority to the amounts due to the first defendant (Balanced) and the second named second defendant (Knightsbridge Managed Funds) under their respective charges.

5                     Meadow Springs is in liquidation.  The company was placed into creditors’ voluntary liquidation by a resolution of its creditors.

6                     Meadow Springs, by its liquidator, contends that an order should be made that the costs which he has incurred on behalf of Meadow Springs in the conduct of this litigation be paid from the fund in priority to the costs of the secured creditors, Balanced and Knightsbridge Managed Funds.  In other words, it is said that the liquidator should be able to retain as an equal first priority, the amount of $115,000 in respect of the fees due to the fourth defendant (IMF) under the IMF Funding Agreement, and the legal costs and expenses incurred in respect of the conduct of this proceeding to date.

7                     Meadow Springs relies upon two grounds in support of its contention.  First, the plaintiff relies upon s 512 of the Corporations Act 2001 (Cth) (the Act).  Section 512 provides:

All proper costs, charges and expenses of and incidental to the winding up (including the remuneration of the liquidator) are payable out of the property of the company in priority to all other claims.

8                     Meadow Springs contends that this provision of the Act applies to give the liquidator a priority in respect of the expenses he has incurred in the winding up, over all other creditors, including secured creditors.  It is contended, therefore, that as the costs incurred by the liquidator in conducting this litigation are properly to be regarded as expenses incurred in the winding up, the liquidator should be entitled to have first call on the fund in order to pay the legal expenses which he has incurred on behalf of Meadow Springs in conducting this litigation.

9                     Meadow Springs’ contention rests on the construction of the words “the property of the company” in s 512 of the Act.  It contends that the words “the property of the company” are to be construed as meaning the whole of the fund under the liquidator’s control.

10                  Balanced and Knightsbridge Managed Funds, on the other hand, contend that “the property of the company” does not include the amounts which are the subject of their respective charges.  Accordingly, the property of the company would only comprise the balance, if any, of the fund net of the amounts beneficially owned by other parties.

11                  The submission of Balanced and Knightsbridge Managed Funds is to be accepted.

12                  In the case of Crawford v Australia & New Zealand Banking Group Ltd (1994) 14 ACSR 310, Underwood J held that the proceeds of the sale of the property which was the subject of a charge in favour of the bank, did not comprise the property of the company within the meaning of s 512 of the Act.

13                  At 315 of that case, Underwood J observed:

Counsel for the liquidator referred to McPherson, The Law of Company Liquidation 3rd edn at 311:

Neither “assets” nor “property” is defined by the Act, but the latter is, as Lord Atkin has said, a term which would be understood by a lawyer as including property, rights and powers of any description. It therefore embraces all the real and personal property of the company, including choses in action such as goodwill, unpaid calls on shares, and rights of action for compensation or damages. Non‑assignable contractual rights and property held on trust are not included, nor is property which has been validly mortgaged or charged or which is subject to some other form of enforceable encumbrance.

The author relies upon Re United Pacific Transport Pty Ltd [1968] Qd R 517 at 521 as authority for the proposition that property validly charged by the company is not the property of the company.  In that case WB Campbell J so held on the basis that “the assets are regarded in equity as the property of the [chargee]”, at 521.  See also Bank of New South Wales v Deputy Commissioner of Taxation (1979‑1980) 28 ALR 43 at 47; 4 ACLR 649.  The textbook was written and the cases decided on now repealed legislation.  The Corporations Law, s 9, defines property to mean:

…any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action;

However, in the circumstances of this case, the introduction of the legislative definition of property makes little difference, for the property of the company as defined by the Corporations Law, had no value after realisation of the assets which were the subject‑matter of the mortgage debenture for there was insufficient to satisfy the indebtedness to the bank.  The liquidator’s fund, being the balance of the realisation of the bank’s security is the property of the ANZ Bank and not the property of the company.

14                  Later at 316, Underwood J also observed:

As the liquidator’s fund is not the property of the company it is not available for the payment of the costs of Wallace‑Smith and Secatore for work done by them as liquidators in the absence of an agreement between them and the bank to that effect.

15                  In my view, therefore, the “property of the company” referred to in s 512 of the Act does not include the monies the subject of the Balanced and WCH Charge.

16                  The second ground upon which Meadow Springs relied was that the liquidator was entitled to an equitable lien to support his right to retain from the fund an amount to pay the legal expenses incurred in the conduct of this litigation.  Meadow Springs relied upon the principle in In re Universal Distributing Company Limited (In Liquidation) (1933) 48 CLR 171 (Universal Distributing).  However, in my view, the principle has no application to these facts.

17                  In Universal Distributing, Dixon J distinguished between the liquidator’s expenses which were incurred in realising the fund in that case, and the other expenses which the liquidator had incurred.  It was only in respect of the expenses incurred in the realisation and preservation of the fund in which the secured creditor had a beneficial interest, that the liquidator had a priority over the secured creditor.  As set out in my reasons, the rationale for granting the liquidator a priority was that his work had benefited the secured creditor because in realising the fund, the liquidator had performed a function which the secured creditor would otherwise have had to perform.  (See also Shirlaw v Taylor (1991) 31 FCR 222 at 230‑231).

18                  However, those considerations do not apply in respect of the legal costs and expenses which have been incurred by the liquidator in this proceeding where the liquidator has challenged the validity of each of the secured creditor’s security.  It cannot be said that the secured creditors have derived any benefit from the liquidator’s legal action ‑ quite the contrary.  Accordingly, the rationale for the intervention of equity to protect the liquidator in respect of those liabilities is absent.  For that reason as well, the position in this case is distinguishable from that in Re Berkeley Applegate (Investment Consultants) Ltd (In Liq); Harris v Conway [1989] Ch 32, which was relied upon by Meadow Springs.

19                  It follows that I decline to make the order requested by Meadow Springs.

Whether Balanced should pay IMF’s costs in respect of Balanced’s cross‑claim

20                  IMF contended that Balanced should pay IMF’s costs of Balanced’s cross‑claim against IMF.  IMF contended that one of the issues at trial related to the amount that Balanced claimed was subject to the Balanced Charge.  Further said IMF, it had challenged a number of items of expenditure said by Balanced to be subject to the Balanced Charge, and it had succeeded in its challenge in respect of the majority of the items.  (See [205] to [232] of my reasons).

21                  The most important questions in the litigation related to enforceability of the Balanced Charge and the priority issue between IMF and the secured creditors.  IMF in its pleadings and at trial put in issue the position taken by Balanced in relation to each of those questions.  The question of whether the challenged items of expenditure were part of the monies secured by the Balanced Charge was a subsidiary issue.  IMF’s success in respect of four of the six challenged items of expenditure does not displace the fact that on the major questions Balanced was successful and, therefore, does not displace the general rule that where a party is substantially successful, it should have its costs.

22                  It is my view that Balanced was substantially successful in respect of the issues in question with IMF and should not have to pay IMF’s costs.

Whether the award of costs in favour of Balanced and the Knightsbridge Managed Funds should be made on an indemnity basis

23                  Balanced and Knightsbridge Managed Funds contended that their respective charges provide that any legal costs which each has incurred in defending and enforcing the security is to be paid on an indemnity basis.  They contend that the Court should give effect to the contractual terms in making an order for costs in their favour.

24                  In Rumball v Mortimore [2000] WASC 126, Owen J observed at [15] to [17]:

The Court has a broad discretion over the basis upon which it orders the costs of an action.  However, where the parties to an action are also parties to a contract which contains plain and unambiguous provisions allowing for costs to be paid on a certain basis, the Court should ordinarily exercise its discretion in a manner consistent with the contractual provisions:  see Citibank Savings Ltd v Nicholson, unreported; FCt SCt of SA; 1 April 1998; Bank of Western Australia Ltd v Ponga; Gomba Holdings (UK) Ltd v Minories Finance Pty Ltd (No 2) [1992] 4 All ER 588.  In Citibank Savings Williams J (with whom Cox and Mullighan JJ agreed) said, with particular reference to proceedings between mortgagee and mortgagor, at 3:

[T]he terms of any costs order in favour of a successful mortgagee should ordinarily reflect the terms of any special bargain contained in the mortgage contract...  [T]here will [however] be special occasions where policy considerations may call in question the enforceability of a particular contractual provision...

In ANZ Banking Group (New Zealand) Ltd v Gibson [1986] 1 NZLR 556 the New Zealand Court of Appeal was dealing with a provision in a guarantee allowing for costs to be paid by a guarantor on a solicitor/client basis. Richardson J said, at 566:

The undertaking of the guarantee for payment of costs of enforcement on a solicitor/client basis is in my view an extending provision intended to entitle the Bank to indemnity with respect to legal expenses properly incurred by it in relation to a recovery action under the guarantee.  Clearly that contractual obligation is enforceable unless contrary to public policy and I am unable to see how this contractual arrangement could be said to impede the administration of justice or otherwise be contrary to any discernible public policy considerations.  To put the point affirmatively, why should a lender be out of pocket as a result of a failure to pay when the parties have expressly provided that they should be indemnified in the event of default by the other.

In both Citibank Savings and Gibson the court made reference to “policy considerations” which may militate against the court exercising its discretion to make a costs order in accordance with the basis provided for in the contract.  In general, a costs order will not allow a party to recover costs which were improperly or unreasonably incurred or improper or unreasonable in amount, notwithstanding what is provided for by the contract:  see Gomba Holdings at 601‑602.  Furthermore, a mortgagee will forfeit his contractual right to his general costs of an action on the mortgage if his conduct has been “[so]...inequitable...as [to] amount to violation or culpable neglect of his duty under the contract”:  per Lord Selbourne LC in Cotterell v Stratton [1872] LR 8 Ch App 295 at 302 (followed in Union Finance Association Ltd v Howarth (1903) 4 SR (NSW) 31; Re Shanahan (1941) 58 WN (NSW) 132; Shercliffe v Engadine Acceptance Corp Pty Ltd (No 2) (1982) 3 BPR 9207; Sandtara Pty Ltd v Australian European Finance Corp Ltd (1990) 20 NSWLR 82; Gomba Holdings; Citibank Savings).

25                  In my view, there is no reason why the costs order in favour of Balanced and Knightsbridge Managed Funds should not give effect to the contractual terms of their respective charges.  I will, therefore, order that Meadow Springs pay Balanced’s and Knightsbridge Managed Funds’ costs of the proceeding to date, including any reserved costs, on an indemnity basis such that Balanced and the Knightsbridge Managed Funds are entitled to their costs, save those costs which have been incurred unreasonably or are of an unreasonable amount.

The costs of the third defendants

26                  The third defendants did not participate in the trial.  The third defendants have applied for an order that their costs be paid by Meadow Springs and no party has opposed that order.  I will, therefore, order that Meadow Springs pays the costs of the third defendants.

27                  I will hear the parties as to the precise terms of the orders.

Associate:

Dated:         10 June 2008