FEDERAL COURT OF AUSTRALIA

City of Swan v Lehman Bros Australia Ltd (No 3)
[2009] FCA 1190

COSTS –– unsuccessful defendants –– whether liable jointly and severally or severally

COSTS –– Corporations Act 2001 (Cth) s 1335(2) –– Federal Court (Corporations) Rules 2000 r 2.13 –– Court's discretion to order costs –– award of costs against non-party who is later joined as a party –– principles governing award of costs against party joined as a defendant on its own application pursuant to r 2.13(4)(a) –– proceedings challenging a deed of company arrangement –– two creditors successfully applied at different times to be joined as defendants, pursuant to r 2.13(4)(a) –– one creditor as the proponent of the deed of company arrangement was a proper and necessary party, the other was parent of company subject to the deed with significant commercial interest –– both creditors actively participated as defendants and cross-claimants in the proceeding –– neither a mere intervenor –– deed found to be void

COSTS –– Corporations Act 2001 (Cth) s 1335 –– Federal Court (Corporations) Rules 2000 r 2.13 –– Federal Court Rules O 27 r 11 –– Court's discretion to order costs –– award of costs in favour or against person who is later joined as a party –– proceedings challenging validity of deed of company arrangement –– parent company of subsidiary subject to the deed of company arrangement granted leave to be heard pursuant to r 2.13(1), later served with subpoena for production before being joined, by consent, as a defendant–– subpoena never called upon –– documents subpoenaed likely to have been discoverable after defendant joined –– defendant took an active role in the proceedings, making substantive arguments at hearing and filing a defence and cross-claim –– orders made determining the proceedings based on answers to separate questions –– plaintiffs successful –– defendant seeks (1) costs and expenses incurred in respect of compliance with subpoena under O 27 r 11 and (2) assessment of costs its liability prior to being joined as party under r 2.13(2)(a) –– whether power to order all or some costs pursuant to s 1335(2)

SUBPOENAS –– Federal Court Rules O 27 r 11 –– costs and expenses of person subpoenaed who later joined as defendant

Held:  Defendants jointly and severally liable –– defendant subpoenaed before being joined liable for 75% of costs –– no order for costs and expenses of compliance with subpoena

Corporations Act 2001 (Cth) ss 1335, 1337S

Federal Court of Australia Act 1976 (Cth) s 43, 59

Federal Court Rules O 6 r 11(3), O 27 r 11

Federal Court (Corporations) Rules 2000 r 2.13

Australian Forest Managers Ltd (In Liq) v Bramley (1996) 65 FCR 13 applied

Cachia v Hanes (1994) 179 CLR 403 cited

Charlick Trading Pty Ltd v Australian National Railways Commission (1997) 149 ALR 647 cited

City of Swan v Lehman Brothers Australia Ltd (No 2) [2009] FCA 1160 cited

City of Swan v Lehman Brothers Australia Ltd [2009] FCA 784 cited

City of Swan v Lehman Brothers Australia Ltd [2009] FCAFC 130 cited

Probiotec Ltd v University of Melbourne (2008) 166 FCR 30 followed

Re Wridgemont Display Homes Pty Ltd (1992) 39 FCR 193 cited

Simpson v Monteith [2009] NSWSC 156 followed

CITY OF SWAN, PARKES SHIRE COUNCIL and WINGECARRIBEE SHIRE COUNCIL v LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQ), NEIL SINGLETON, STEPHEN PARBERY, LEHMAN BROTHERS ASIA HOLDINGS LIMITED (IN LIQUIDATION) and LEHMAN BROTHERS HOLDINGS INC

NSD 538 of 2009

RARES J

21 OCTOBER 2009

SYDNEY

in the matter of lehman brothers australia limited

(in liquidation) (acn  006 797 760)

THE COURT ORDERS THAT:

1.                  The plaintiffs’ costs be paid jointly and severally:

(a)        as to the whole amount by the first and fourth defendants;

(b)        as to 75% by the fifth defendant.

2.                  The plaintiffs’ costs of the proceedings:

(a)        be paid by the first defendant as costs in respect of an application for the winding up of the first defendant;

(b)        have priority in the winding up of the first defendant in accordance with s 556(1)(b) of the Corporations Act 2001.

3.                  There be no order as to the fifth defendant’s costs or expenses in respect of its compliance with the subpoena served on it on 23 June 2009.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

IN THE MATTER OF LEHMAN BROTHERS AUSTRALIA LIMITED

(in liquidation) (ACN 006 797 760)

REASONS FOR JUDGMENT

1                     The plaintiff Councils seek their costs of the proceedings against each of the corporate defendants, Lehman Australia, Lehman Asia and Lehman Bros.  Lehman Australia accepted that any costs it should be ordered to pay be payable as costs of its winding up, ordered by me on 2 October 2009:  City of Swan v Lehman Brothers Australia Ltd (No 2) [2009] FCA 1160.  Lehman Australia argued that the order should apportion the liability for costs severally so that each corporate defendant would be ordered to pay one-third of the Councils’ costs.  Lehman Asia also asserted that since the Councils had not joined it as a defendant initially and it had applied to be joined, it was an intervenor, and that it should not be ordered to pay any costs at all or any significant costs.

2                     Lehman Bros argued that under r 2.13 of the Federal Court (Corporations) Rules 2000, its liability was limited to any additional costs that were incurred by the Councils, until it was joined as a defendant at its own request on 16 July 2009.   In addition, Lehman Bros seeks an order for its reasonable expenses in respect of a subpoena served on it by the Councils on 23 June 2009.  The Councils argued that the subpoena sought documents that would have been discoverable had Lehman Bros been a party at the time of service.  They argued that the expenses in respect of the subpoena should be characterised as an incident of Lehman Bros’ later involvement as a defendant.

Background

3                     The Councils commenced these proceedings urgently and ex parte on 5 June 2009 when Stone J gave them leave to serve the originating process returnable before me on 12 June 2009.  That process was directed to challenging the validity and implementation of the resolution of Lehman Australia’s creditors, made on 28 May 2009, that it execute a deed of company arrangement.

4                     As soon as the matter was called in court on 12 June 2009, counsel for Lehman Australia and the former administrators announced that a deed of company arrangement had been executed earlier that morning.  The Councils sought an opportunity to reformulate their case to take account of that new development.  Lehman Asia successfully sought to be joined as a defendant.  In addition, on 12 June 2009, I also ordered that Lehman Bros have leave to be heard in the proceedings without becoming a party under r 2.13.  Lehman Bros foreshadowed that it may apply later to become a party.  Its counsel applied for that leave saying:  “… at the moment we don’t seek … formally [to] be joined as a party”.  However, he also responded to a concern raised by the Councils that s 1335(2) of the Corporations Act 2001 (Cth) did not give the Court power to make orders for costs against a non-party, by saying that “no point will be taken about the cost issues” and accepted that subpoenas could be served on Lehman Bros’ solicitors.

5                     On 23 June 2009, the Councils served a subpoena on Lehman Bros that sought a substantial range of documents described in 14 paragraphs.  The subpoena was not called on during the proceedings.  Lehman Bros did not produce any documents in answer to it.  But now it claims to have incurred about $80,000 in costs and expenses in respect of the subpoena, including negotiating the refinement of its scope and embarking on steps to obtain or locate documents that may have had to be produced.  A significant proportion of those costs and expenses was claimed in respect of work done after 10 July 2009.

6                     During the hearing of argument on 10 July 2009, Lehman Bros’ senior counsel, in opposing the Councils’ application for the hearing of separate questions (that led to the hearing before the Full Court), foreshadowed that within the next 24 to 48 hours he expected that it would seek to be joined as a defendant.  He argued that the Councils’ then claims were not sufficiently pleaded and required further amendment.  He also foreshadowed that Lehman Bros, if joined, would file a cross-claim.  Accordingly, on 10 July I ordered that the Councils file and serve further amended points of claim that clearly pleaded the issues that they wished to raise as separate questions and that would join Lehman Bros, if it sought to be a party.  A slight delay occurred before I ordered by consent, on 16 July, that Lehman Bros be joined as a defendant.

7                     Lehman Bros argued that its later joinder on 16 July 2009 occurred in circumstances that should make it liable only for the Councils’ costs incurred after 16 July 2009.  It also relied on an affidavit of Philip Hoser, one of its solicitors, to seek an order for its costs and expenses in respect of the subpoena.

Is each Corporate Defendant only liable severally for costs?

8                     Lehman Australia argued that each corporate defendant should be ordered to pay one-third of the Councils’ costs severally.  Lehman Asia accepted that the discretion to order costs, even on the basis that it were an intervenor, was unconfined.  But it argued that because it had sought its own joinder on 12 June 2009, its position was that of an intervenor and so it should be held liable for costs as a party.

9                     That argument is without substance.  On 5 June, when the proceedings began, they were properly constituted as a vehicle to challenge the creditors’ resolution that Lehman Australia execute a deed of company arrangement containing provisions to the effect of those held by the Full Court to be beyond the statutory powers of the creditors to include in such a deed:  City of Swan v Lehman Brothers Australia Ltd [2009] FCAFC 130.  Importantly, on 12 June 2009, the Councils obtained new causes of action in respect of the deed that had been executed on that day.  Lehman Asia was an actual party to that deed as were, conformably with s 444B(2) and (5), Lehman Australia and its administrators.

10                  Thus, in any action to set aside the deed Lehman Asia, as a party to it, had to be a defendant.  It was a proper and necessary party, as its offer to be joined on 12 June 2009 recognised.  Lehman Asia was also the principal proponent of the deed during the earlier administration: City of Swan v Lehman Brothers Australia Ltd [2009] FCA 784 at [1].  It filed a defence and cross-claim.  It sought relief by having the Court remove or vary the terms of the impugned clauses or order amendments so as to give effect to the intention of those creditors who had voted in favour of the resolution.  In addition, it sought an order for rectification of the deed:  City of Swan [2009] FCA 784 at [11]-[12].

11                  Lehman Asia had not sought to be added as an intervenor on 12 June 2009.  Nor was it content to rely on merely being heard under r 2.13(1) without being made a party.  Neither position would have been appropriate.  Lehman Asia was a party to the deed.  And, Lehman Asia was an active, proper and necessary party to the proceedings that sought that the deed be terminated or declared void.  It exercised its rights of participation in the proceedings as a party, including bringing a cross-claim.  It had a significant interest in seeking to uphold the validity of the deed of company arrangement, or obtaining relief to similar effect, or to enforce the balance of the deed excluding any clauses found to be invalid.  It should be liable for costs as a party.

12                  The Court’s power to order costs in these proceedings is created by s 1335(2) of the Corporations Act.  That provides:

“(2)      The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs.”

Thus, the parties accepted in argument that s 1335(2) displaces the broader power to order costs conferred on this Court under s 43(2) of the Federal Court of Australia Act 1976 (Cth).  That result had been reached in decisions under the predecessor of s 1335(2) of the Corporations Law.  These had held that the terms of the earlier s 1335(2) were mandatory in proceedings like the present that are “under this Act” and the section had displaced the broader powers under s 43(2) of the Federal Court of Australia Act:  Australian Forest Managers Ltd (In Liq) v Bramley (1996) 65 FCR 13 at 20F-G, 22C-F, 23D-E per Lindgren J;  see too Re Wridgemont Display Homes Pty Ltd (1992) 39 FCR 193 at 196-197 per Jenkinson J.

13                  Under s 1337S(1)(c), this Court’s rule making powers under s 59 of the Federal Court of Australia Act were extended “without limitation, with respect to costs”.  Because of the width of the power in s 1337S(1)(c), the provisions of r 2.13 with respect to costs can thus extend to non parties, despite the wording of s 1335(2).

14                  Ordinarily, where defendants or respondents in the same interest all participate in the proceedings and fail, as a practical result (but not because of any rule of law or practice) they will be liable jointly and severally to an order that they pay the plaintiffs’ costs:  cf Probiotec Ltd v University of Melbourne (2008) 166 FCR 30 at 44-46 [53]-[61] per myself, Finn and Besanko JJ agreeing.  In general, the purpose of an order for costs is to indemnify, at least partially, a successful party:  Probiotec 166 FCR at 44 [51] and Cachia v Hanes (1994) 179 CLR 403 at 410-411 per Mason CJ, Brennan, Deane, Dawson and McHugh JJ.

15                  The consequence of ordering each of the corporate defendants to pay one-third or some other proportion of the Councils’ costs severally, would be to put at risk the efficacy of the partial indemnity, were one or more of the defendants either incapable of paying its portion or recalcitrant.  Despite their insolvencies, it is not suggested that the corporate defendants will not be able to meet any costs order.  I am satisfied that it would not be appropriate or just to reduce their liabilities from being joint and several merely because they were the three unsuccessful active parties.  They can seek contribution among themselves after one or more has paid the Councils.  In principle, the Councils should be free to seek recovery of the full amount of any costs order against all of the corporate defendants, each of which took an active part in the proceedings.  Each of them contributed to the costs being incurred, at least while a party (see below) in a way which, as between them and the plaintiffs was not readily distinguishable.  Each of the corporate defendants was essentially in the same interest, adopting and reinforcing arguments the others put, even though there were some individual substantive (but as the matter proceeded, in the result, not substantial) differences between them (e.g. the different results sought in Lehman Asia’s and Lehman Bros’ cross-claims):  see too Probiotec 166 FCR at 49 [73] per myself, at 52 [91] per Besanko J, and at 32 [1] per Finn J.

Lehman Bros’ Position

16                  Lehman Bros’ position was different to that of Lehman Asia.  Lehman Bros was not a necessary party to the proceedings.  However, it obtained significant and express benefits from the impugned provisions in the deed of company arrangement.  And, as its cross-claim showed, if it lost those benefits because the impugned provisions were found to be invalid, unlike Lehman Asia, Lehman Bros wanted the deed then to terminate and Lehman Australia to be wound up.  Lehman Bros argued that its liability for costs before 16 July was governed by r 2.13(2) and that s 1335(2) prevented any wider order for costs being made against it before that date.

17                  Rule 2.13(2)(a) provides that the Court may direct that a person granted leave under r 2.13(1) to be heard, without becoming a party in a proceeding, if it considers that the attendance of that person has resulted in additional costs for any party that those costs should be borne by the person.  Lehman Bros argued that the Councils had not incurred any additional costs because of its attendances prior to 16 July.  I reject that argument.  It is inconsistent with the substantive position put by Lehman Bros at the hearing on 10 July.

18                  Lehman Bros also argued that because it was not a party before 16 July, r 2.13(2) was the sole source of its liability for costs.  I am of opinion that s 1335(2) gives the Court power to award costs against a party, including costs incurred by the successful party before the new party had been joined.  The power to order costs in s 1335(2) is not confined, once the Court considers that a party to the proceedings should be ordered to bear them.  Of course, the time and circumstances of a party’s joinder will be relevant to the exercise of the discretion to order costs, particularly in respect of any period before that joinder:  see Probiotec 166 FCR at 49 [72].

19                  Here, Lehman Bros contemplated from its first appearance that it may wish to become a party.  By 10 July 2009 that position had become substantially clearer.  During the hearing on that day its counsel recognised the likelihood that Lehman Bros would become a party and argued in anticipation that it would put its own substantial case forward in the litigation.  Of course, once it became one, Lehman Bros would assume the obligations of a party under the Federal Court (Corporations) Rules and the Federal Court Rules, including discovery.  By this time, it was apparent that unless an order for an early trial of separate issues was made (a course resisted by Lehman Bros) these proceedings would be complex, lengthy and involve considerable discovery.  The classes of documents sought in the subpoena broadly included documents that would have been discoverable by Lehman Bros.  I have not considered whether the terms of the subpoena were appropriate in every respect.  However, they reflected (whether or not, if challenged, they would be found too broad or imprecise) classes of documents that would be likely to be relevant for collection or consideration by Lehman Bros’ lawyers for the purpose of discovery.  Thus, much of what Mr Hoser’s affidavit referred to was work that would have been required to be done in any event, even if no subpoena had been issued.

20                  In Charlick Trading Pty Ltd v Australian National Railways Commission (1997) 149 ALR 647 at 649-651 Mansfield J examined the scope of the discretion to make an order for payment of a third party’s reasonable costs and expenses in complying with a subpoena under the predecessor of FCR O 27 r 11.  The present rule also provides the Court with a similarly wide discretion to order a party that causes a subpoena for production to be issued to pay the subpoenaed person’s reasonable costs and expenses of compliance.  The subsequent joinder of that person as a party, however, may be relevant to the exercise of that power:  Simpson v Monteith [2009] NSWSC 156 at [54]-[58] per Hoeben J.  He noted that the obligation of the person subpoenaed to discover the same documents after becoming a party would normally make the costs of production of so much of the documents as were discoverable, the new party’s costs in the proceedings.  And, like here, in Simpson [2009] NSWSC 156 at [57], the documents had not been required to be produced before the joinder.

21                  I am of opinion that the liability of Lehman Bros for costs must be decided under s 1335(2).  This is because it became a party to the proceedings and the costs that are both payable to it and by it are costs of the proceedings within the meaning of s 1335(2).  The history of Lehman Bros’ involvement and the existence of each of r 2.13(2)(a) and FCR O 27 r 11 are relevant to the exercise of the power under s 1335(2).  But by becoming a party, Lehman Bros changed its status and subjected itself to the provisions of s 1335(2).  And, ordinarily, FCR O 6 r 11(3), provides where a party is added the date of commencement of proceedings so far as concerns that party, is the date of filing of the originating process joining that person.

22                  I am of opinion that neither FCR O 27 r 11 nor r 2.13(2)(a) should be construed as a code that excludes the wide discretion under s 1335(2) to make appropriate orders for costs in respect of a person to whom those rules would otherwise apply once the person has later become a party to the proceedings.  First, s 1335(2) is a statutory provision, whereas the others are Rules of the Court.  Secondly, the power under s 1335(2) to make a just and appropriate order for costs against a party, once that person has been joined, is not excluded expressly or by necessary implication.  It would be possible for injustice to occur if the Court were obliged to allow a person to benefit from any delay in being joined as a party in order to take advantage of its then non-party status.  For example, it could do this in order to apply under FCR O 27 r 11 for its expenses of answering a subpoena even though, if it became a party, it would be liable to discover the same documents.  Or a person could delay seeking to be joined until very close to the hearing so as to take advantage of the limited liability for costs under r 2.13.  In addition, the Court can join a party of its own initiative under r 2.13(4)(b).  The existence of that power suggests that the Court can override a recalcitrant person’s desire to avoid liability for costs for a time when it simply seeks to be heard under r 2.13(1) rather than immediately to assume the obligations of a party.  The exercise of that power will depend on an assessment of its appropriateness having regard to the person’s role in relation to the subject matter of the proceedings.

23                  Here, on and from 12 June Lehman Bros had a real and active role in the proceedings that went beyond a mere watching brief or an interested creditor.  The formality of its position was refined over a period so that by 10 July 2009, it was asserting a likelihood that it would seek to become a party.  While it could have remained in the position of a non party, had it chosen to do so, I am satisfied that by 10 July 2009 Lehman Bros was substantively, if not formally, in the position of an active party in the proceedings.  Its decision to formalise its participation, by becoming a party, changed the form of its earlier participation but not much of its substance.  That had been in the character of a party, despite its formal stance under r 2.13(1).  The relief it later sought and the defence it pleaded went to the heart of the issues in the whole proceedings.  But, these were consistent with the objectives it had pursued up to then in argument.  The Councils should be entitled to their costs against Lehman Bros in respect of the work preparatory to its formal joinder, just as they would be entitled to seek recovery on a taxation of costs reasonably and properly incurred before any proceeding was commenced.

24                  I am satisfied that much, if not all, of the documents and work claimed by Lehman Bros in respect of the subpoena would have been incurred had discovery been ordered.  Some of that cost would be likely to have been incurred in any event by 16 July 2009 had Lehman Bros been joined in anticipation of discovery and in preparation of its pleading of, and collection of evidence for, its defence and cross-claim.  However, since discovery was not ordered, some of the work was undertaken prematurely and may not have been of immediate utility to Lehman Bros at the stage the proceedings had reached by 16 July 2009.  I am not satisfied that it is appropriate to order a separate taxation of Lehman Bros’ pre-joinder costs and expenses under O 27 r 11 or r 2.13(2)(a).  Rather, I consider that justice can best be done by making a costs order against Lehman Bros for a proportion of the whole of the plaintiffs’ costs.  This will balance the consequences of any present unnecessary costs and expenses in respect of the subpoena and the gradual transformation of Lehman Bros’ role from one under r 2.13 to that of a party, on the one hand, with its overall lack of success in the proceedings on the other.

25                  The substantive questions during the case management phase of the proceedings leading to Lehman Bros’ joinder were largely concerned with the best means of arriving at a prompt resolution of what appeared to be a very complex case.  This culminated in my reserving questions for the Full Court that lead to a decisive outcome.  Lehman Bros was unsuccessful in its opposition to that process and in the result.  It should bear a substantial share of the Councils’ costs.

26                  In all of the circumstances, I am of opinion that justice will be done by requiring Lehman Bros to pay 75% of the Councils’ costs of the whole proceedings jointly and severally with the other two corporate defendants who are liable for the whole of those costs.

Associate:

Dated:         21 October 2009