FEDERAL COURT OF AUSTRALIA

Sebastian v Strongwall International Limited (Deregistered) (No 2) [2011] FCA 1105

THE COURT ORDERS THAT:

1.    The freezing order and injunction against Professional Payments Services Pty Ltd pursuant to paragraph 2 of the Orders made on 6 July 2011 (and as amended on 11 July 2011 and 27 July 2011) be set aside and discharged.

2.    The sum of $59,701.47 paid into Court by Professional Payments Services Pty Ltd on 16 August 2011 be paid out to Professional Payments Services Pty Ltd forthwith.

3.    The applicants jointly and severally pay the costs of Professional Payments Services Pty Ltd of this application, the preparation and attendance at the hearing on 27 July 2011 and of and incidental to the freezing order and injunction:

(a)    up until 10 August 2011 on a party and party basis; and

(b)    thereafter, the applicants do pay the costs of Professional Payments Services Pty Ltd on an indemnity basis so that Professional Payments Services Pty Ltd is fully indemnified for all its costs incurred save for any costs which are of an unreasonable amount or have been unreasonably incurred.

4.    The respondents do file within 21 days, should they wish to do so:

(c)    An amended undertaking to reflect the contents of these reasons.

(d)    A minute of orders discharging the injunctions referred to in these reasons.

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

REASONS FOR JUDGMENT

INTRODUCTION

1    These reasons address two topics outstanding following delivery of reasons in Sebastian v Strongwall International Limited (Deregistered) [2011] FCA 1045 (Sebastian No 1). In Sebastian No 1, I foreshadowed orders discharging, on terms, injunctions which had been made in preceding ex parte hearings. I also foreshadowed discharging a third party freezing order made against Professional Payments Services Pty Ltd (PPS). PPS had indicated in submissions filed on 5 August 2011 that it would seek costs on an indemnity basis. I will deal with that issue first.

Indemnity costs

2    PPS relies upon the principle that an applicant who resorts to the jurisdiction to obtain a freezing order must expect to pay all reasonable expenses and costs to which innocent third parties may be put by their actions. For this proposition, it relies upon Project Developments Co Ltd SA v KMK Securities Ltd [1983] 1 All ER 465 (at 466) and Norilya Minerals Pty Ltd v Ireland (1994) 12 WAR 485 (at 488).

3    The applicants (Sebastian) argue that the Court’s discretion in relation to costs is to be exercised judicially and ordinarily will be taxed (or assessed) on a more limited ‘party and party’ basis rather than the more generous indemnity basis, unless the circumstances of the case warrant a departure from the usual order: Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225. It is contended that PPS has not been subjected to high handed or unmeritorious conduct, citing Tadgell J in Australian Guarantee Corporation Ltd v De Jager [1984] VR 483 (at 502). Sebastian acknowledges, however, that indemnity costs may be enlivened where a party persists for whatever reason with a case when on proper consideration it should be seen to be hopeless: J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (No 2) (1993) 46 IR 301 where French J (as his Honour then was) said (at 303):

It is sufficient, in my opinion, to enliven the discretion to award such costs that, for whatever reason, a party persists in what should on proper consideration be seen to be a hopeless case.

4    In my respectful view, these assertions do not really grapple with the principle that a freezing order against an innocent third party may be in a special category because an innocent third party would normally be totally removed from the ambit of the litigation.

5    Nevertheless, it appears to me that it may be too sweeping a generalisation to assert that whenever an innocent third party succeeds in setting aside a freezing order it should have all its costs on an indemnity basis rather than a party and party basis.

6    The starting point for the submission to support that view appears to be the observations of Parker J in Project Development, where his Honour said (at 466-467):

In my judgment an innocent third party affected by a Mareva injunction ought, if he has to apply to the court for variation of the order and is successful in so doing, to have all costs incurred so long as they are not unreasonable in amount or unreasonably incurred; and a plaintiff who resorts to the draconian remedy of a Mareva injunction should expect to pay such costs. If in pursuit of his rights against a defendant he initiates an order of the court affecting assets in the hands of third parties, and that order is later varied at the instance of third parties so as to exclude assets in their hands, justice appears to me to require that all the innocent third parties' costs should be paid by the plaintiff unless they are unreasonable. Hence I reject the party and party basis.

…

It appears to me that, whilst the successful third party intervener should be allowed all his reasonable costs, it is right that he should have to establish, as he does on the common fund basis, the reasonableness of the costs for which he is contending. …

… That will result in the plaintiff having to pay to the intervener all costs which would be allowed under Ord 62, r 29 (1) with the exception or with the qualification only that despite the wording of Ord 62, r 29 (1) it will be for the interveners to establish that the costs are not unreasonable in amount and have not been unreasonably incurred. …

7    As noted by Laffoy J in Dunne v Fox [1999] IR 283, although Parker J had held that the intervener should be allowed all his reasonable costs, it was also held he should establish the reasonableness of the costs. Thus, in Project Development the terms of the ‘indemnity costs’ there ordered was different from the modern form of an order in that the onus as to reasonableness was placed on the claimant. The usual modern indemnity costs order is that the unsuccessful party would pay the costs incurred by the third party ‘except insofar as they are of an unreasonable amount or have been unreasonably incurred’ (Norilya Minerals (at 488)).

8    The onus of proving that the costs are unreasonable usually rests on the unsuccessful party. As noted by Simmonds J in Computer Accounting & Tax Pty Ltd v Professional Services of Australia Pty Ltd (No 4) [2009] WASC 407 (at [88]):

… this would mean the innocent third party would not have to establish that the costs were necessary or proper or that the costs were of a reasonable amount and reasonably incurred’ (see Forbes v Frigger [2009] WASC 77 (at [60]), Hasluck J quoting from EMI Records Ltd v Ian Cameron Wallace Ltd [1983] 1 Ch 59 (at 71) per Sir Robert Megarry VC))…

9    This was in contrast, as Simmonds J noted, to the order made in Project Development (at 467-468) where the onus of reasonableness was still on the claiming party.

10    The subtlety of the distinction has not otherwise been particularly topical in the Australian authorities. The Australian cases have focussed more on two other issues. First, whether the party setting aside the freezing order is truly an innocent third party (or whether it is somehow involved in the actual matter in dispute). Secondly, the cases have taken into account conventional indemnity costs concepts, particularly the question of whether it should have been obvious that the very unusual relief given under a freezing order was very likely to be set aside or discharged, that is, whether it was ‘hopeless’.

11    The present application was not, from the outset, an instance of a ‘hopeless’ freezing order application such as where the incorrect plaintiff applied for it (Tremaine Developments Pty Ltd (in liq) v Courtney Develops Pty Ltd [2011] VSC 112). Indemnity costs are always the exception rather than the rule as noted, in the context of a freezing order, by Wilson J in Trustee For Peter And Tanya Zufic Family Trust v Eyears [2008] QSC 355 (at 6).

12    It would be reasonable, in the full background and circumstances of this dispute, (which I will not revisit here) to be put on suspicion concerning unexplained aspects of the security given by Mr Hanna (as guarantor for Strongwall) to PPS until those aspects are properly explained. There was the arguably mysterious purpose of the advance, next there was the very high interest rate and thirdly there was the familial connection between Mr Hanna and the proprietor of PPS. (It is not clear when this was first known.)

13    PPS was nevertheless a relevantly innocent third party put to expense by compliance with and setting aside a freezing order. By submissions filed on 5 August 2011 supported by a detailed affidavit sworn on 4 August 2011, there was a full explanation or at least a sufficient explanation of the arrangement for Sebastian, after consideration, to reach the conclusion that prospects of successfully pursuing the innocent third party freezing order would be very slim, the conclusion ultimately reached in Sebastian No 1. (Although further arguments were advanced as to the justification of lodging a caveat, these arguments were not successful in disposing of the freezing order). In my view, at least from 10 August 2011 onwards, there can be little doubt that the usual order as to indemnity costs (see Norilya Minerals and Computer Accounting) should apply.

14    Therefore, the funds paid into Court should be released and PPS should have its solicitor/client costs to be taxed or agreed up until 10 August 2011 and after that date on an indemnity basis.

The terms of discharge of the injunctive orders

15    In Sebastian No 1 I concluded (at [94]) that the injunctive relief which was in place should be discharged, conditional only on undertakings being given on the matters referred to in the reasons.

16    On 12 September 2011 an undertaking signed by Mr Hanna was filed in the following terms:

I, George Khalil Hanna of 27 Jenever Place, Bentley WA (Second Respondent) undertake to this Court that:

1.    Notwithstanding that I maintain the 18 July 2000 Assignment was an effective instrument of transfer, I will sign any document necessary to ensure that upon re-registration of the First Respondent, the ownership of the Strongwall Patent and the intellectual property associated with the Strongwall System is legally and beneficially assigned to the First Respondent. The preparation and procurement of any necessary documents to effect this assignment, and any necessary registration of those documents, will be the responsibility of, and at the cost of, the First Respondent.

2.    I will not, without the leave of the Court, cause or permit the Third Respondent to dispose of the 30% shareholding in the First Respondent held by the Third Respondent.

17    Sebastian contends that the undertaking is insufficient as it does not refer to all of the patents nor to the associated intellectual property and does not deal with the position pending the re-registration of the first respondent (Strongwall). It also contends that it goes beyond the undertakings contemplated by the Court by the reference to the 18 July 2000 assignment which is in dispute in the proceedings, and by its references to the cost of the assignment ‘which again is a matter which is disputed and as the new controllers of [Strongwall], upon its re-registration (whoever they may be), are entitled to be heard as where the burden of the costs of the assignments ought to lie (prima facie, [Mr Hanna] should pay the costs)’.

18    Some of these matters may be disposed of immediately. The reference to the assignment is simply a statement of Mr Hanna’s view. It is not binding in any sense and will remain in dispute. There is no difficulty with that reference being in the undertaking.

19    As to the cost of the assignment, it seems to me that this should not stand in the way of the matter proceeding. The whole purpose of permitting reinstatement is to endeavour to achieve, at least on some basis, through mediation (see Hanna v Australian Securities and Investments Commission [2011] FCA 1077), some means of bringing back to life some value in these patents and associated intellectual property. The cost is amongst the matters which could be dealt with in such a mediation. If the matter must be resolved by trial, costs in procuring assignment of the patents back to Strongwall is something which can still then be addressed.

20    As to the complaint that the undertaking does not deal with the position pending the re-registration of Strongwall, there is some force in this observation. The re-registration is not imminent unless settlement is agreed. The patents, which should be registered with Strongwall, are still under the control of Mr Hanna notwithstanding his acknowledgement of the obligation to transfer them. Although Mr Hanna contends that the patents have, in effect, already been transferred to Strongwall, that is very much in dispute. I would require the undertaking to extend to the period prior to the re-registration before discharging the injunction orders.

21    As that amendment will be necessary for the undertaking, Mr Hanna should also take into account the complaint that the undertaking does not refer to all of the patents, nor to all of the associated intellectual property. The complaint was not greatly developed in submissions and is another matter for clarification between the parties at the forthcoming mediation, if not before.

CONCLUSION

22    Upon Mr Hanna filing an undertaking which satisfies these remaining issues, the Court will give effect to a minute which discharges the injunctions referred to in [34] of Sebastian No 1.

23    The following orders are made:

1.    The freezing order and injunction against Professional Payments Services Pty Ltd pursuant to paragraph 2 of the Orders made on 6 July 2011 (and as amended on 11 July 2011 and 27 July 2011) be set aside and discharged.

2.    The sum of $59,701.47 paid into Court by Professional Payments Services Pty Ltd on 16 August 2011 be paid out to Professional Payments Services Pty Ltd forthwith.

3.    The applicants jointly and severally pay the costs of Professional Payments Services Pty Ltd of this application, the preparation and attendance at the hearing on 27 July 2011 and of and incidental to the freezing order and injunction:

(a)    up until 10 August 2011 on a party and party basis; and

(b)    thereafter, the applicants do pay the costs of Professional Payments Services Pty Ltd on an indemnity basis so that Professional Payments Services Pty Ltd is fully indemnified for all its costs incurred save for any costs which are of an unreasonable amount or have been unreasonably incurred.

4.    The respondents do file within 21 days, should they wish to do so:

(a)    An amended undertaking to reflect the contents of these reasons.

(b)    A minute of orders discharging the injunctions referred to in these reasons.

Associate:

Dated:    27 September 2011