FEDERAL COURT OF AUSTRALIA

Offstage Support Association Inc v Time of My Life Pty Ltd (No 2) [2011] FCA 1183

THE COURT ORDERS THAT:

1.    The plaintiff, Mr Stephen Braun, Ms Linda Braun and Mr Grant McCartney pay the defendant’s costs of the proceeding (including this application) on an indemnity basis.

THE COURT DECLARES THAT:

2.    The liability of the plaintiff, Mr Stephen Braun, Ms Linda Braun and Mr Grant McCartney under Order 1 is joint and several.

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

REASONS FOR JUDGMENT

Background

1    On 12 April 2011 I dismissed an application by the plaintiff (the first respondent on this application) for an order to wind up the defendant (the applicant on this application) (‘the company’) on one or more of the grounds provided for by subs 461(e), (f) or (k) of the Corporations Act 2001 (Cth) (‘the Act’). I did so, as counsel for the plaintiff correctly conceded, on the basis that there was no evidence to support a winding up order on any of those grounds: [2011] FCA 378 (‘Reasons’) [2].

2    Despite the effective abandonment of these grounds, on the hearing of the application the plaintiff sought to enliven my discretion under s 459B of the Act to order that the company be wound up in insolvency. It sought to do so in reliance on financial statements of the company for the years ended 30 June 2006 and 2007 respectively, put in evidence by the company to demonstrate a point of standing. I concluded that, without more, these financial statements contributed nothing to any conclusion about the insolvency of the company as at these dates, let alone at the time of the hearing. In short, I was not satisfied that the company was insolvent such as to enliven my discretion under s 459B of the Act: Reasons [5] – [7].

3    In the course of concluding that none of the grounds had been made out, I observed that the plaintiff did not assert any standing to apply for an order to wind up the company other than as a creditor of the company: para (b) of s 462(2). I further observed that the debt in respect of which the plaintiff claimed to be a creditor of the company was, in my opinion for good reasons, strongly disputed by the company and that, on the evidence before me, I was not satisfied that the plaintiff was a creditor of the company. As the plaintiff did not rely on any other relevant standing, I concluded that too was sufficient for me to dismiss its application: Reasons [3] – [4].

4    Finally, I also dismissed the application as an abuse of process on the first, if not both, of the branches of that principle as enunciated by McGarvie J in Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation (Cth) [1978] VR 83 at 93-94, the first being where the winding up application is incapable of success as a matter of law or for absence of supporting evidence and the second being where there is a more suitable alternative means of resolving the dispute involved in a disputed claim against the company. I concluded that the circumstances were such as to attract the first branch of the principle if not the second: Reasons [8] – [13].

5    I published my Reasons on 15 April 2011. At [14] of those Reasons, I said:

‘I was asked to refrain from making any order in relation to costs at this stage. I grant the company leave to approach my chambers to have the matter re-listed so that I can hear any application that may be sought in relation to costs.’

Present Application

6    On 17 June 2011 the company filed an application and supporting affidavit of its solicitor, Ms Nicole Tyson, sworn the same date, seeking the following relief in relation to costs:

(1)    An order under s 43 of the Federal Court of Australia Act 1976 (Cth) (‘the FCA Act’) that the plaintiff, Mr Stephen Braun and Ms Linda Helen Braun, pay the company’s costs of the proceeding on an indemnity basis.

(2)    An order under s 43 of the FCA Act and/or O 62 r 9(1) of the Federal Court Rules 1979 that the plaintiff’s solicitor on the winding up application, Mr Grant McCartney, pay the company’s costs of the proceeding on an indemnity basis.

(3)    The orders in (2) and (3) be made on a joint and several basis.

7    On the hearing of the present application there was no appearance by or on behalf of the plaintiff, Mr Braun or Ms Braun, despite the fact that the hearing date of 17 August 2011 was specifically set to accommodate the personal circumstances and exigencies of Mr Braun. Mr McCartney was present but did not appear for either the plaintiff, Mr Braun or Ms Braun. Mr B Levet of counsel appeared for Mr McCartney and Mr J Lockhart SC appeared for the company.

Context

8    The present application for relief in relation to costs, as with the application to wind up the company which I dismissed on 12 April 2011, has to be assessed and determined in the wider context of proceedings which preceded this proceeding, in particular the application filed in this Court on 3 November 2010 by Mr Kevin and Ms Billie Jacobsen seeking orders for the winding up of the company on one or more of the grounds provided for by subs 461(f), (g) or (k) of the Act: NSD1498/2010. The matter came before Emmett J on 10 November 2010. A transcript of the hearing before his Honour is exhibited to the affidavit of Ms Tyson filed in support of the present application. Extracts from this transcript inform a number of the issues that must be determined in the present application. For example:

(1)    At T 8, line 46 to T 9, line 43:

‘HIS HONOUR:    Well, that’s the only question; are they creditors and is the company insolvent?

MR LEVET:    Well, we don’t know as to whether - - -

HIS HONOUR:     So far as the winding up application is concerned.

MR LEVET:     We don’t know as to whether or not it’s insolvent.

HIS HONOUR:     What's the ground for the winding up?

MR LEVET:     It’s the just and equitable.

HIS HONOUR:     But the creditor can’t usually rely on the just and equitable ground, can he?

MR LEVET:     Your Honour, in the time available to me I haven’t been able to find a case where a creditor has – a person other than a creditor – sorry, where a creditor who gets his standing by virtue of being a creditor relies on the just and equitable, but conversely I haven’t found a case that says he can’t.

HIS HONOUR:     Why not just sue for the debt and see if you’re a creditor.

MR LEVET:     Well, ultimately - - -

HIS HONOUR:     I mean, why is it just and equitable - - -

MR LEVET:     Yes.

HIS HONOUR: - - - that a company be wound up because it hasn’t paid a creditor if it’s otherwise solvent?

MR LEVET:     We say that that [sic] the justice and equity arises as a result of the whole circumstances of - - -

HIS HONOUR:     Well, that’s a different matter altogether, that query whether you’ve got standing if you’re not a shareholder.

MR LEVET:     Yes, Your Honour, can I indicate that my instructor has only just filed a notice of appearance in this matter and - - -

HIS HONOUR:     That was one thing I was just going to raise, that the winding up application has been filed by the plaintiffs themselves.

MR LEVET:     Yes. And they have now instructed solicitors and counsel in relation to the matter.’

(Emphasis added.)

(2)    At T 10, line 41 to T 11, line 9:

‘MR LEVET:    One of them appears to have been, which is mentioned obliquely in the initial licence agreement, but which is amplified in subsequent correspondence – one of them appears to be that if my client ceased to be the producer of the show that she was able to bring it back. The other – and she could do that forthwith. The other, which is the matter which concerns both my friend and I, is that in the event that a winding up application was made that was not remedied within 30 days she has the option to, as it were, reacquire the rights to Time of My Life. Now, that wouldn’t be in my clients’ interests and it wouldn’t be in my friend’s client’s interests.

HIS HONOUR:    Doesn’t that mean that it’s really in your interest to have this application dismissed and then set about formulating a proceeding that raises all of the issues that you’ve outlined? I mean, nobody really wants the company wound up.

MR LEVET:    Nobody wants the company wound up.’

(Emphasis added.)

(3)    At T 12, line 1 to line 46:

‘HIS HONOUR:    I mean, it’s not really going to resolve the dispute that you’ve outlined to me in the last half hour or so, which sounds like a genuine dispute which needs to be resolved, but not by a winding up application such as this, I wouldn’t have thought.

MR LEVET:    Well, the problem then, of course, is that one doesn’t want to be in a res judicata position because part of the relief that one would ultimately be seeking is the appointment of an administrator to all of the companies in the Jacobsen Group.

HIS HONOUR:     Well, again, I haven’t heard anything either, but l can’t imagine why dismissing this by consent would give rise to any issue estoppel, much less a res judicata.

MR. LEVET:     That is the concern, your Honour.

HIS HONOUR:     And it may well be that Mr Lockhart would agree that dismissing this application wouldn’t bind you from making any other claim that you’re entitled to make. Is that a fair assumption, Mr Lockhart or not?

MR LOCKHART:    Yes, Your Honour. If these proceedings are dismissed – this is simply a winding up application. It doesn’t - - -

HIS HONOUR:     It just means that the company is not going to be wound upon whatever ground you’ve claimed. And I’m not even sure if the ground is specified or not in the application, which means it’s probably defective anyway.

MR LEVET:     Well, your Honour - - -

HIS HONOUR:     But if this application were dismissed without prejudice in the sense that it wouldn’t preclude you from making any other claim which you’re entitled to make on the basis of the factual material that you’ve briefly outlined - - -

MR LEVET:     Yes.

HIS HONOUR: - - - then it seems to me the parties’ interests would be best served – you can then go away and spend however long you want to formulating a claim that raises these matters. I mean, it seems to me there are many more parties that need to be joined to this proceeding - - -

MR LEVET:     Absolutely, your Honour, so we - - -

HIS HONOUR: - - - to resolve the issues that you’ve formulated.

MR LEVET:     Yes.

HIS HONOUR:     So, I mean, this winding up application really is doomed to failure anyway, isn’t it?’

(Emphasis added.)

(4)    At T 16, line 12 to line 46:

‘MR LOCKHART:     …He’s well aware that the making of an application to wind up Time Of My Life, if it is extant, for 30 days the rights are lost. And these are very, very valuable rights. On one hand, Mr Jacobsen says in court that nobody wants the company wound up, yet the very mechanism that has been chosen to air these grievances is a winding up application. He could have chosen, and ought to have chosen, a very different mechanism – one which would involve a suit joining all relevant parties – all those parties to the 29 June 2009 settlement restructuring, because he seeks to set the entire transaction aside.

HIS HONOUR:     He doesn’t in this proceeding at the moment.

MR LOCKHART:     He doesn’t seek to set it aside, your Honour.

HIS HONOUR:     But it may well be that is what is being foreshadowed.

MR LOCKHART:     He doesn’t seek to set it aside, but in order to establish that he’s a creditor he has to undo a variety of releases and acknowledgments, to which he was a party, where he had lawyers advising him - - -

HIS HONOUR:     I think we’re on common ground. What do you suggest I should do this morning?

MR LOCKHART:     Unless the plaintiff is prepared to indicate today – and by that I mean perhaps the close of today – that they’re not going to withdraw the winding up application – leaving aside whatever other applications they may flag – that’s a matter for them and they can be dealt with when they’re raised. If that doesn’t happen today, then what we seek is the matter be set down for an early final hearing in such time as to enable the matter to be dealt with and disposed of and at least a realistic opportunity for a decision to be made by 3 December. That’s the difficulty that we find ourselves in. It might be said it’s an unfortunate clause to have a 30-day automatic loss of rights simply by making application, but that’s the position in which we find ourselves.

HIS HONOUR:     That’s apparently a matter of history. It’s there I gather.

MR LOCKHART:     It’s there.’

(Emphasis added.)

(5)    At T 17, line 7 to T 18, line 35:

‘HIS HONOUR:     Mr Levet, it must be possible to get instructions within a couple of hours mustn’t it as to the disposition of this winding up application. I mean, I just can’t understand how the present plaintiffs could contemplate proceeding with it.

MR LEVET:     Your Honour, part of the difficulties that certainly my instructor and I have faced is that we haven’t been able to talk to people that might shed some light on this in terms of the existence of the winding up application and, sort of, discuss it with them. For instance, we were [sic] very much have liked to have had a teleconference with our clients and Michael, who’s presently in London and resides in the United Kingdom, who has been intimately involved with this and has been intimately involved with the issue of this 30-day rights business. We simply haven’t been able to talk to the people we want to talk to in the context of the winding up.

HIS HONOUR:     But be that as it may, the application seems to be totally misconceived … It appears to have been commenced without any legal advice and, you know, on that basis it seems, as I’ve said twice already, totally misconceived. I can’t see how you’d need to speak to anybody in order to decide to withdraw the winding up application albeit without prejudice to making whatever claims you want to for equitable relief or other relief along the lines that you’ve foreshadowed, namely, that there’s been a joint venture and there have been breaches of – if I assume the allegations – breach of fiduciary obligations and other obligations arising out of that relationship.

MR LEVET:    Yes, your Honour.

HIS HONOUR:     I mean, what I’d be disposed to do is to stand the matter down till this afternoon to enable you to get some instructions that will enable us to know that, within a very short time, either you’re going to persist with this winding up application, in which case I’ll list it for hearing immediately.

MR LEVET:     Yes, your Honour.

HIS HONOUR:     Or that we can at least buy some time to enable the parties’ interests to be properly preserved by getting rid of the winding up application.

MR LEVET:     Yes, your Honour.

HIS HONOUR:     I’ll hear the winding up application this afternoon if you want to, but I gather you’re not ready to do that.

MR LEVET:     Not ready to do it. Haven’t spoken to the witnesses we need to speak to, your Honour. Simple as that.

HIS HONOUR:     But, as I understand it, Mr Lockhart says it doesn’t matter what witnesses you call, if you’re relying on the just and equitable ground it’s doomed to failure. Maybe he’ll move for summary dismissal of the proceeding if that’s the only base upon which you say that you’re entitled to get a winding up order, but I’ll deal with that as soon as Mr Lockhart is ready to make - - -

MR LEVET:     I think there were a couple of other grounds, your Honour.

HIS HONOUR:     Well, they’re not in them – the winding [up] application – at the moment, are they?

MR LEVET:     They are.

HIS HONOUR:     Does the winding up application comply with the rules?

MR LEVET:     It’s 461(f), (g) and (k), your Honour.

HIS HONOUR:     Well, that may be. They may be grounds to be relied upon by a shareholder, but not a creditor.

MR LEVET:     Yes, your Honour.

HIS HONOUR:     I mean, if you’re a creditor you can sue and you get judgment if there’s no defence. If you’re not a creditor then, by definition, you’ve got no standing at all.

MR LEVET:     I suppose unless one is – I’m thinking out aloud, your Honour – unless one is proceeding under the oppressive ground.

HIS HONOUR:     But it’s not oppressive to a creditor.

MR LEVET:     Yes, your Honour.’

(Emphasis added.)

(6)    At T 21, line 22 to line 24:

‘HIS HONOUR:     … If I’m persuaded that it is an abuse of process, and I must say that it seems to me there is a real prospect of that, then I [would] be disposed to restrain publication of the fact of the litigation.’

(Emphasis added.)

Following an adjournment at 10:38 a.m. and a resumption at 2:31 p.m.:

(7)    At T 23, lines 34 and 35:

‘MR LEVET:    … By consent we’d seek an order that the plaintiff’s application of 3 November be dismissed.’

(8)    At T 24, line 17 to line 34:

‘MR LEVET:    Yes. Can I say, your Honour, that it would not be intended to bring the same application on the same grounds and using the same basis for standing before a court again. Having said that, an order seeking the appointment for an administrator or receivers to the companies of the group generally on grounds for oppression ---

HIS HONOUR:    Well, assuming that somebody has standing to make such an application.

MR LEVET:    Yes.

HIS HONOUR:    And I’m not specifically one way or the other at the moment about that.

MR LEVEL:    We would, at least ---

HIS HONOUR:    All I was saying earlier in the day was that a mere creditor wouldn’t necessarily have standing.’

(Emphasis added.)

The Evidence

9    On the hearing of the present application, the company relied on:

(1)    Affidavit of Ms Tyson sworn 31 March 2011    Ex 1

(2)    Affidavit of Ms Tyson sworn 17 June 2011    Ex 2

(3)    Affidavit of Ms Tyson sworn 17 August 2011    Ex 3

(4)    Affidavit of Ms Zoe Robinson affirmed 4 April 2011    Ex 4

(5)    Affidavit of Ms Jennifer Kiddle sworn 4 April 2011    Ex 5

(6)    Letter dated 19 April 2011 from Mr McCartney to Ms Tyson    Ex 6

(7)    Three notices to produce filed 19 July 2011 returnable on 3 August 2011, one to each of Mr Braun, Ms Braun and Mr McCartney together with letter dated 14 July 2001 from Mr McCartney to Addisons    Ex 7

(8)    Letter dated 7 July 2011 to Mr Braun and Ms Braun from Ms Tyson with covering email dated 7 July 2011 to Mr Braun and Mr McCartney    Ex 8

10    On the hearing of the application, Mr McCartney relied on:

(1)    An affidavit affirmed by him on 16 August 2011    Ex A

(2)    A second affidavit affirmed by him on 17 August 2011    Ex B

11    Mr McCartney was cross-examined. None of the deponents of affidavits relied on by the company were required for cross-examination.

12    In his first affidavit (Ex A), Mr McCartney deposed:

‘2.    Before I filed the plaintiff’s winding up application in the substantive matter (325 of 2011) I formed the view both on my own account and in concert with advice of my appointed counsel that the matter was properly arguable.

3.    In particular I gave consideration to the debt claimed by Encore International, Inc. and why the matter should proceed by winding up application as opposed to a creditors statutory demand application. In this respect I gave particular consideration to the nature of recovery of the Encore International, Inc. debt and how preferences could be avoided.

4.    As a consequence proceedings issued in the form as filed.

5.    As I considered that timing was an essential part of the way in which the matter should go forward the application was filed only with the affidavit of Linda Braun attached.

6.    It was my intention to address the following evidence in support of my client’s claim:

a)    The affidavit of John Frederick Lord referred to and annexed to the affidavit of Linda Braun;

b)    To subpoena John Frederick Lord to cross examine him on the contents of his affidavit and other matters relating to the solvency of Time of My Life Pty Ltd and its related entities;

c)    The affidavit of Bruce Glatman confirming the debt of Encore International, Inc;

d)    To subpoena Time of My Life Pty Ltd for production of relevant financial information.

e)    Affidavit of Margaret Ennis annexing her investigation into the financial status and conduct of Time of My Life Pty Ltd and its related entities.

f)    Cross examination of Nicholas Weininger the Chief Financial Officer of Time of My Life Pty Ltd on his affidavit and the documents that would have been produced under the subpoena referred to above.

g)    Cross examination of Jennifer Kiddle, the company secretary of Time of My Life Pty Ltd in relation to both her affidavit and the documents that would have been produced under the subpoena referred to above.

7.    Subsequent to His Honour’s ruling made on 7th April, 2011 that further evidence could not be adduced I again gave thought to my client’s position and in particular in relation to the possible question of an abuse of process.

8.    The view I arrived at was that the matter continued to be properly arguable based on the evidence already filed (in particular the affidavit of Nicholas Weininger and Jennifer Kiddle) and to the law both as I understood it and advice sought in this regard.

9.    It remained my view that the matter even without the evidence referred to above remained properly arguable and did not involve an abuse of process and in this respect I attach a true copy of the Plaintiff’s Outline filed in this matter marked ‘DGM 1’.

10.    Subsequently releases were sought from both Linda and Stephen Braun in respect of legal professional privilege. Those releases were refused.’

13    Mr McCartney’s second affidavit (Ex B) attached a copy of a letter dated 28 June 2011 from Mr Braun and Ms Braun, signed on her behalf by Mr Braun, in the following terms:

‘Dear Mr McCartney,

We note that you no longer represent us and are unable to do so in relation to the costs application that has been made against us.

You have asked whether we would be prepared to release you from legal professional privilege for the purpose of your defence to the costs application that has been made against you.

We have come to the conclusion that it would not be in our interest to do so and therefore decline.

Yours faithfully,

S Braun (signed)    Linda Braun

    (by her Attorney

    Stephen Braun) (signed)

STEPHEN BRAUN    LINDA BRAUN’

14    In cross-examination, Mr McCartney made the following admissions, concessions or denials:

(1)    Mr McCartney admitted (T 27, lines 30 – 33) that on 13 April 2011 he had a conversation with Ms Tyson, the company’s solicitor, in substance as follows (Ex 3 at [7]):

‘Grant:    Are your clients not prepared to pay anything to Kevin and Billie to resolve these matters?

Nicole:    No I don’t think so, but that’s without instructions. Also, now we are dealing with other applications like Offstage. How would settling with Kevin and Billie resolve those matters?

Grant:    I think you’d find that if your clients pay Kevin and Billie some money, these other creditors like Bruce Glatman, Offstage etc will go away.

Nicole:    Really? How can you say this when Offstage is a separate entity?

Grant:    Well I think the Brauns felt sorry for Kevin and Billie as they are looking at retirement with nothing, and they feel for Kevin and Billie. Therefore I think you’d find Offstage would resolve if you paid something to Kevin and Billie.’

(2)    Mr McCartney admitted that he had sent a letter dated 25 March 2011 (Ex 1, p 148) to Mr Kevin and Ms Billie Jacobsen confirming that his client, the plaintiff, had filed a winding up application against the company and a copy of that application was attached to that letter. Mr McCartney conceded that he did this on the instructions of the plaintiff, which instructions were given by or through Mr Braun. Mr McCartney also conceded that he had discussions with Mr Kevin Jacobsen, prior to the commencement by the plaintiff of this proceeding, but around this time (25 March 2011), concerning the bringing of the proceeding. He reluctantly conceded that he understood that one of the purposes of the letter of 25 March 2011 could well have been so that it could be disseminated to various persons associated with proposed negotiations concerning the acquisition from, and the sale by, the company of its rights to the stage play ‘Dirty Dancing’. Indeed, so much is self-evident from the second paragraph of the letter. And Mr McCartney conceded that the purpose of his letter of 23 December 2010 to Mr Robert McCormack of Tress Cox, with copy by email to Mr Karl Sydow (Ex 1, p 132) was to put potential purchasers of such rights of the company on notice of the existence of the proceeding commenced in this Court on 13 December 2010 (see [24] below): T 29, line 40 to T 34, line 3.

(3)    Mr McCartney conceded that at the time of the commencement of this proceeding, Mr Kevin Jacobsen had wanted some money to be paid to him and his wife, Ms Billie Jacobsen, by the company and/or Mr Colin Jacobsen interests. Indeed, according to Mr McCartney, Mr Kevin Jacobsen had been saying this for some time and he is still saying it: T 34 lines 5 – 14.

(4)    Mr McCartney denied that he had a discussion with Mr Kevin Jacobsen around the time of commencement of this proceeding about the fact that if the 30 day trigger clause in the ‘Magic Hour’ agreement were enlivened, that would apply some pressure to the company to enter into negotiations with Mr Kevin Jacobsen: T 34, lines 16 – 21. Nevertheless, he conceded his awareness of the existence of the clause from as early as December 2010 and that, in his view, the effect of the clause was that if an application was made to wind up the company then, if it was not disposed of within 30 days, the rights would be lost: T 34, lines 22 – 33; and that the existence and, his view of, the effect of the trigger clause, was a matter he regularly discussed with Mr Kevin Jacobsen during February and March 2011: T 35, lines 1 – 6.

(5)    Mr McCartney conceded that he knew at the time when the plaintiff commenced this proceeding to wind up the company that the plaintiff’s assets were of the order of $1,000: T 36, lines 25 – 27. He said that he expected the plaintiff to be able to meet its costs obligations in respect of the proceeding from contributions of members, although, apart from Mr Braun and Ms Braun, he was not aware of the other members: ‘I think Stan Holmes, and one stage I think David Jacobsen [T 36, lines 36 – 46] … I might be incorrect on [Stan Homes], though’: T 37, lines 1 – 2.

(6)    Mr McCartney conceded that recovery of the alleged Encore International Inc (‘Encore’) debt was not pursued by Court proceedings; he said this was because there was a concern that there may be a preference issue in relation to recovery: T 38, lines 5 – 17. He disagreed with the proposition that there was no basis whatsoever for considering that there was any risk at all of the company going into liquidation at that point in time; he said that he thought it was insolvent and still is, but did not proffer any basis for that belief; nor was he re-examined on that issue: T 38, lines 28 – 32. He conceded, however, that no letter of demand was sent for the repayment of the debt at any time during 2011 by any person or any law firm to his knowledge: T 39, lines 7 – 9; and said that, in his view, it was not unusual, even if not ‘perfectly orthodox’, to seek to recover a debt by bringing winding-up proceedings in a court without first issuing a statutory demand: T 39, lines 11 – 26.

(7)    Initially, Mr McCartney would not agree that neither in the originating process nor the amended originating process was the insolvency ground relied upon in the application to wind up the company: T 41, lines 11 – 14. He said that his understanding was that the grounds that were specified were sufficient to include insolvency. The later amendment was, he said, essentially a belt and braces approach: T 42, lines 3 – 5. But he agreed that the later amendment was to include the just and equitable ground as opposed to a specific insolvency ground: T 42, lines 6 – 7. He then denied that the reason that the plaintiff at no stage subpoenaed the company to produce relevant financial information was because that was not something that he had considered to be a matter for the purposes of advancing the claim: T 42, lines 10 – 13.

(8)    Mr McCartney was then referred to the view he expressed in [8] of Ex A, namely, that notwithstanding the ruling I made on 7 April 2011, the grounds of the winding up application ‘continued to be properly arguable based on the evidence already filed … and to the law both as [he] understood it and advice sought in this regard’. When he was asked what evidence was already filed, he answered: ‘The balance sheets you referred to’: T 43, lines 13 – 15. The transcript then reads (T 43, lines 17 – 34):

‘I’m sorry, you understand it, do you not, that the balance sheets were relied upon at the hearing for the purpose of demonstrating insolvency, but you recall, do you not, that Offstage’s counsel at the hearing accepted that there was insufficient evidence to support contentions based upon section 461. Do you recall that?---I don’t recall exactly that.

Was it your understanding that the balance sheets that formed part of [Ms Kiddle’s] evidence were relevant and went to the various section 461 grounds that formed part of the application?---I think so, yes.

Apart from the balance sheets were there any other – was there any other evidence that you understood to support the section 461 grounds?---There were the profit and loss statements as well.

And in relation to the insolvency grounds did you understand that there was any evidence supporting the insolvency grounds beyond the balance sheets and the profit and loss statements you’ve referred to?---There was the continuing instructions from my clients.’

(9)    Mr McCartney was then referred to Ex 6 – a letter dated 19 April 2011 from Mr McCartney to Ms Tyson – in the following terms:

‘We hold our view that the appeal continues to enliven the termination provisions of the Magic Hour –TOML agreement and that mutual destruction of all of the Jacobsen family’s interest appears assured unless a positive step is taken prior to Good Friday.

Our clients have no doubt that Eleanor Bergstein will accept the termination has taken place and she will act accordingly. In our view this may only be averted by Offstage withdrawing its appeal.

Further, you will have noted that KJPL is now in liquidation. The liquidator of that company has indicated he will be commencing public examination of Amber Jacobsen, Colin Jacobsen, Peter Allen, John David, Jennie Kiddle, Scan Weininger and John Lord.

The evidence that will fall from those examinations will be disastrous for your clients. We already have the statement of Achilles Constantinidis confirming what Amber said to him about inserting the poison pill into the Constitution and Shareholders Agreements by way of the Kemp Strang obfuscation.

We have already alluded to a private criminal prosecution in this respect which we understand is proceeding.

We strongly suggest that you seek urgent instructions from your client on these matters with a view to an immediate resolution.’

Mr McCartney’s cross-examination on this letter reads (T 44, lines 18 – 37):

‘What was your understanding of the purpose of this letter, Mr McCartney?---My understanding of the purpose of this letter was to suggest that a settlement between the parties would be advantageous to all parties.

And that was an understanding based upon your knowledge that if the 30 days in the Magic Hour agreement expired then the rights would be terminated. Correct?---That was my view, yes.

And you understood, did you not, that the purpose of the bringing of the winding up proceedings and the appeal was to trigger the 30 day provision in the sense that it started the 30 days running and that would apply commercial pressure to Time of My Life which would assist Mr Kevin Jacobson in negotiating monetary compensation from Time of My Life?---No, the purpose of the application was to get payment on the – on the international debt failing which the winding up of the company.

And your position is that rather than sue in a court of law for the payment of a debt your understanding was that by reasons of some urgency to do with insolvency that one simply couldn’t wait to sue in a court of law, that the winding up proceedings were the only way forward. Is that your understanding as to why it was done in this fashion?---That is correct.’

Assessment of Mr McCartney’s Evidence

15    Much was made in submissions to the Court on behalf of Mr McCartney that it was not put to him in cross-examination that he did not form the views to which he deposes in [2], [8] and [9] of Ex A. So much may be accepted. It may also be accepted, if only on the face of his evidence, that Mr McCartney did in fact address the issues to which he refers and subjectively formed the views to which he deposes. But if he did, then the views he formed as deposed to in [8] and [9] of Ex A – after my ruling on 7 April 2011 – if not the view he formed as deposed to in [2] of Ex A – before commencement of the proceeding – are not views which, in my opinion, a competent solicitor experienced in this area of the law could reasonably come to; and I have no reason to doubt that Mr McCartney is a competent solicitor experienced in this area of the law. For those reasons, I attach no weight at all to what Mr McCartney deposes to at [8] and [9] of Ex A.

16    Much was made by Mr McCartney (see [6] of Ex A) of his intention to adduce further evidence by issuing subpoenas to certain persons and cross-examining them – it was not explained how such persons would be susceptible to cross-examination; by issuing subpoenas for the production of documents; cross-examination of witnesses giving evidence on behalf of the company – it was not explained why this could not have been done in any event; as well as calling evidence from other persons. He deposed, in effect, that his intention in that regard was frustrated by my ruling of 7 April 2011 that the plaintiff not be granted leave to adduce further evidence. Apart from the difficulties I have already referred to in accepting what Mr McCartney deposes to at [6] of Ex A, the paragraph is more notable for what it does not say than what it does say. It does not explain how any of this evidence could have made any difference to the conclusions I reached in dismissing the plaintiff’s application on the s 461 grounds, on the insolvency ground or as an abuse of process; or how it would overcome the difficulty the plaintiff faced in relation to its standing to apply for an order to wind up the company. For those reasons, I attach no weight at all to what Mr McCartney deposes to at [2] to [6] of Ex A.

17    A number of Mr McCartney’s answers to questions put to him in cross-examination are, in my view, not credible. Into this category fall the following:

(1)    His response that he expected the plaintiff to be able to meet its costs obligations in respect of the proceeding from contributions of members: [14(5)] above. No basis was offered for this expectation; he did not even know who the members were.

(2)    His refusal to agree that neither in the originating process nor the amended originating process was the insolvency ground relied upon in the application to wind up the company: [14(7)] above. The documents as filed speak for themselves; he was responsible for preparing and filing them.

(3)    His inability to recall that the plaintiff’s counsel at the hearing accepted that there was insufficient evidence to support contentions based upon s 461: [14(8)] above. Mr McCartney was present at the hearing instructing the plaintiff’s counsel.

(4)    His denial that he understood that the purpose of the bringing of the winding up proceedings and the appeal was to trigger the 30 day provision in the ‘Magic Hour’ agreement to apply commercial pressure to the company which would assist Mr Kevin Jacobsen in negotiating compensation from the company; and his assertion that the purpose was to get payment of the assigned debt, failing which, to wind up the company: [14(9)] above. This denial and assertion flies in the face of events and communications that are in evidence and clearly suggest the contrary is true.

Findings

18    The plaintiff was registered under the Associations Incorporation Act 2009 (NSW) on 14 March 2011 (Ex 5, p 35) pursuant to an application dated 10 March 2011 and lodged by a Mr David Jacobsen, the son of Mr Kevin Jacobsen, containing a declaration and privacy acknowledgment signed by Mr Braun, the brother of Ms Billie Jacobsen, the wife of Mr Kevin Jacobsen (Ex 4, p 4).

19    Mr Braun is shown on the plaintiff’s certificate of registration (Ex 5, p 35) as the public officer of the plaintiff, and Ms Braun, the sister of Ms Billie Jacobsen, is the Secretary and a committee member of the plaintiff (Ex 1 (affidavit of Ms Linda Helen Braun sworn 22 March 2011) in the winding up application at [1] and [33]).

20    The application for registration disclosed that:

(1)    The objects of the plaintiff were:

‘To promote the interests of fledgling producers, promoters and members of the public seeking to advance Australian entertainment.’

(2)    The total assets of the plaintiff were $1,000.

(3)    The major sources of income were expected to be ‘donations’ and ‘fundraising’.

21    Clearly the plaintiff, at the time of registration, was an ‘entity of straw’ and no evidence was adduced that, subsequent to registration, its financial position had improved.

22    By deed dated 20 March 2011, the plaintiff alleges it accepted an assignment of a debt said to be owing by the company to Encore in the sum of USD54,800 in payment of a consideration of AUD1.00 but the deed was not executed by the plaintiff and there is no other evidence that the plaintiff bound itself to the covenants, on the part of the plaintiff, contained in the deed: (Ex 1 in the winding up application, ex ‘A’). Notice of the alleged assignment dated the same date signed on behalf of Encore (Ex 1 in the winding up application, ex ‘B’) takes the matter no further. Why, it may be asked, would a creditor assign a debt in excess of USD50,000 that was owing to the creditor by a solvent company, owning valuable rights, to an unrelated assignee for AUD1.00? The short answer is that it would not. Indeed, by itself, the assignment casts real doubt on the existence of the debt, and even if it exists, its amount.

23    On 10 November 2010 Emmett J dismissed the application (NSD1498/2010) by Mr Kevin and Ms Billie Jacobsen seeking orders for, inter alia, the winding up of the company under subs 461(1)(f), (g) and (k) of the Act. His Honour ordered them to pay the costs of the company. As at 31 March 2011 the company had not received any moneys in payment of these costs.

24    On 21 March 2011, Mr Kevin Jacobsen filed a notice of discontinuance of proceeding (NSD1736/2010) he commenced on 13 December 2010, against the company and others. In consequence, orders were made by Bennett J on the same date, that Mr Kevin Jacobsen pay the respondents’ (including the company’s) costs, with some costs to be assessed on an indemnity basis and others on a party/party basis. As at 31 March 2011 the company had not received any moneys in payment of its costs.

25    This proceeding was commenced two days later by the filing of the originating process on 23 March 2011.

26    On 28 March 2011, Ms Tyson wrote to Mr McCartney in the following terms (Ex 1, annexure ‘A’):

‘We refer to the proceedings brought by Offstage Support Association Inc (Offstage) against Time of My Life Pty Limited (TOML) in the Federal Court of Australia.

Offstage alleges it is a creditor of TOML (based on a debt allegedly assigned from Encore International Inc (Encore)) however the originating process seeks an order to wind up TOML under either section 461(1)(e) or section 461(1)(f) of the Corporations Act (the Act).

The application is fundamentally flawed and is bound to fail, for at least the following reasons:

(a)    Firstly, TOML denies any debt to Encore. TOML had no notice of any debt to Encore prior to receiving this application. Further, even if Encore was a creditor of TOML (which is denied), TOML had not received any notice of assignment as at 23 March 2011, when the Application was filed. Offstage was therefore not a creditor with standing to make an application on that date;

(b)    Even if Offstage was or is a creditor of TOML (which is denied), the grounds relied upon in section 461 apply to members, not creditors. Sections 461(e) and (f) apply when the affairs of the company have been conducted in a way, inter alia, oppressive or unfairly prejudicial to members. It is not appropriate for a creditor which claims its debt has been unpaid, to seek to wind up a company on the grounds relied upon in section 461(1)(e) and (f).

Other fundamental failings include that the Deed of Assignment relied upon is not executed, and that whilst Lynda [sic] Braun deposes to being the Secretary of the Plaintiff, a search conducted with the Office of Fair Trading records that Stephen Braun (her brother) is its public officer. TOML also denies the substance of the allegations made in Ms Braun’s affidavit, or that those allegations (even if founded) would ground orders for winding up under section 461.

For the reasons above the claim is fundamentally flawed and should be withdrawn.

If Offstage claims it is owed a debt by TOML, it should bring proceedings against TOML to recover the debt. It should not instead seek to wind up TOML on grounds applicable to members.

The present application is similar in nature to the first application brought by Kevin and Billie Jacobsen against TOML in the Federal Court last year (1498 of 2010), in which the Jacobsens sought an order to wind up TOML under sections 461(1)(f), (g) and (k) of the Act, based on them being alleged creditors of TOML. That application was dismissed on the first return date, with costs ordered against Mr and Mrs Jacobsen. We have provided your firm with a copy of the transcript of those proceedings previously, which should make evident the similarity between the matters raised in those proceedings and the present.

Of further concern is that the present application was instigated shortly after Kevin Jacobsen discontinued his second application against TOML in proceedings 1736 of 2010 in the Federal Court last Monday, 21 March 2011. We are instructed that Linda Braun is Billie Jacobsen’s sister. A Fair Trading search indicates that Offstage was incorporated on 14 March 2011.

It is evident Kevin Jacobsen has had some involvement in the present proceedings in that Offstage relies on an affidavit of John Lord sworn in the previous proceedings, and Mr Jacobsen has written to various persons overseas, both notifying them of the action, and providing a letter from you in relation to the action (see enclosed). These communications and the timing of the latest application raise serious concerns as to the intention and purpose of the proceedings, and Kevin Jacobsen’s involvement.

In the event the proceedings are continued, TOML will make urgent application to have the claim summarily dismissed. TOML reserves its right to seek orders, including costs orders, against non-parties including Kevin and Billie Jacobsen and the practitioners of your firm, relying on principles in Consolidated Byrnes Holdings Ltd v. Hardel Investments Pty Ltd [2009] FCA 399. TOML also reserves its rights to make submissions on the purpose for which this application is brought, including that the winding up is sought for a collateral or ulterior purpose.

We request that your client agree to discontinue the proceedings immediately, with no order as to costs.

We request that you confirm your client’s position by 5 pm tomorrow, and whether it agrees to discontinue with no order as to costs. Failing this TOML shall seek orders as foreshadowed above, without delay.’

27    On 4 April 2011, Mr Philip Stern of Addisons wrote to Mr McCartney in the following terms:

‘We refer to the directions hearing this morning before his Honour Justice Emmett.

The form of relief sought by your client (placing the company into liquidation) is misconceived. Even if the alleged debt to your client were owing (which it is not) there is no basis established to wind up the company. No answer could be given to this proposition when the matter was raised with your counsel by Emmett J this morning.

Ultimately this dispute concerns whether or not your client’s alleged debt is in fact owing. The appropriate action if your client believes that it is owing is to commence a proceeding to recover the debt. When asked by his Honour why that was not the proper course to take, your client’s counsel understandably could give no answer.

A winding up of the company achieves no more than depriving the company of its primary asset, for the reasons articulated by his Honour this morning i.e. the triggering of the provision in the rights agreement which results in the loss of the rights.

In fact your client’s seeking to wind up the company when the obvious and proper course available to it is to commence a proceeding to recover the debt speaks volumes as to your client’s true purpose in commencing this proceeding, that being to trigger the loss of rights clause to apply pressure upon the company.

We invite your client to now withdraw its application.

Our client reserves all of its rights in relation to this action, including the basis for the making of costs orders and by whom such costs orders should be paid, including costs orders against Ms Braun and other officers of your client.’

28    Mr McCartney acted for the plaintiff on the hearing of its application on 12 April 2011 on instructions from Mr Braun and Ms Braun. Mr McCartney, in turn, instructed counsel.

29    By reason of the findings in [18] – [22], [24] and [25] above, namely, the date that the plaintiff was brought into existence, the proximity of that date to the commencement of the proceeding and the discontinuance of the earlier proceeding, the identity of the persons associated with the plaintiff as officers or committee members, the limited amount of its assets and the nominal consideration it paid for the assignment of an alleged debt of over US$50,000, I find that the plaintiff was brought into existence for the sole purpose of commencing the proceeding and being used as the vehicle for the litigation whilst at the same time shielding, not only those associated with it as officers or committee members, but others, such as Mr Kevin Jacobsen and Ms Billie Jacobsen, from adverse costs orders or further adverse costs orders.

30    By reason of the matters referred to in [4] above, the proceeding was an abuse of process. The persons responsible for the commencement and pursuit of the proceeding, apart from the plaintiff, include Mr Braun as its public officer and Ms Braun as committee member, Secretary and attorney. In addition, Ms Braun affirmed the only affidavit in support of the application.

31    I find that there is much to be said for the company’s submission, particularly having regard to my assessment of Mr McCartney’s evidence at [15] – [17] above, that the plaintiff’s case was hopeless at the outset. But even if issuing subpoenas might have assisted, once it became clear at the directions hearing on 7 April 2011 that leave would not be granted to issue subpoenas, from that point on there was no way forward.

32    The last ditch attempt in the days before the hearing to seek to rely upon the ground of insolvency, was also hopeless. Seeking to rely on two balance sheets, four and five years old, respectively, was undoubtedly doomed to fail as outlined in the Reasons at [5] – [7].

33    By reason of the finding at [26] above, I find that Mr Braun, Ms Braun and Mr McCartney were put on notice, no later than 28 March 2011, that costs orders would be sought against them if the proceeding was not discontinued.

34    Finally, and, having regard to the relief sought in this application (see [6] above), perhaps most importantly, I find that the plaintiff’s application for an order that the company be wound up was brought for a collateral purpose. The proceeding was not brought for the purpose of recovering a debt, if there was one, or failing that, the winding up of the company; it was brought for the purpose of applying commercial pressure by the triggering of the 30 day clause found in the rights agreement between the company and Magic Hour Productions Inc (annexed to Ex 5, pp 23, 24) with the dual objects of securing a monetary payment from the company, or other interests associated with Mr Colin Jacobsen, for Mr Kevin and Ms Billie Jacobsen and, at the same time, deterring any dealing with the rights. That this was the purpose of the plaintiff, and those who stood behind it, including Mr Braun and Ms Braun; and not only known to, but acquiesced in by, Mr McCartney, is apparent from the following:

(1)    The fact that the case was hopeless speaks volumes as to the true purpose for which the proceeding was brought. To recover a US$50,000 debt by the taking of complex winding up proceedings rather than suing in a court, after having been warned that this is an abuse of process, speaks tellingly of a different purpose.

(2)    Knowledge of the 30 day trigger clause. Mr McCartney was well aware of this through his involvement in the earlier proceedings: see, for example, Ex 1, p 174. It is open to me to infer, and I do, that Mr Braun or Ms Braun were also aware of the provision by reason of their being siblings of Ms Billie Jacobsen, wife of Mr Kevin Jacobsen. Mr Kevin Jacobsen and Ms Billie Jacobsen were parties to an earlier application to wind up the company (Ex 1, [10] – [13]). Those proceedings were discontinued by the Jacobsens at the first directions hearing, following argument before Emmett J, during which it was apparent that the Jacobsens were aware of the 30 day trigger clause (see [8(2)] above).

(3)    There had been a consistent course of conduct engaged in by the Jacobsens with the assistance of Mr McCartney, in disseminating letters advising certain persons considered to be involved in a potential sale of the rights, advising such persons that litigation has been on foot and warning such persons that any purchase of assets from the company may be imperilled by reason of Federal Court proceedings that had been commenced against the company and others (being a second set of proceedings).

(4)    Within two days of the commencement of this proceeding, Mr McCartney's firm wrote to Mr Kevin and Ms Billie Jacobsen, disingenuously ‘confirming’ to them that the plaintiff had filed a winding up application against the company, copy attached. The letter goes on to suggest that they advise any party known to them that in the event that they attempt to conclude any transaction with the company that that may be impeded by the winding up application: Ex 1, p 148, which was then apparently distributed to various persons by Mr Kevin Jacobsen (see pp 151 – 162). Further, it is clear from the letter sent on 15 December 2010 by Ms Tyson to Mr McCartney (Ex 1, pp 163 -164) that Mr McCartney was aware that the company was engaging in a sale of its assets, of which Mr Kevin Jacobsen was aware.

(5)    Exhibit 6: letter from Mr McCartney’s firm dated 19 April 2011, to Ms Tyson of Addisons. This letter was sent at the time that an appeal had been filed against my order dismissing the application. It states the view that the appeal continues to enliven the termination provisions of the Magic Hour agreement and that mutual destruction of all of the Jacobsen Family’s interest appears assured unless a positive step is taken prior to Good Friday. It is then suggested that termination will only be averted if the appeal is withdrawn, and the company is urged to seek an immediate resolution. This is clear evidence that the purpose behind the bringing of the winding up application was not to recover a debt, or have the company wound up, so as to enable some orderly process of dealing with its assets/liabilities; rather, the application was brought with a view to enlivening the 30 day trigger provision and thus place persons for whom Mr McCartney acted in a more favourable negotiation position as well as deter any dealings with the rights. While that letter is described as being ‘without prejudice’, no such privilege applies because the document is relevant to determining liability for costs: s 131(2)(h) of the Evidence Act 1995 (Cth and NSW). In addition, the company relied on the exception to the exclusion in s 131(2)(k) – where one of the persons in the dispute, or an employee or agent of such a person, knew or ought reasonably to have known that the communication was made in furtherance of a deliberate abuse of power: see Van Der Lee v State of New South Wales [2002] NSWCA 286 where the NSW Court of Appeal held that a communication evidencing abuse of process will not be protected by ‘without prejudice’ privilege (at [62]).

Analysis

35    As noted in [7] above, there was no appearance by or on behalf of the plaintiff, Mr Braun or Ms Braun. On behalf of Mr McCartney, Mr Levet relied almost exclusively on the principles which fell from McColl JA, with whom Hodgson and Ipp JJA agreed, in Lemoto v Able Technical Pty Ltd & Ors (2005) 63 NSWLR 300 at [92], as being the principles which can be gleaned from the English and Australian authorities which have considered the power to order legal practitioners to pay the cost of proceedings in which they have represented parties:

‘…

(a)    The jurisdiction to order a legal practitioner to pay the costs of legal proceedings in respect of which he or she provided legal services must be exercised “with care and discretion and only in clear cases”: Ridehalgh (at 229), Re Bendeich (1994) 53 FCR 422; Deputy Commissioner of Taxation v Levick (1999) 168 ALR 383 at 389 [11] per Hill J; Levick v Commissioner of Taxation (2000) 102 FCR 155 at 166 [44]; Gitsham v Suncorp Metway Insurance Ltd [2002] QCA 416 at [8], per White J (with whom Davies JA and Williams JA agreed); De Sousa v Minister for Immigration Local Government and Ethnic Affairs (1993) 41 FCR 544; Money Tree Management Services Pty Ltd and Institute of Taxation Research v Deputy Commissioner of Taxation (No 3) (2000) 45 ATR 262;

(b)    A legal representative is not to be held to have acted improperly, unreasonably or negligently simply because he or she acts for a party who pursues a claim or a defence which is plainly doomed to fail: Ridehalgh (at 233); Medcalf v Mardell [2003] 1 AC 120 at 143 [56] per Lord Hobhouse of Woodborough; White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169 (affirmed on appeal, Flower & Hart (a firm) v White Industries (Qld) Pty Ltd (1999) 87 FCR 134); Levick v Deputy Commissioner of Taxation; cf Steindl Nominees Pty Ltd v Laghaifar [2003] 2 Qd R 683;

(c)    the legal practitioner is not “the judge of the credibility of the witnesses or the validity of the argument”: Tombling v Universal Bulb Co Ltd [1951] 2 TLR 289 at 297; the legal practitioner is not “the ultimate judge, and if he reasonably decides to believe his client, criticism cannot be directed to him”: Myers v Elman (at 304) per Lord Atkin; Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406 at 413 [34] per Callinan J;

(d)    A judge considering making a wasted costs order arising out of an advocate’s conduct of court proceedings must make full allowance for the exigencies of acting in that environment; only when, with all allowances made, a legal practitioner’s conduct of court proceedings is quite plainly unjustifiable can it be appropriate to make a wasted costs order: Ridehalgh (at 236, 237);

(e)    A legal practitioner against whom a claim for a costs order is made must have full and sufficient notice of the complaint and full and sufficient opportunity of answering it: Myers v Elman (at 318); Orchard v South Eastern Electricity Board (at 572); Ridehalgh (at 229);

(f)    Where a legal practitioner’s ability to rebut the complaint is hampered by the duty of confidentiality to the client he or she should be given the benefit of the doubt: Orchard v South Eastern Electricity Board (at 572); Ridehalgh (at 229); in such circumstances “[t]he court should not make an order against a practitioner precluded by legal professional privilege from advancing his full answer to the complaint made against him without satisfying itself that it is in all the circumstances fair to do so”: Medcalf (at 134 [23] per Lord Bingham of Cornhill);

(g)    The procedure to be followed in determining applications for wasted costs must be fair and “as simple and summary as fairness permits ... [h]earings should be measured in hours, and not in days or weeks ... Judges ... must be astute to control what threatens to become a new and costly form of satellite litigation”: Ridehalgh (at 238 - 239); Harley v McDonald [2001] 2 AC 678 at 703 [50]; Medcalf (at 136 [24]).

36    In relation to the orders sought against Mr Braun and Ms Braun, it is not without relevance what her Honour said in the very next paragraph of her reasons:

‘The authorities concerning the sparing exercise of the jurisdiction to make wasted costs orders against legal practitioners (sub-par (a)) are consistent with cases in which orders are sought that a lay non-party pay the costs of litigation; such an order is exceptional: Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965 at 980 per Lord Goff of Chievely; Taylor v Pace Developments Ltd [1991] BCC 406 at 410; Symphony Group Plc v Hodgson [1994] QB 179 at 192-3, per Balcombe LJ; Flinn v Flinn [1999] VSCA 134 at [24].’

37    Later in her reasons, her Honour offered the following observations which again are not without relevance to the facts of the present case:

‘[139]    One of the reasons the Div 5C jurisdiction should be exercised with caution is to ensure that the preparedness of the legal profession to represent litigants “should not be undermined either by creating conflicts of interest or by exposing the [legal profession] to pressures which will tend to deter them from representing certain clients or from doing so effectively”: cf Medcalf (at 141 [52]).

[140]    Some cases which have considered the question whether a legal practitioner acts improperly in representing a client with a hopeless case have expressed the view that “a party is entitled to have a practitioner act for him or her even in an unmeritorious case”: see White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (at 236; 88).

[141]    An allied view is that the administration of justice may be better served by a party being legally represented notwithstanding that the party has a hopeless case. In Kumar v Minister for Immigration and Multicultural and Indigenous Affairs (2004) 133 FCR 582 at 587 [15], Mansfield J referred to “the public interest for the client to be represented” even when a legal practitioner had advised that proceedings had no reasonable prospects of success on the basis that “[p]roceedings, even hopeless proceedings, are likely to be conducted more efficiently by a solicitor for a party than by a litigant in person”.

[142]    Properly administered the Div 5C jurisdiction should not trespass upon the preparedness of legal practitioners to provide legal services in claims for damages as long as they have reasonable prospects of success. However, the purpose of Div 5C is plainly to deter the legal practitioner at the peril of a personal costs order, and possibly disciplinary proceedings, from representing a client whose prospects in pursuing or resisting a claim for damages he or she has formed the view have no reasonable prospects of success. There is no entitlement to legal representation in such cases. It is a matter for the client to determine whether to pursue the claim or defence without such services.’

38    By reference to the principles reproduced in [35] above, Mr Levet, on behalf of Mr McCartney, relied heavily on the views which Mr McCartney deposed he came to, both before and after my ruling on 7 April 2011, in his affidavit of 16 August 2011 (Ex A). In particular, his view at [2] that before he filed the plaintiff’s winding up application he formed the view, both on his own account and in concert with counsel, that the matter was properly arguable; his view at [8] that after my ruling, the matter continued to be arguable based on the evidence already filed, the law as he understood it and advice sought in this regard; and his view at [9] that even without the further evidence the matter remained properly arguable and did not involve an abuse of process. Mr Levet submitted that, in the course of cross-examination, it had not been put to Mr McCartney that he had not addressed the matter or, in doing so, had not reached the views to which he deposed; and that I should therefore accept them. For the reasons explained in [16] above, I do not reject Mr McCartney’s evidence as to the view he deposed he came to at [2] of Ex A, but I do not attach any weight to that evidence. For the reasons explained in [15] above, I do not attach any weight to Mr McCartney’s evidence at [8] and [9] of Ex A. Even the plaintiff’s counsel conceded during the course of the hearing on 12 April 2011 that there was no evidence to support a winding up order on any of the grounds in paras (e), (f) or (k) of s 461 of the Act; that the plaintiff had no standing to bring an application for a winding up order other than as a creditor of the company (s 462(2)) which was, for good and obvious reasons, totally disputed; even if that standing could be made out, it would not have supported reliance on the grounds in paras (e), (f) or (k) of s 461; and reliance on the insolvency ground by seeking to enliven the Court’s discretion under s 459B of the Act, only ‘came out of the woodwork’ during the course of the hearing. It was not detailed in either the originating process filed on 23 March 2011 or the amended originating process filed on 6 April 2011, the day before I ruled on the plaintiff’s application for leave to adduce further evidence. As I observed at [15] above, Mr McCartney did not give me the impression that he was incompetent in this area of the law.

39    That said, these findings, while they support my conclusion that the relief sought by the company on the present application should be granted, are not at the heart of the matter. That is identified below.

40    It is the finding at [34] above which impels me to the conclusion that the company should have the relief it seeks in this application against both Mr Braun and Ms Braun, and against Mr McCartney. That finding, that this proceeding was not brought for the purpose of recovering the Encore debt, assuming that debt existed, nor for the purpose of winding up the company – so much was conceded by counsel for Mr Kevin and Ms Billie Jacobsen in the earlier winding up proceeding (see [8(2)] above), if not by Mr McCartney on this application – with the knowledge and acquiescence of Mr McCartney, is on its own, of great weight in impelling that conclusion. But when it is coupled with the findings in [38] above, it becomes overwhelming.

41    In the case of Mr Braun and Ms Braun, the conclusion is supported by what Mason CJ and Deane J (with both of whom, Gaudron J agreed) said in Knight v F.P. Special Assets Ltd (1992) 174 CLR 178 at 192 – 193:

‘Obviously, the prima facie general principle is that an order for costs is only made against a party to the litigation. As our discussion of the earlier authorities indicates, there are, however, a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party. Thus, for example, there are several long-established categories of case in which equity recognized that it may be appropriate for such an order to be made.

For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.’

42    In Kebaro Pty Ltd v Saunders [2003] FCAFC 5, a Full Court of this Court held that the phrase ‘played an active part in the conduct of the litigation’ as used in Knight at 193, did not, in their view, make it ‘necessary to demonstrate that the non-party exclusively controlled the conduct of the proceedings. It is enough to point to its role as one of the actors in the scene in important and critical respects’ (at [113]).

43    In Consolidated Byrnes Holdings Ltd v Hardel Investments Pty Ltd (2009) 176 FCR 348 at [379], Lander J referred to the categories of cases identified by Shepherdson J in Naomi Marble & Granite Pty Ltd v FAI General Insurance Company Ltd [1999] 1 Qd R 518 at 545 where it might be appropriate to make an order for costs against a non-party:

‘1.    Where a person has some management of the action e.g. a director of an insolvent company who causes the company improperly to prosecute or defend a proceeding…

2.    Where a person has maintained or financed the action (citing Singh v. Observer Ltd [1989] 2 All E.R. 751).

Balcombe L.J. was a member of the Court of Appeal in each of Bahai v. Rashidian and Symphony Group and in Symphony Group went on to say that he accepted that the categories which he had set out were neither rigid nor closed.

To the above two categories of non-parties against whom costs orders may be made the following can be added:

(a)    Where the unsuccessful party is a corporation (as is the case here) the director or directors who have the right to control the corporation; (Oz B and S Pty Ltd v. Elders IXL Ltd (1993) 117 A.L.R. 128 (Einfeld J.); Re Land and Property Trust Co. Plc. [1991] 1 W.L.R. 601 at 604-605 and H. Leverton Ltd v. Crawford Offshore (Exploration) Services Ltd — unreported decision on costs of Garland J. in Queens Bench Division dated 11 October 1996).

(b)    In the situation of a party to litigation who was an insolvent person or a man of straw, a person who has played an active part in the conduct of the litigation and who has an interest in the subject matter of the litigation (Knight v. F.P. Special Assets Limited at 193 in a passage I set out earlier in these reasons).

(c)    Where the non-party is the effective litigant standing behind the actual party — Knight v. F.P. Special Assets Limited at 202 (per Dawson J.).

(d)    Where the non-party is funding or otherwise financially assisting the unsuccessful party to the litigation and stands to benefit if that party has been successful (Re Foster; Ex parte Foster v. Duus (1994) 121 A.L.R. 494 at 503; (Einfeld J.) H. Leverton Ltd v. Crawford Offshore (Exploration) Services Ltd).

(e)    Where a non-party has supported the unsuccessful party and has done so acting in bad faith towards the other parties and towards the court such as by giving false testimony or forging documents or preventing relevant documents being discovered (H. Leverton Ltd v. Crawford Offshore (Exploration) Services Ltd).’

44    A relevant consideration is whether early notice was given to the non-party that an order for costs would be sought against him: Gore and Ors (trading as Clayton Utz) v Justice Corporation Pty Ltd (2002) 119 FCR 429 at 446 – 448; Plante v James [2011] QCA 109 (Court of Appeal) at [5]. The finding at [26] is relevant to this consideration.

45    So far as Mr McCartney is concerned, what fell from Goldberg J in White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169 (affirmed on appeal) is totally relevant and supportive of the conclusion I have reached.

46    As to this Court’s jurisdiction to award costs; against non-parties; and against solicitors representing parties in proceedings before it, his Honour observed at 229, 230:

‘The court’s primary jurisdiction to award costs is found in s 43 of the Federal Court of Australia Act 1976 (Cth) which provides in subs (1):

Subject to subsection (1A), the Court or a Judge has jurisdiction to award costs in all proceedings before the Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which any other Act provides that costs shall not be awarded.

This section confers jurisdiction on the court to award costs not only against parties to proceedings but also against persons who are not parties to proceedings: Caboolture Park Shopping Centre Pty Ltd (in liq) v White Industries (Qld) Pty Ltd (1993) 45 FCR 224 at 229; 117 ALR 253. Cf Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 185, 190, 192, 202; 107 ALR 585; Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965 at 979.

In particular the court has jurisdiction to order costs against solicitors representing parties in proceedings before it. This jurisdiction is based upon the ability of the court to enforce duties owed by practitioners to the court: Caboolture Park Shopping Centre Pty Ltd (in liq) v White Industries (Qld) Pty Ltd at FCR 231–4; Myers v Elman at 318–19; Grassby v R (1989) 168 CLR 1 at 16–17; 87 ALR 618; Knight v FP Special Assets Ltd at CLR 188. This jurisdiction is available notwithstanding the fact that the Federal Court does not maintain a roll of practitioners and does not have any strike off jurisdiction in relation to practitioners; it is available when practitioners appearing before the court have acted with impropriety: Caboolture Park Shopping Centre Pty Ltd (in liq) v White Industries (Qld) Pty Ltd at FCR 233–4.

The primary object of the jurisdiction is to reimburse to a party to proceedings costs which that party has incurred because of the default of the practitioner, that is to say it is a jurisdiction which is compensatory rather than punitive or disciplinary: Myers v Elman [1940] AC 282 at 289, 319 (cf 303 per Lord Atkin at 303 who said that the jurisdiction was punitive); Davy-Chiesman v Davy-Chiesman [1984] Fam 48 at 59, 60; Edwards v Edwards [1958] P 235 at 248; Orchard v South Eastern Electricity Board [1987] 1 QB 565 at 571; Michael v Freehill Hollingdale & Page [1990] 3 WAR 223 at 233; Monitronix Ltd v Michael (1992) 7 WAR 195 at 201. The judgments in Myers v Elman are not consistent particularly in relation to whether the relevant jurisdiction is compensatory or punitive but subsequent cases have proceeded on the basis that the jurisdiction is compensatory: Mauroux v Soc Com Abel Pereira da Fonseca SARL [1972] 1 WLR 962 at 970; Currie & Co v Law Society [1977] 1 QB 990 at 997; Orchard v South Eastern Electricity Board.’

47    As to commencing or continuing proceedings with no or substantially no prospect of success, his Honour observed at 231:

‘There have been dicta in a number of cases which have suggested that commencing or maintaining proceedings with no or no substantial prospects of success enlivens the jurisdiction to order a solicitor to pay the costs of a party. However, a proposition expressed so broadly must be treated with considerable caution as it exposes a tension with the important right of a person to have a case conducted in the courts irrespective of the view which his or her legal adviser has formed about the case and its prospects of success. The courts must be open to any party who claims that he or she has been wronged and seeks to vindicate a right or to compel the enforcement of an obligation. In such circumstances clients should be entitled to expect that the practitioners acting for them will conduct their litigation without any conflict of interest and with a view, consistently with their duty to the court, to putting the client's case as instructed. A practitioner should not be looking over his or her shoulder wondering whether what the practitioner proposes to do as part of the strategy, tactics and conduct of the litigation may result in the practitioner being visited with a costs order: cf Ridehalgh v Horsefield [1994] Ch 205 at 226. Ordinarily, such a situation would be quite oppressive and unacceptable in the court system as we presently know it. Nevertheless, practitioners have a duty to the court to ensure that the court's process is not abused and used for improper or ulterior purposes.

I consider there are limitations on the proposition that commencing or maintaining proceedings which have no or substantially no prospects of success may result in a costs order being made against a practitioner. Something more must be added to the equation such as, for example, an ulterior purpose, abuse of process or a serious dereliction of duty.’

48    And at 236, his Honour concluded:

‘The authorities do not support the proposition that simply instituting or maintaining a proceeding on behalf of a client which has no or substantially no prospect of success will invoke the jurisdiction. There must be something more namely, carrying on that conduct unreasonably. It is not clear what is encompassed by “unreasonably” initiating or continuing proceedings if they have no or substantially no chance of success. It seems to me that it involves some deliberate or conscious decision taken by reference to circumstances unrelated to the prospects of success with either a recognition that there is no chance of success but an intention to use the proceeding for an ulterior purpose or with a disregard of any proper consideration of the prospects of success.’ (Emphasis added.)

49    Finally at 239, under the heading ‘Abuse of Process’, his Honour said:

‘A number of the authorities to which I have referred also make it clear that a solicitor may be liable to a costs order where his or her conduct amounts to an abuse of process of the court: Edwards v Edwards at 248; Ridehalgh v Horsefield at 234; Orchard v South Eastern Electricity Board at 572; Tolstoy-Miloslavsky v Aldington at 750.

The concept of “abuse of process” in this context involves a party using court proceedings and procedures for a purpose unrelated to the objectives which the court process is designed to achieve. The concept of “abuse of process” was considered extensively by the High Court in Williams v Spautz (1992) 174 CLR 509; 107 ALR 635. The decision (per Mason CJ, Dawson, Toohey and McHugh JJ at CLR 523; ALR 643) makes it clear that:

central to the tort of abuse of process is the requirement that the party who has instituted the proceeding has done so for a purpose or to effect an object beyond that which the legal process offers.

It is the predominant purpose of the litigation which is the relevant criterion and it is not necessary for the improper purpose to be the sole purpose of the litigation before abuse of process can be established: Metall & Rohstoff v Donaldson Inc [1990] 1 QB 391 at 469; Williams v Spautz at CLR 529. It is important to distinguish between the motive for a proceeding and the purpose of the proceeding because it is the purpose of the proceeding rather than the motivation for it which establishes the abuse where that purpose is to obtain relief not within the scope of the remedy available within the proceedings: Williams v Spautz at CLR 529, 534–5.’

Assessment of Costs

50    The only remaining issue is whether the company’s costs should be assessed on a party/party basis or, as sought by the company, on an indemnity basis.

51    In all the circumstances, I think they should be assessed on an indemnity basis. Those circumstances are sufficiently ‘special’ such as to take the case out of the ‘ordinary’ category and no submission has been made to the contrary. As Flick J said in Eat Media Pty Ltd v Mulready Media Pty Ltd [2009] FCA 1058 at [20], [21]:

‘[20]    To warrant an order for costs on an indemnity basis the circumstances must be “special” and such as to take the case out of the “ordinary” category. It “must involve behaviour associated with the conduct of the proceeding … which is so unreasonable as to make it unjust that the other party should be limited in its recovery to party and party costs”: Sony Computer Entertainment Australia Pty Ltd v Dannoun (No 2) [2001] FCA 1530 at [4] per Lindgren J (citing NMFM Property Pty Ltd v Citibank Ltd (No 11) [2001] FCA 480, 109 FCR 77 and Waverley Council v Refkin Pty Ltd [2001] FCA 1469).

[21]    One instance of such “special” circumstances emerges where “it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success”: Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401 per Woodward J.’

Conclusion

52    For the foregoing reasons, the company should have the relief sought in its application.

Associate:

Dated:    20 October 2011