FEDERAL COURT OF AUSTRALIA

MG Corrosion Consultants Pty Ltd v Gilmour [2014] FCA 1339

THE COURT ORDERS THAT:

1.    The defendants do pay the plaintiff’s costs of the proceeding, including the defendants’ cross-claim against the plaintiff and any reserved costs, to be taxed, if not agreed.

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

REASONS FOR JUDGMENT

1    On 12 September 2014, judgment was delivered in this proceeding, which was a derivative action brought at the instance of Mr Vinciguerra, with the leave of the Court in the name of the plaintiff, MG Corrosion Consultants Pty Ltd (MGCC). MGCC succeeded on its claim of breach of duties against the defendants on the basis set out in the judgment. The cross-claim of the defendants was dismissed. See MG Corrosion Consultants Pty Ltd v Gilmour [2014] FCA 990. MGCC was invited to bring forward a minute of final orders to reflect the findings made by the Court.

2    On 2 October 2014 judgment was entered, save in respect of costs. That is the question now dealt with in these reasons.

3    Counsel for the defendants submits that because the defendants had made a pre-trial without prejudice offer to Mr Vinciguerra on 20 September 2013, to settle the proceeding, save as to costs, in the sum of $160,000, the plaintiff should pay their costs after the offer or, alternatively, there should be no order as to costs. As to the costs prior to 20 September 2013, counsel submits the defendants should not pay any costs, save for those the subject of the existing interlocutory costs orders.

4    MGCC rejects that submission and says, instead, that the defendants should pay the costs of MGCC including on an indemnity basis from 11 June 2012, alternatively 19 August 2013, as a result of Calderbank offers to settle made to the defendants on those dates of respectively $600,000 and $322,500.

5    In these circumstances, two primary costs issues are raised for determination:

(1)    Whether the failure of Mr Vinciguerra to accept the defendants’ offer to settle for $160,000 should result in the plaintiff paying the defendants’ costs after that offer of settlement was made.

(2)    Alternatively, whether the defendants are liable to pay the costs of the plaintiff including on an indemnity basis from either 11 June 2012 or 19 August 2013, having regard to either of the offers to settle then made.

Is MGCC liable to pay the defendants’ costs of the proceeding following their offer of settlement?

6    On 20 September 2013, the solicitors acting for the defendants emailed the solicitors for MGCC and Mr Vinciguerra with the following settlement offer:

We are therefore instructed to offer to your client, on behalf of Mr Gilmour, on a ‘without prejudice basis, save as to costs’, the sum of $160,000 in full and final settlement of your client’s claim.

7    The email proposed that the $160,000 would be paid by three instalments.

8    The offer was premised on the basis that, depending on the level of directors’ fees and management fee markups that the Court deemed reasonable at trial, the total amount of the claim sustainable would range between $97,160 and $425,849. The defendants relied on the opinion of Mr Lopez, the liquidator, in that regard.

9    The email noted that Mr Lopez had stated that even if the amount of $425,849 was ordered by the Court to be paid to MGCC, that payment would be insufficient to require any repayment by the defendants to MGCC because of the amount owed by MGCC, in his estimation, to the defendants as at the date of liquidation.

10    The offer was expressly made on a Calderbank basis: see Calderbank v Calderbank [1976] Fam 93; [1975] 3 All ER 333.

11    The defendants submit that the offer of $160,000 so made was unreasonably rejected at the time it was made and so MGCC should bear the costs of the action after the offer was made.

12    In the event, judgment was entered in the proceeding against each of the defendants in the amount of $1,056,290.80 (the judgment sum) plus pre-judgment interest and various sums from 30 June 2003 to 2007.

13    Notwithstanding that the judgment sum plus pre-judgment interest greatly exceeds the settlement offer of $160,000, the defendants submit that the appropriate measure for assessing the reasonableness of the offer made and the unreasonableness of the refusal or failure to accept it, is what sum Mr Vinciguerra, as a shareholder of MGCC, could reasonably have expected to receive on the winding up of the company at material times.

14    In that regard, notwithstanding the judgment ordered, and relying on Mr Lopez’ currently expressed opinion, the defendants say Mr Vinciguerra is most likely to receive less than $160,000 on a winding up and even if the payout were to exceed $160,000 it would only be by a relatively small amount, and so the refusal of the offer made in September 2013 was not reasonable.

15    MGCC rejects those submissions on a number of bases, the most important one being that it contends the question of what sum would likely be paid to Mr Vinciguerra on any winding up of the company as at the time of September 2013, was far from clear and the offer was therefore not unreasonably declined.

16    One of the other points taken on behalf of MGCC, which should be dealt with immediately, is that the September 2013 offer made was not made to Mr Vinciguerra, but to MGCC and on any view the judgment ultimately obtained by MGCC far exceeded the offer made.

17    In my view, given the nature of dealings between the parties at the time of the offer it was well understood by the recipient that the offer of $160,000 was one made to Mr Vinciguerra personally. Mr Vinciguerra was the party who had obtained the leave of the Court to maintain the derivative action against the defendants and it was clear that the offer was directed to him.

18    I am prepared to accept the primary submission made on behalf of the defendants that in a derivative proceeding such as the present, at least in the factual circumstances that prevail in this case, where the shareholder effectively maintaining the derivative action has an ultimate expectation that, if successful, there will be a winding up of the company and a payment made to that shareholder that reasonably reflects their true rights on a winding up, then an offer of settlement by the defendant may be taken into account for the purposes of exercising the Court’s broad discretion as to costs.

19    Counsel for the parties were unable to identify any relevant authority where this question has arisen. In my view, however, it would be entirely artificial in a derivative proceeding, such as the present, for the Court to ignore an offer of settlement made to the shareholder who effectively maintains the derivative proceeding when it comes to the exercise of the costs discretion. While the offer made may not be determinative of costs, the fact that it was made and the circumstances in which it was made may be considered relevant to the exercise of the costs discretion.

20    Thus, the real question in the present case is whether the settlement offer of $160,000, save as to costs, made in September 2013, was unreasonably declined by Mr Vinciguerra.

21    The costs issue is raised in reliance on the Calderbank rules. None of the parties rely on R 25.14 of the Federal Court Rules 2011 (Cth) for the costs orders they seek and the Calderbank principle is applicable in these circumstances.

22    Notwithstanding the relevance of the offer for present purposes, in my view the circumstances as they were known to Mr Vinciguerra at the time the offer of settlement was made in September 2013 do not lead to the conclusion that his failure to accept the $160,000 offer was unreasonable.

23    In pressing their submission, the defendants rely on the affidavit of Mr Lopez filed in the proceeding on 20 October 2014. He relevantly says that:

    Prior to his appointment as a joint liquidator on 8 May 2012, he was one of the joint voluntary administrators of the company from 26 March 2012.

    The second defendant, formerly Sola-Kleen Pty Ltd, has ceased to trade.

    Mr Gilmour advises him there are no available assets.

    Accordingly, in his view, there is little or no likelihood that any claim against the defendants would result in funds being available in the liquidation of MGCC.

    Management fees were charged to MGCC by the second defendant and included in that were director’s fees for Mr Gilmour as well as an allowance for the wages for Mr Gilmour. As a consequence in calculating the balance of Mr Gilmour’s personal loan account, as at 11 November 2014, he has excluded from that calculation any allowance for wages or director’s fees for Mr Gilmour.

    In other respects he has relied upon the decision of the Court, the bank statements for MGCC and the general ledger transactions verified against the bank statements of the company.

    On that basis he has calculated that the amount owing by Mr Gilmour to the company as at 11 November 2014 will be $1,209,042.46, plus pre-judgment interest.

    The total fees and disbursements in the liquidation of MGCC are approximately $117,000 plus estimated additional fees and disbursements to complete it and to distribute the surplus would result in the total costs being between $150,000 and $170,000 plus GST.

    The current creditors in the liquidation of the company of which he is aware total $358,905.66, including “Mr Malcolm Gilmour – $220,000”.

    No formal proofs of debt have been lodged and determination of admitted claims needs to be completed.

    As to the amounts that make up the loan account of Mr Gilmour, income tax considerations arise as the judgment sum of $1,056,290.80 plus interest of $441,602.13 are items of a revenue nature, affect the company’s income tax liability and is subject to company income tax at the rate of 30 cents in the dollar. Furthermore, for the period subsequent to 30 June 2007, he disallowed the management fees, director’s fees and salaries as calculated by the company and included only those at the rate allowed by the Court in the judgment. His adjustments resulted in further adjustments to the company’s income tax liability. Accordingly, before any distribution funds to shareholders are made, the additional income tax liability needs to be satisfied which he estimates to be in the order of $497,567.88.

    Upon Mr Gilmour paying to MGCC the loan account of $1,209,042.46 and then deducting the amount payable to creditors of between $138,906 to $358,000, the liquidation fees and disbursements ($150,000 to $170,000), the surplus available for distribution to shareholders after company tax is payable range between $183,474.58 and $422,568.58.

    As a result Mr Vinciguerra, with a 30% shareholding, would receive between approximately $55,042.37 and $126,770.57 and subject to his personal income tax position he may be required to pay additional tax based on the difference between his marginal tax rate and the company rate. As a maximum this could amount to 17 cents plus 2% for the Medicare levy as well as a budget repair levy of a further 2% on any income in excess of $180,000.

    In addition to the amount referred to which he will receive as a shareholder distribution, Mr Vinciguerra may receive $45,625 as a creditor – he being one of the creditors in the sum earlier mentioned of $358,905.66.

24    In my view, the current estimated potential dividend distribution to Mr Vinciguerra estimated by Mr Lopez is no sure guide as to whether or not Mr Vinciguerra unreasonably declined the September 2013 offer of $160,000. For a start, as counsel for MGCC submitted, the inclusion of Mr Gilmour as a creditor in the sum of $220,000 seems a little odd. I take it, from the way Mr Lopez has explained matters in his affidavit, that he simply listed creditors and claimants in the liquidation of the company of which he was “aware”. He is not saying in fact that the $220,000 is payable. Indeed, he notes that no formal proofs of debt have been lodged and a determination of admitted claims needs to be completed. I would pay little regard, at this point, to any inclusion of that sum in the creditors list. Indeed, in his affidavit, Mr Lopez goes on, in calculating the possible surplus available for distribution to shareholders, to note that the amount payable to creditors might range from $138,906 to $358,000. That range has obviously been calculated by taking out the $220,000 at the lower end. At best, the surplus will be $183,474.58 on the assumptions made by Mr Lopez in his affidavit. That would then mean at best, again on Mr Lopez’ calculations, that the payment to Mr Vinciguerra would be at the bottom of the range estimated, namely $55,042.37, to which would be added the amount that should be paid to Mr Vinciguerra as a creditor of $45,625.

25    Further, to the extent that Mr Lopez opined that there may be various amounts of tax or levies to be paid by Mr Vinciguerra which would affect the payment out to him, I would treat those observations as uncertain.

26    Those immediate comments reduce the usefulness of Mr Lopez’ estimation of the current winding up position when it comes to assessing whether the $160,000 settlement offer was unreasonably refused.

27    It should be also noted that the settlement offer made included no amount on account of costs.

28    Counsel for MGCC also notes that the defendants are already liable for a number of interlocutory costs which the Court has ordered which, on any reasonable view, will be in the order of $36,000.

29    Counsel thus puts forward calculations based on Mr Lopez’ affidavit adjusted to reflect these additional costs and the interest that has accrued on the costs to which MGCC is entitled and which, under the terms of the orders, MGCC is required to pay to Mr Vinciguerra, he having taken those steps.

30    Schedule A put forward on behalf of MGCC includes four calculations of the anticipated distribution to shareholders and debts to creditors ignoring the $220,000 shown to Mr Gilmour. Schedule B calculates the overall return to Mr Vinciguerra from the liquidation of the company both as a creditor and as a shareholder. Schedule C calculates the return to Mr Vinciguerra from the offer made, incorporating a notional calculation of interest at the Court rate of 6% from the dates on which payments would have been made under the offer so as to properly account for any benefit to Mr Vinciguerra in obtaining monies early.

31    Based on these calculations, the expected return to Mr Vinciguerra after the liquidation and after tax would be a net return of $171,000.74 if the liquidator’s costs finished at $170,000 with creditors of $138,000, or a net return of $175,860.74 if the liquidator’s costs finish up at $150,000 with creditors of $138,906.

32    Counsel by reference to Sch C says that if the offer had been accepted, tax of $37,200 would have been payable, with a net return to Mr Vinciguerra after tax of $122,800 and even if interest was to be notionally added to adjust for the fact that Mr Vinciguerra would have received a payment earlier, the net return to him after tax would be $131,234.52.

33    Counsel submits the outcome of this analysis is that, whether or not taxation consequences are taken into account, the only way in which Mr Vinciguerra would receive less in a winding up of the company than he would have if he had accepted the offer, is if the creditors had included Mr Gilmour as being owed a sum of $220,000. I accept that submission.

34    I also accept the submission that, at this point, while an estimate has been made that the additional winding up costs are likely to be incurred by the liquidators, they have been estimated very much in the round and without any detail or itemisation. To that extent they are merely projected.

35    I also accept the submission made by counsel for MGCC that generally, to be effective, a Calderbank offer must provide for payment of taxed costs in addition to the sum offered to be paid in settlement, something not done here and without any real foundation for not doing so.

36    Finally, it is difficult to make any sound estimation that, when he refused the offer in September 2013, before trial, Mr Vinciguerra acted unreasonably. In that regard, I accept the submissions made on behalf of MGCC that:

    Mr Lopez’ calculations of the anticipated return to shareholders following liquidation are very materially affected by events that occurred after 30 June 2007, most substantively a calculation of additional tax that will be payable by MGCC.

    Also, that as at 20 September 2013 all that Mr Vinciguerra knew about Mr Lopez’ costs was that costs to 11 September 2013 were $40,332.35 and that Mr Gilmour had paid $20,000 on account of the liquidator’s costs.

    The reasonableness of Mr Vinciguerra’s non-acceptance of the offer has to be assessed against the circumstances that then prevailed and he could not possibly have undertaken a calculation of Mr Gilmour’s loan account that has now been undertaken by Mr Lopez, estimated the extent of any taxation liability of the company or estimated Mr Lopez’ fees as being between $150,000 to $170,000 on the information then available to him.

37    In my view, it cannot be said on any relevant basis that Mr Vinciguerra unreasonably failed to accept the settlement offer made by Mr Gilmour, through his solicitors, in September 2013.

38    On that basis, the costs submission made on behalf of the defendants should be rejected.

39    There is also therefore no basis to the submission made on behalf of the defendants that there should be no order as to costs for the period prior to the September 2013 offer.

Is MGCC entitled to its costs, including on an indemnity basis?

40    MGCC submits that it is entitled to an award of indemnity costs on a Calderbank basis. It refers to settlement offers made by it on 11 June 2012 of $600,000 and on 19 August 2013 of $322,500. It says those offers involve compromise not only of the causes of the action successfully pursued but also the costs of the proceedings and costs orders made in favour of Mr Vinciguerra in the proceedings.

41    Counsel for MGCC commenced his costs submissions in relation to this indemnity costs question by submitting that, on any view, MGCC had been successful given the terms of the judgment for in excess of $1 million together with pre-judgment interest which will be close to a total of $1.5 million. It follows that costs should follow the event.

42    So far as indemnity costs are concerned, counsel submits that one should look at the position of the person who has received the offer of settlement and ask whether they have secured a more or less favourable result following the trial and if a less favourable result then they should pay indemnity costs.

43    In that regard, counsel emphasises that each of the offers made in 2012 and 2013 proposed that Mr Vinciguerra would receive the relevant amounts of either $600,000 or $322,500 in full and final settlement of all claims that he may have been able to agitate. The second offer was conditional on agreement by the company and approval by the Court given that Mr Vinciguerra had obtained leave to pursue a derivative action.

44    Counsel submitted that settlement on either offer would have provided the defendants with a far more favourable result than the trial has produced for them.

45    In that regard, counsel for MGCC referred to Mr Lopez’ recent affidavit, referred to above, and submitted there is to be a judgment sum in excess of either of the offers of $600,000 or $322,500; that there is in excess of $497,000 of tax payable; and that creditors will have to be paid at least $138,000. Counsel submitted that given Mr Lopez’ estimation of liquidation fees to come, before one even comes to dividing the surplus between shareholders, more than $600,000 of the judgment sum that has been paid into the liquidation will have gone out of the liquidation to the liquidator and to creditors unrelated to the defendants.

46    Thus, counsel put a submission that in substance focussed on the defendants and Mr Gilmour in particular and whether by making a $600,000 payment, or a $322,500 payment to Mr Vinciguerra, they would have been better off than under the outcome actually obtained after judgment.

47    Counsel summarised the position by submitting that the defendants could have got out of the litigation for a payment of $600,000 in 2012 or a payment of $322,500 in 2013 but now they had a judgment against them of approximately $1.5 million. And that while that is a very simple analysis, it emphasises the point that the offers of settlement made were reasonable and they should have been accepted and the failure to do so was unreasonable.

48    The difficulty I have with the submission made is not unlike the difficulty I had and described above in dealing with the defendants’ submissions that it was unreasonable for Mr Vinciguerra to decline to accept the offer of settlement of $160,000 in September 2013.

49    There always were a number of unpredictable aspects to anticipated winding up proceedings. In circumstances where questions arose going to the factoring agreement, issues of mark-up (upon which the expert witnesses had much to say), tax treatment and the like and likely liquidation costs, it is difficult to conclude that declining the $600,000 offer was unreasonable in the circumstances and equally difficult to say that at material times declining the offer of settlement of $322,500 was unreasonable.

50    After the event, both offers might be said to have been attractive, but at the time there were so many difficult variables to be considered, it cannot easily be concluded the offers were unreasonably refused.

51    In my view, as a matter of judgement, it was not unreasonable for the defendants to decline to settle by paying Mr Vinciguerra out on either offer made.

Final order as to costs

52    In those circumstances, where in my view none of the parties are entitled to indemnity costs orders, the appropriate costs order is that the defendants should pay the costs of the plaintiff of the proceedings to be taxed if not agreed.

Order

53    There will, therefore, be an order that:

1.    The defendants do pay the plaintiff's costs of the proceeding, including the defendants’ cross-claim against the plaintiff and any reserved costs, to be taxed, if not agreed.

Associate:

Dated:    9 December 2014