FEDERAL COURT OF AUSTRALIA

Brancato v Azzurri Stone (NSW) Pty Ltd, in the matter of Azzurri Stone (NSW) Pty Ltd [2020] FCA 466

ORDERS

THE COURT ORDERS THAT:

1.    The second defendant pay the plaintiff’s costs of the winding up proceeding on a party party basis.

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

REASONS FOR JUDGMENT

GLEESON J:

1    On 11 March 2020, with the consent of the plaintiff (Mr Brancato) and the second defendant (Mr Oliveri), the Court ordered that the first defendant (company) be wound up. Mr Brancato owns 49 of the 100 issued shares in the company and is a former director of the company. Mr Oliveri owns the remaining 51 issued shares in the company and has been a director of the company since its registration on 4 July 2017.

2    By s 466(2) of the Corporations Act 2001 (Cth) (Act), the liquidator of the company must, unless the Court orders otherwise, reimburse the applicant for a winding up order out of the property of the company the taxed costs incurred by the applicant in any such proceeding.

3    Mr Brancato now asks the Court to make an order otherwise, namely that the costs of the proceeding be paid to him:

(1)    by Mr Oliveri on an indemnity basis; or

(2)    by Mr Oliveri on an ordinary basis; or

(3)    by the company.

4    In essence, Mr Brancato contends that the costs of the proceeding were unnecessarily incurred in circumstances where, prior to the proceeding, Mr Brancato accepted a proposal from Mr Oliveri that the company be placed into voluntary liquidation.

RELEVANT FACTS

5    The proceeding was commenced by an originating process filed on 5 November 2019. The originating process stated that the application was made under Pt 5.4A of the Act, which provides for a company to be wound up by the Court on “other grounds”. Even so, the relief sought went beyond the powers conferred by Pt 5.4A and comprised:

(1)    a declaration that certain payments made by Mr Brancato to the company were loans repayable at call;

(2)    an order that an amount equal to the payments be paid by the company to Mr Brancato;

(3)    alternatively, an order that the company be wound up “on just and equitable grounds” and a liquidator be appointed; and

(4)    alternatively, an order that a liquidator be appointed provisionally to the company.

6    Mr Oliveri was also made a defendant to the proceeding, and Mr Brancato sought an order that Mr Oliveri pay the costs of the proceeding on an indemnity, or alternatively, a party/party basis.

7    The dispute that preceded the proceeding goes back at least to May 2019. By letter dated 13 May 2019, Baker & McKenzie lawyers wrote to Matthews Folbigg Lawyers stating that they acted for the company, rejecting a claim by Mr Brancato and demanding repayment of an alleged loan of $15,000. By letter dated 13 June 2019, Matthews Folbigg wrote to Baker & McKenzie asserting that amounts totalling $300,000 were not equity contributions and that the amount of $15,000 was not payable by Mr Brancato unless it could be established that the amounts totalling $300,000 were not loans.

8    In his affidavit, Mr Brancato stated that, on 2 August 2019, a letter was sent by Matthews Folbigg to Baker & McKenzie but the letter was not annexed to his affidavit. Mr Brancato submitted that Mr Oliveri did not refute any of the facts set out in that correspondence, but it is hard to make too much of this when the contents of the letter are not disclosed.

9    Even so, it is relevant to note that, by email dated 20 August 2019, Baker & McKenzie wrote to Matthews Folbigg stating that the letter was “quite extensive and requires careful consideration and response” and seeking Mr Brancato’s agreement to delay the filing of any proceedings until after 6 September 2019. Later on 20 August 2019, an email from Baker & McKenzie described the matters raised in the letter as “far more extensive and detailed than anything in your second letter”, and said that their clients were seeking further time to respond appropriately. On the evidence, there was no substantive response from the company or from Mr Oliveri.

10    Mr Brancato also gave evidence that, on 26 August 2019, the company’s solicitor called his solicitor and said that the company intended to go into voluntary liquidation but required his consent. Mr Brancato gave that consent but did not agree with the nominee for liquidator of the company, expressing the view that this person lacked independence, and raising the question of payment of the liquidator. Mr Brancato nominated three other potential liquidators. By email dated 29 August 2019, Matthews Folbigg told Baker & McKenzie that Mr Brancato would commence proceedings including seeking an order for indemnity costs against Mr Oliveri if a reply was not received by 1 pm the following day.

11    Matthews Folbigg received no response to Mr Brancato’s proposed liquidators prior to the commencement of the proceeding. Mr Oliveri did not arrange for the company to be wound up voluntarily.

12    The originating process was made returnable on 12 December 2019. Neither the company nor Mr Oliveri filed a notice of appearance in accordance with r 2.9 of the Federal Court (Corporations) Rules 2000. Nor was there any compliance with s 465C of the Act. Section 465C provides relevantly that, on the hearing of an application under s 462, a person may not, without the leave of the Court, oppose the application unless, within the period prescribed by the rules, the person has filed, and served on the applicant:

(1)    notice of the grounds on which the person opposes the application; and

(2)    an affidavit verifying the matters stated in the notice.

13    Even so, orders were made, expressed to be by consent, which provided for the defendants to file and serve evidence by 7 February 2020, for Mr Brancato to put on any evidence in reply by 28 February 2020 and for a case management hearing on 5 March 2020. No notice of appearance had been filed by the defendants, but the plaintiff’s solicitor informed the Court that solicitors for the defendants had said that that a notice of appearance would be filed shortly.

14    The defendants did not comply with the 11 December 2019 order affecting them and, on 4 March 2020 by consent, the proceeding was adjourned for a case management hearing on 12 March 2020. Again, the order was expressed to be by consent although the defendants still had not filed a notice of appearance.

15    The 12 March 2020 date was vacated when the winding up order was made on 11 March 2020.

LEGAL FRAMEWORK

16    In the matter of HCafe Chatswood Pty Ltd [2018] NSWSC 362 (Re HCafe Chatswood), Black J stated the following relevant proposition:

[A]lthough the Court can make an order for costs where there has been no hearing on the merits, it will generally not do so where that would require the trial of a hypothetical action between the parties and deprive them of the cost saving which would have been achieved by settlement, but may do so where it concludes that “one of the parties have acted so unreasonably that the other party should obtain the cost of the action” or where the Court can be confident that, although both parties are acted reasonably, one party was almost certain to have succeeded if the matter had been fully determined: Re The Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex Parte Lai Qin [1997] HCA 6; (1997); 186 CLR 622 at 624-625.

17    In this case, the question is whether the Court should make an order for costs that would provide for a departure from the ordinary position stated in s 466(2).

18    In Vanguard 2017 Pty Limited, in the matter of Modena Properties Pty Limited v Modena Properties Pty Limited (No 2) [2018] FCA 1461 (Vanguard (No 2)) at [36] and following, Thawley J set out the provisions and principles relevant to orders against a non-party in the context of a winding up application where the relevant non-party was the sole director of the company ordered to be wound up, and also indemnity costs orders.

19    Where the only apparent reason for Mr Oliveri’s joinder to the proceeding was to seek costs against him, the principles concerning the making of a costs order against a non-party are relevant. Thawley J addressed the particular position of a company director, in Vanguard (No 2) at [46] to [49] as follows:

[46]    There is often little difficulty connecting with the proceedings the actions of a director of a company which is a party to the proceedings. In the case of a sole director company, the director is the controlling mind of the company. However, it is obviously not sufficient of itself that the director, being actively involved in the proceedings, caused the company to defend proceedings. Such conduct is consistent with the director’s duties to the company and would not be described as “exceptional” so as to disengage the ordinary rule that it is the parties to the proceedings who bear the costs. However, there may be situations where the director’s conduct is such that a non-party costs order is appropriate. The question might arise, for example, where the director’s management of the litigation was in breach of a duty to the company or was in some material way improper, or where the director caused the litigation to be conducted in a manner intended to increase irrecoverable costs of the opposing party. Such circumstances are potentially capable of warranting the exercise of the discretion to award costs against a non-party director.

[47]    In Taylor v Pace Developments Ltd [1991] BCC 406 at 409F-H, Lloyd LJ (with whom Nourse and Ralph Gibson LJJ agreed) observed:

... The controlling director of a one-man company is inevitably the person who causes the costs to be incurred, in one sense, by causing the company to defend the proceedings. But it could not be right that in every such case he should be made personally liable for the costs, even if he knows that the company will not be able to meet the plaintiff’s costs, should the company prove unsuccessful. That would be far too great an inroad on the principle of limited liability. I do not say that there may not be cases where a director may not properly be liable for costs. Thus he might be made liable if the company’s defence is not bona fide, as, for example, where the company has been advised that there is no defence, and the proceedings are defended out of spite, or for the sole purpose of causing the plaintiffs to incur irrecoverable costs. No doubt there will be other cases. But such cases must necessarily be rare. In the great majority of cases the directors of an insolvent company which defends proceedings brought against it should not be at personal risk of costs.

[48]    This passage was approved in Framework Exhibitions Ltd v Matchroom Boxing Ltd (unreported, Court of Appeal (England and Wales) (Civil Division), 23 September 1992, Transcript No 873 of 1992) by Leggatt LJ, with whom Glidewell and Mann LJJ agreed. Taylor (and other cases) were referred to in Symphony Group Plc v Hodgson [1994] QB 179 at 191G-192A (Balcombe LJ). His Lordship noted that “while it was not suggested in any of these cases that it would never be a proper exercise of the jurisdiction to order the director to pay the costs, in none of them was it the ultimate result that the director was so ordered”.

[49]    I respectfully agree with the observations of Lloyd LJ set out above.

20    An order for indemnity costs requires some justification to depart from the usual costs rule, in this case, reflected in s 466(2): Seven Network Limited v News Limited [2009] FCAFC 166; (2009) 182 FCR 160 at [1102]. Although the cases are not closed, the examples referred to by Thawley J in Vanguard (No 2) at [52] (identified in Colgate-Palmolive Company v Cussons Pty Ltd [1993] FCA 801; 46 FCR 225 at 233) illustrate the kinds of delinquency that may warrant an order for indemnity costs.

21    In Vanguard (No 2), Thawley J ordered that the company’s director pay the costs of winding up proceedings on an indemnity basis where his Honour found, at [86] and [87], that the director had given instructions for the filing of a misleading affidavit and the proceeding was continued “in wilful disregard of known facts” and “unduly prolonged by groundless contentions”.

CONSIDERATION

22    Mr Oliveri submitted that there has been no hearing, let alone determination, of the merits of the proceeding. While this is true, it is also relevant that:

(1)    Mr Oliveri himself proposed to place the company into voluntary liquidation 2.5 months before Mr Brancato commenced the proceeding;

(2)    after Mr Brancato consented to a voluntary winding up but proposed alternative liquidators, Mr Oliveri apparently did not take further steps to commence a voluntary winding up;

(3)    the defendants did not ever file a notice of grounds for opposing the winding up application and there is no evidence that they ever articulated any basis for opposing the application; and

(4)    nor did the defendants ever file an affidavit verifying any matters that might have constituted grounds for opposing the winding up application.

23    Next, Mr Oliveri submitted that Mr Brancato has not obtained the entirety or preponderance of the relief claimed in the proceeding. However, the relief that Mr Brancato sought was expressed in the alternative. Mr Brancato obtained the relief that he sought in the alternative to his primary claim which was for recovery of his alleged loans to the company.

24    Thirdly, Mr Oliveri argued that the matter falls precisely within the reasoning in the decisions of In the matter of Riverside Spares Pty Ltd [2019] NSWSC 1900 (Re Riverside) and Re HCafe Chatswood. However, in each of those cases, the litigation had been actively defended before an eventual consent to a winding up order. Each case involved one or more claims for relief on the basis of oppression, as well as a claim that the relevant company be wound up on the just and equitable ground.

25    In Re Riverside, Black J did not accept that the defendants were unreasonable in failing to accede to a winding up earlier, stating that such a finding would require a “collateral inquiry … as to the reasonableness or unreasonableness of the positions taken by the parties in extended correspondence, addressed to matters such as their concerns as to the potential tax implications of a winding up, and how that winding up would be best implemented to minimise any tax disadvantages”.

26    In Re HCafe Chatswood, Black J concluded that the arguments put by the plaintiffs on the issue of costs would have required consideration of the merits of the substantive dispute between the parties. His Honour also rejected a contention that a winding up order was always inevitable because of the breakdown of the relationship between the parties, observing that where there is such a breakdown, discretionary considerations come into play including the fault of the parties in respect of the circumstances of the breakdown. His Honour also noted that a winding up became more likely as the financial position of the company deteriorated and particularly after a provisional liquidator had been appointed.

27    I accept that Mr Brancato was put to unnecessary expense by the manner in which the defendants have conducted themselves in relation to the proceeding. In particular, there is no explanation for why they did not consent to a winding up order in December 2019, when the matter was first listed before the Court. The defendants did not file an appearance in the proceeding before the winding up order was made and never identified any ground for opposition to the winding up order. Further, Mr Brancato, apparently putting his contentions in detail in writing well before commencing the proceeding did not elicit any response from the defendants which might have identified some basis as to why Mr Brancato would not have been entitled to a winding up order on the just and equitable grounds. Thus, although there was no determination of the merits, there is also no reason to think that the plaintiff would not have succeeded in obtaining the order sought.

28    It is a separate question whether the costs of the proceeding should be borne by the company’s director, Mr Oliveri, instead of the usual position under s 466(2). There is no evidence to explain why Mr Oliveri did not place the company into voluntary liquidation. Having stated an intention to do so, Mr Oliveri then went silent, effectively leaving Mr Brancato with no choice except to apply to the Court to achieve what Mr Oliveri accepted was appropriate, namely, the winding up of the company.

29    Mr Oliveri did not attempt to argue that his inaction from late August 2019 until the proceeding was commenced was in the interests of the company. On the other hand, there is no evidence that Mr Oliveri’s inaction was to his own benefit, and there is no evidence that Mr Oliveri was seeking to cause Mr Brancato harm by his inaction.

30    On balance, I accept that the circumstances justify an order departing from the usual position provided for by s 466(2). By not proceeding with a voluntary winding up, Mr Oliveri caused the costs of the winding up proceeding to be incurred unnecessarily. In those circumstances, it is just that the costs of the winding up proceeding should be paid on an ordinary basis by him personally instead of from the assets of the company. The circumstances do not reveal delinquency of a kind that would make it appropriate to require Mr Oliveri to pay those costs on an indemnity basis.

Associate:

Dated:    14 April 2020