FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Merlin Diamonds Limited (No 4) [2020] FCA 990

ORDERS

THE COURT ORDERS THAT:

1.    The plaintiff’s taxed costs of the proceeding be reimbursed out of the property of the defendant in accordance with s 466(2) of the Corporations Act 2001 (Cth).

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

REASONS FOR JUDGMENT

O’BRYAN J:

Introduction

1    This judgment concerns the costs of the plaintiff, the Australian Securities and Investments Commission (ASIC), in conducting this proceeding, and specifically whether those costs should be met by ASIC, or by the defendant, Merlin Diamonds Limited (Merlin), or by the non-parties who intervened to oppose (unsuccessfully) the orders sought by ASIC in the proceeding.

2    By originating process filed on 14 May 2019, ASIC sought an order that Merlin be wound up pursuant to ss 461(1)(e) and/or (k) or s 464 of the Corporations Act 2001 (Cth) (Corporations Act) and, as an interim step, the appointment of provisional liquidators under s 472(2) of the Corporations Act.

3    The interlocutory application for the appointment of provisional liquidators was heard on 2 and 3 September 2019 (Interlocutory Application). It was opposed by Merlin and separately by 13 shareholders of Merlin (the Opposing Shareholders) who were granted leave to be heard pursuant to r 2.13 of the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules). On 20 September 2019, I made orders for the appointment of provisional liquidators: Australian Securities and Investments Commission v Merlin Diamonds Limited [2019] FCA 1546.

4    The application for final relief was heard on 10 March 2020 (Winding Up Application). It was opposed by 22 shareholders and 9 convertible noteholders listed in the Schedule to an Amended Notice of Appearance filed on 9 March 2020 (the Interested Parties) who were granted leave to be heard pursuant to r 2.13 of the Corporations Rules. On 31 March 2020, I ordered that Merlin be wound up in insolvency pursuant to s 459B of the Act: Australian Securities and Investments Commission v Merlin Diamonds Limited (No 3) [2020] FCA 411.

5    ASIC did not oppose the grant of leave to the Opposing Shareholders or the Interested Parties to intervene and be heard on the respective applications and did not seek conditions on the grant of leave.

6    In Australian Securities and Investments Commission v Merlin Diamonds Limited (No 3) [2020] FCA 411, I made the following observations concerning the costs of the proceeding (at [80]):

As to the costs of the proceeding, ASIC was successful on both its interlocutory application and this application for final relief and should have its costs. The opposing parties on the interlocutory application and this application for final relief were unsuccessful. Nevertheless, the parties sought an opportunity to make further submissions on the question of the costs of the proceeding, including the interlocutory hearing on 2 and 3 September 2019, following my determination of the primary issues. I will therefore make orders for the filing of submissions on the question of costs by the parties and any person who was given leave to appear at the interlocutory hearing on 2 and 3 September 2019 or the final hearing on 10 March 2019. I will determine the question of costs on the papers unless any person that has filed a submission notifies the Court that they seek an oral hearing, in which event I will convene a telephone or video hearing in accordance with Special Measures Information Note 1 issued by the Court (SMIN-1), or any further special measures issued by the Court which supersede SMIN-1.

7    On 2 April 2020, ASIC filed and served written submissions seeking the following orders on costs:

(a)    ASIC’s costs of the Interlocutory Application and Winding Up Application be paid by Merlin and taxed and reimbursed in accordance with s 466(2) of the Corporations Act;

(b)    the Opposing Shareholders indemnify Merlin in respect of the costs payable to ASIC on the Interlocutory Application (or, in the alternative, the additional costs incurred by ASIC resulting from their opposition to the Interlocutory Application); and

(c)    the Interested Parties indemnify Merlin in respect of the costs payable to ASIC on the Winding Up Application (or, in the alternative, the additional costs incurred by ASIC resulting from their opposition to the Winding Up Application).

8    On 9 April 2020, the Opposing Shareholders and the Interested Parties each filed and served written submissions. The Opposing Shareholders opposed orders (a) and (b) sought by ASIC and submitted that ASIC should bear its own costs. The Interested Parties opposed order (c) sought by ASIC, but not order (a).

9    For the reasons below, I have determined that ASIC’s taxed costs of the proceeding should be reimbursed out of the property of Merlin in accordance with s 466(2) of the Corporations Act, but that no costs order should be made against the Opposing Shareholders or the Interested Parties.

ASIC’s Submissions

10    In seeking orders that the Opposing Shareholders and Interested Parties indemnify Merlin in respect of ASIC’s costs of the Interlocutory Application and the Winding Up Application respectively, ASIC relied on two sources of power.

11    The first source of power is r 2.13(2) of the Corporations Rules which provides that, if the Court considers that the attendance of a person to whom leave has been granted under r 2.13(1) has resulted in additional costs for any party, or the corporation, which should be borne by the person to whom leave was granted, the Court may direct that the person pay those costs. In Re Pan Pharmaceuticals Ltd; Selim v McGrath (2004) 48 ACSR 681 (Pan Pharmaceuticals), Barrett J observed that the effect of r 2.13 is that a person who is granted leave to be heard without becoming a party chooses a course that involves a limited costs exposure to it. In Grocon Constructors Pty Ltd v Kimberley Securities Ltd [2009] NSWSC 691 (Grocon Constructors), Barrett J summarised the effect of the rule as being that (at [6]):

A person who elects to participate in proceedings on the r 2.13 basis is not susceptible to a costs order in the ordinary course. Such a person could be ordered to pay costs only in the special circumstances (and to the limited extent) referred to in r 2.13(2) or by reference to the general principles concerning the award of costs against non parties...

12    The second source of power relied on by ASIC is s 43 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) which empowers the Court to award costs in a proceeding, including against non-parties: see Knight v F P Special Assets Ltd (1992) 174 CLR 178 (Knight) in respect of the analogous power of the Queensland Supreme Court. In Kebaro Pty Ltd v Saunders [2003] FCAFC 5, the Full Court of the Federal Court said (at [103]) that a non-party costs order is exceptional relief and, while the categories of cases in which it might be exercised are not closed, it could be exercised if the non-party is the real party to the litigation.

13    ASIC submitted that there are exceptional circumstances which justify an order that the Opposing Shareholders indemnify Merlin for ASIC’s costs in the Interlocutory Application. The Opposing Shareholders:

(a)    applied to be heard pursuant to r 2.13 and were wholly unsuccessful;

(b)    caused additional costs to ASIC (including the cost of communications with their solicitors, perusal and consideration of evidence and submissions filed by the Opposing Shareholders, and the cost of drafting and settling submissions in reply, as well as the Opposing Shareholders causing an additional day of hearing);

(c)    were the principal opponents of ASIC’s application to appoint a provisional liquidator;

(d)    had an interest in the subject of the litigation;

(e)    only held an aggregate of 11% of the issued share capital in Merlin and a relatively modest investment in convertible notes, and therefore cannot be said to have represented the view of the majority of shareholders and noteholders who would otherwise indirectly bear the costs of a usual costs order against Merlin;

(f)    did not contest that there was prima facie evidence of wrongdoing in the conduct of the affairs of Merlin giving rise to serious concerns, yet maintained that the appointment of a provisional liquidator and the winding up of Merlin would not be in the best interests of the company or its shareholders despite taking no steps to remove the directors from office.

14    ASIC submitted that there are exceptional circumstances which justify an order that the Interested Parties indemnify Merlin for ASIC’s costs on the Winding Up Application. The Interested Parties:

(a)    were the sole opponents of ASIC’s application for final relief;

(b)    caused material additional costs to be incurred by ASIC and, but for their application, the application for final relief might have been heard in February 2020 as opposed to March 2020;

(c)    only held an aggregate of 20.5% of the issued share capital in Merlin and a relatively modest investment in convertible notes, and therefore cannot be said to have represented the view of the majority of shareholders and noteholders who would otherwise indirectly bear the costs of a usual costs order against Merlin;

(d)    continued to press for the appointment of an administrator notwithstanding they failed to advance any credible deed of company arrangement proposal and it was obvious that the appointment of a liquidator could not foreclose the possibility that an administrator might subsequently be appointed (as per s 436B(1) of the Corporations Act); and

(e)    failed to establish any credible basis for the appointment of Mr Shepard as liquidator instead of the provisional liquidators.

The submissions of the Opposing Shareholders

15    The Opposing Shareholders submitted that the Court has no power to make the indemnity order sought by ASIC for the following reasons:

(a)    First, ASIC has no standing to seek any orders on behalf of Merlin, including the indemnification orders.

(b)    Second, even if ASIC has standing, the Court has no power to require the Opposing Shareholders to indemnify Merlin for any costs reimbursed, or required to be reimbursed, to ASIC pursuant to s 466(2) of the Corporations Act. Such an order is not a costs order and, as a consequence, nothing in s 1335(2) of the Corporations Act or s 43 of the FCA Act authorises such an order.

(c)    Third, r 2.13(2) can only be engaged by Merlin to the extent that additional costs have been incurred by it. Those additional costs cannot extend to the costs of ASIC.

16    The Opposing Shareholders noted, correctly, that their intervention in the proceeding pursuant to r 2.13(1) was not opposed by ASIC and ASIC never foreshadowed an application to recover costs against them.

17    In relation to r 2.13(2) more generally, the Opposing Shareholders submitted that the rule enshrines a legislative code for the imposition of costs on a person granted leave to be heard in a proceeding without becoming party to the proceeding, and it is not open to ASIC to seek to circumvent that code by seeking an order that the Opposing Shareholders indemnify Merlin for costs awarded against it as a defendant in the proceeding. They submitted that the indemnity order sought by ASIC is directly inconsistent with r 2.13(2) because it seeks to make the Opposing Shareholders liable for all of ASIC’s costs notwithstanding the limitation contained in r 2.13(2) that the only costs order that can be made is an order for additional costs incurred as a result of the participation of the intervener pursuant to r 2.13. The Opposing Shareholders argued that ASIC has not properly articulated or deposed to its costs, and the Court is in no position to consider or determine that additional costs were incurred by ASIC and the amount of any additional costs. Further, the Opposing Shareholders deny that they caused ASIC to incur additional costs, arguing that the matters raised by them for the consideration of the Court would need to have been addressed by ASIC in any event.

18    In relation to s 43 of the FCA Act, the Opposing Shareholders argued that intervention in a proceeding under r 2.13 provides no analogy for the circumstances in which costs may be awarded against a non-party. The Opposing Shareholders had an interest in the proceeding as shareholders and noteholders (and that is why they were given leave to appear) and participated in the proceeding as contemplated by r 2.13.

19    The Opposing Shareholders also objected to the order sought by ASIC that Merlin pay ASIC’s costs of the proceeding, but they did not advance any submissions in support of that objection.

The submissions of the Interested Parties

20    Like the Opposing Shareholders, the Interested Parties noted, correctly, that their intervention in the proceeding pursuant to r 2.13(1) was not opposed by ASIC and ASIC never foreshadowed an application to recover costs against them.

21    In relation to r 2.13(2), the Interested Parties submitted that their participation in the hearing of the Winding Up Application did not extend the hearing beyond the single day allocated. ASIC was obliged to prove at the final hearing that Merlin was insolvent, an obligation left unchanged by the leave granted to the Interested Parties. The Interested Parties deny that their attendance at the hearing resulted in additional costs.

22    In relation to s 43 of the FCA Act, the Interested Parties argued that there was no power to make an indemnity order as sought by ASIC and the circumstances were not analogous to the type of cases discussed in Knight.

Consideration

23    ASIC has sought an order that its costs of the Interlocutory Application and Winding Up Application be paid by Merlin and taxed and reimbursed in accordance with s 466(2) of the Corporations Act. While that order was formally opposed by the Opposing Shareholders, they offered no submissions or argument as to why ASIC should not receive its costs as contemplated by that section. In my view, there is no good reason why the order should not be made, and I will make that order.

24    The further orders sought by ASIC are that the Opposing Shareholders and the Interested Parties indemnify Merlin for the amounts payable to ASIC on account of its costs of the Interlocutory Application and the Winding Up Application respectively or, in the alternative, the additional costs incurred by ASIC resulting from their opposition to the Interlocutory Application and the Winding Up Application respectively. ASIC does not contend that Merlin will be unable to meet ASIC’s costs of the proceeding. I infer that the purpose of the further orders sought by ASIC is to shift the burden of paying ASIC’s costs of the proceeding away from Merlin (and indirectly all members and creditors of Merlin) to the Opposing Shareholders and the Interested Parties respectively, either wholly or partially. Subject to questions concerning the Court’s power to make the further orders sought by ASIC (which have been raised by the Opposing Shareholders), the question becomes whether it is just in all the circumstances for the Opposing Shareholders and the Interested Parties to bear the whole or part of ASIC’s costs of the Interlocutory Application and the Winding Up Application respectively, in addition to their own costs.

25    ASIC’s suggestion that the Opposing Shareholders and the Interested Parties should bear the whole of ASIC’s costs of the Interlocutory Application and the Winding Up Application respectively can be dismissed immediately. No justification for such an order has been offered by ASIC. The Interlocutory Application and the Winding Up Application would have required preparation and court hearings on the part of ASIC regardless of any opposition from the Opposing Shareholders and the Interested Parties. The mere fact that the Opposing Shareholders and the Interested Parties appeared and made submissions in opposition to the applications provides no justification for an order that they bear the whole of ASIC’s costs (in addition to their own costs).

26    The real questions are whether the Court has power to order that the Opposing Shareholders and the Interested Parties bear the additional costs incurred by ASIC resulting from their opposition to the Interlocutory Application and the Winding Up Application respectively, and whether it is just in all the circumstances for such an order to be made.

27    I reject the submission of the Opposing Shareholders that the Court does not have power to make an order in the form sought by ASIC because the order is not a costs order. While the order sought by ASIC may not be a traditional costs order, in my view it is properly seen as a costs order and within the powers conferred on the Court by s 43 of the FCA Act and r 2.13(2) of the Corporations Rules. The effect of the order is to require the Opposing Shareholders and the Interested Parties to pay to Merlin the additional costs incurred by ASIC resulting from their opposition to the Interlocutory Application and the Winding Up Application respectively. The payment would reimburse Merlin for the same costs payable by Merlin to ASIC pursuant to s 466 of the Corporations Act. The fact that the payment of ASIC’s costs by Merlin is made by force of s 466 of the Corporations Act rather than s 43 of the FCA Act does not alter the character of the amounts paid. The payment is for ASIC’s taxed costs of the proceeding. The effect of the order sought by ASIC is to adjust that cost burden as between Merlin (as defendant to the proceeding) and the Opposing Shareholders and Interested Parties (as interveners).

28    I also reject the submissions of the Opposing Shareholders and the Interested Parties that ASIC has not established that it incurred additional costs by reason of their intervention in the proceeding. While ASIC has not sought to quantify the amount of the additional costs, it submitted that it incurred the following additional costs:

By reason of the Opposing Shareholders’ participation, ASIC incurred additional costs including, numerous telephone and email communications with the solicitor for the Opposing Shareholders, perusal and consideration of the Affidavit of Mr Dale sworn 1 August 2019 and Opposing Shareholders’ Submissions dated 1 August 2019 (16 pages in length), drafting and settling submissions in reply dated 12 August 2018 and an additional day of hearing: Transcript Opposing Parties’ oral submissions Day 1 – T100 L33 (at around 3pm) to T112 L43 (adjournment of Day 1 at 4.03pm); and Day 2 – T1 L3 (at 10.14am) to T44 L42 (at around 11.45am).

By reason of the Interested Parties’ participation, ASIC incurred additional costs including, numerous telephone and email communications with the solicitor for the Interested Parties, perusal and consideration of the Jarvis Affidavit, the Feilich Affidavit, the First and Second Mitchell Affidavits and the Interested Parties’ Outline of Submissions and ASIC’s written and oral submissions in reply and a further 1/2 day of hearing.

29    Without seeking to determine finally the categories of additional costs incurred by ASIC, I am satisfied that, by reason of the attendance of the Opposing Shareholders and the Interested Parties at the hearings of the Interlocutory Application and the Winding Up Application respectively, ASIC incurred additional costs. However, my overall assessment is that the additional costs reflect a modest proportion of ASIC’s overall costs of the proceeding.

30    Rule 2.13(1) confers a broad power on the Court to grant leave to a creditor, contributor or officer of a corporation, or other interested person, to intervene and be heard in a proceeding under the Corporations Act without becoming a party. Rule 2.13(2) confers a further discretion on the Court to award costs against such a person if the attendance of the person has resulted in additional costs for any party. The discretion is confined to the award of the additional costs.

31    There appears to be very limited judicial guidance concerning the award of costs under r 2.13(2). In Pan Pharmaceuticals and Grocon Constructors, Barrett J considered the award of costs in favour of an intervener (as opposed to the award of costs against an intervener). His Honour concluded that such an award would only be made in exceptional circumstances. That conclusion is consistent with the principle, as stated by Branson J in Johnston v Cameron [2002] FCAFC 301 (at [19]):

Although intervenors are commonly said to have the benefits and the burdens of parties, there is no “usual practice” of ordering costs in their favour when the outcome of a proceeding accords with the arguments advanced by them (see Ruddock v Vadarlis [2001] FCA 1865; 188 ALR 143 at [53]).

32    Nor is there a usual practice of ordering costs against interveners when the outcome of a proceeding is contrary to the arguments advanced by them. In O’Toole v Charles David Pty Ltd (1991) 171 CLR 232 (O’Toole), the Commonwealth had intervened before the Federal Court and the High Court in support of an unsuccessful party. The successful party sought costs against the Commonwealth pursuant to s 78A(2) of the Judiciary Act 1903 (Cth), which provided that:

Where the Attorney-General of the Commonwealth or of a State intervenes in proceedings in a court under this section, the court may, in the proceedings, make such order as to costs against the Commonwealth or the State, as the case may be, as the court thinks fit.

33    The High Court (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) said (at 311) that:

It is only in special circumstances that it is appropriate for the Court to make an order for costs against an intervener or, at all events, an order which would have the result that an intervener pay to one of the parties more than the amount by which the costs of that party have been increased by the intervention.

34    In O’Toole, the High Court awarded costs against the Commonwealth as intervener because it was the Commonwealth which obtained the removal of the cause into the High Court.

35    Similarly, in Australian Industry Group v Automotive, Food, Metals, Engineering, Printing & Kindred Industries Union [2003] FCAFC 226, the Union (as a successful respondent) sought costs against the Commonwealth which had intervened and advanced arguments in support of the unsuccessful appellant under s 471(2) of the Workplace Relations Act 1996 (Cth) which provided that:

If the Minster intervenes in a proceeding before the Court, the Court may, despite section 347, make an order for costs against the Commonwealth.

36    The Full Federal Court, applying O’Toole, concluded that costs would not be awarded as special circumstances did not exist to justify such an award (at [11]).

37    While r 2.13(2) does not expressly require the existence of special circumstances before the award of additional costs against an intervener, in my view the authorities referred to above, applying analogous statutory powers to award costs against interveners, support the conclusion that the Court would require the existence of circumstances that are out of the ordinary to justify the award of costs against an intervener.

38    In so far as it is necessary to consider s 43 of the FCA Act as a separate source of power to award costs against an intervener, the same principles are applicable: see for example Ruddock v Vardalis (No 2) (2001) 115 FCR 229 at [53] and the other cases cited above. ASIC’s submissions made reference to the principles stated in Knight. However, Knight concerns the award of costs against a non-party who stands behind a party, not the award of costs against an intervener.

39    In my view, the circumstances of the present case do not justify the award of costs against the Opposing Shareholders or the Interested Parties. The proceeding was instigated by ASIC for the protection of the members and creditors of Merlin and the public more generally. The named defendant was Merlin. The Opposing Shareholders and the Interested Parties, as members and creditors of Merlin, had a financial interest in the proceeding; they sought, and were given leave under r 2.13, to appear in the proceeding, adduce evidence and make submissions. While they opposed the orders sought by ASIC, they were not the defendant to the proceeding. They did not conduct the case for Merlin and they did not control Merlin. They were interested persons who merely exercised their right to be heard.

40    None of the circumstances relied on by ASIC would ordinarily cause the Court to order the Opposing Shareholders and the Interested Parties to reimburse ASIC for the additional costs of the proceeding caused by their participation. The fact that the Opposing Shareholders and the Interested Parties had an interest in the proceeding is unexceptional as it explains why they sought and were granted leave to be heard under r 2.13. The fact that the Opposing Shareholders and the Interested Parties did not contest many aspects of ASIC’s case is a beneficial factor, not an adverse factor. While the Opposing Shareholders and the Interested Parties were unsuccessful in their arguments, the arguments were not untenable and, in my view, there was nothing improper in the arguments advanced. Having failed in their arguments, the Opposing Shareholders and the Interested Parties must bear their own costs of participating in the proceeding.

41    As already noted, to the extent that the Opposing Shareholders and the Interested Parties caused ASIC to incur additional costs in the proceeding, those additional costs will be borne by Merlin by reason of the order I will make requiring Merlin to reimburse ASIC for its costs. There is no suggestion that Merlin will be unable to pay ASIC’s costs and, accordingly, ASIC will not suffer any disadvantage by reason of the participation of the Opposing Shareholders and the Interested Parties in the proceeding. The persons who might be said to suffer some disadvantage are other members and creditors of Merlin who, to the extent of additional costs incurred, will receive less from the winding up of Merlin. However, I consider that the Opposing Shareholders and Interested Parties advanced arguments that they considered were for the benefit of members and creditors generally, and the arguments were not advanced for the individual interests of the Opposing Shareholders or the Interested Parties. I am not persuaded that the circumstances of the case justify an order that the Opposing Shareholders and the Interested Parties indemnify Merlin for ASIC’s additional costs.

Conclusion

42    In conclusion, in my view the appropriate order to be made is for ASIC’s taxed costs of the proceeding be reimbursed out of the property of Merlin in accordance with s 466(2) of the Corporations Act.

Associate:

Dated:    15 July 2020

SCHEDULE OF PARTIES