FEDERAL COURT OF AUSTRALIA

Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Edenborn Pty Ltd (No 2) [2020] FCA 1083

ORDERS

THE COURT ORDERS THAT:

1.    It is declared that the payments made by Gunns Limited (In Liquidation) (Receivers and Managers Appointed) (ACN 009 478 148) (Gunns Limited) to the Defendant and the invoices issued by the Defendant to Gunns Limited between 30 March 2012 and 16 May 2012 are a single transaction which was an unfair preference within the meaning of s 588FA of the Corporations Act 2001 (Cth) (the Act) in the sum of two hundred and twenty thousand dollars ($220,000.00), an insolvent transaction within the meaning of s 588FC of the Act, and a voidable transaction within the meaning of s 588FE of the Act:

2.    It is declared that the payments made by Gunns Limited to the Defendant on the dates and in the amounts set out below were unfair preferences within the meaning of s 588FA of the Act, insolvent transactions within the meaning of s 588FC of the Act, and voidable transactions within the meaning of s 588FE of the Act:

3.    It is declared that the transactions between Gunns Limited and the Defendant on the dates and in the amounts set out below are a single transaction which was an unfair preference within the meaning of s 588FA of the Act, an insolvent transaction within the meaning of s 588FC of the Act, and a voidable transaction within the meaning of s 588FE of the Act:

4.    Pursuant to s 588FF of the Act, the Defendant pay to the Plaintiff the sum of two million, four hundred and fifty five thousand, ninety dollars and eleven cents ($2,455,090.11) representing the total of the amounts referred to in Orders 1 to 3 above.

5.    Pursuant to s 51A(1)(a) of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act), the Defendant pay to the Plaintiffs pre-judgment interest on the amount payable pursuant to Order 4 above, in the amount of six hundred and twenty-three thousand, one hundred and ninety dollars and three cents ($623,190.03), calculated as follows:

(a)    pursuant to paragraph 3.1 of the Plaintiffs’ Amended Originating Process, pre-judgment interest of $552,503.86 on the sum of $2,133,624.64 in respect of transactions 3–6 inclusive in Orders 2 and 3 above (being transactions which occurred between 3 July 2012 and 25 September 2012) calculated from 17 September 2015 until 27 May 2020 on the following basis:

(i)    $36,826.95 for the period between 17 September 2015 and 31 December 2015, calculated at a rate of 6.00% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT;

(ii)    $63,658.96 for the period between 1 January 2016 and 30 June 2016, calculated at a rate of 6.00% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT;

(iii)    $61,676.91 for the period between 1 July 2016 and 31 December 2016, calculated at a rate of 5.75% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT;

(iv)    $117,349.36 for the period between 1 January 2017 and 31 December 2017, calculated at a rate of 5.50% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT;

(v)    $117,349.36 for the period between 1 January 2018 and 31 December 2018, calculated at a rate of 5.50% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT;

(vi)    $58,192.42 for the period between 1 January 2019 and 30 June 2019, calculated at a rate of 5.50% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT;

(vii)    $56,467.98 for the period between 1 July 2019 and 31 December 2019, calculated at a rate of 5.25% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT; and

(viii)    $40,981.92 for the period between 1 January 2020 and 27 May 2020, calculated at a rate of 4.75% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT.

(b)    pursuant to paragraph 3.2 of the Plaintiffs’ Amended Originating Process, pre-judgment interest of $70,686.17 on the sum of $321,465.47 in respect of transactions 1-2 inclusive in Orders 1 and 2 above (being transactions which occurred between 30 March 2012 and 2 July 2012), calculated from 12 May 2016 (being the date of the Plaintiffs’ Amended Originating Process) until 27 May 2020 on the following basis:

(i)    $2,582.26 for the period between 12 May 2016 and 30 June 2016, calculated at a rate of 6.00% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT; and

(ii)    $9,292.64 for the period between 1 July 2016 and 31 December 2016, calculated at a rate of 5.75% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT;

(iii)    $17,680.60 for the period between 1 January 2017 and 31 December 2017, calculated at a rate of 5.50% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT;

(iv)    $17,680.60 for the period between 1 January 2018 and 31 December 2018, calculated at a rate of 5.50% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT;

(v)    $8,767.64 for the period between 1 January 2019 and 30 June 2019, calculated at a rate of 5.50% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT;

(vi)    $8,507.83 for the period between 1 July 2019 and 31 December 2019, calculated at a rate of 5.25% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT; and

(vii)    $6,174.60 for the period between 1 January 2020 and 27 May 2020, calculated at a rate of 4.75% per annum pursuant to paragraph 2 of Federal Court Practice Note GPN-INT.

6.    Pursuant to s 52 of the Federal Court Act, the Defendant pay the Plaintiffs post-judgment interest on the amount payable pursuant to Order 3 above, calculated at a rate of 6.75% per annum pursuant to paragraph 3.2 of Federal Court Practice Note GPN-INT from 27 May 2020 and continuing to accrue at that rate until the date of the Defendant’s payment of the amount payable pursuant to Order 4 above.

7.    Pursuant to r 40.02 of the Federal Court Rules 2011 (Cth), the Plaintiffs are entitled to their costs of, and incidental to, this proceeding on:

(a)    a party and party basis up to and including 11.00am on 18 February 2019; and

(b)    an indemnity basis from 11.00am on 18 February 2019.

8.    Within 28 days of the date of this order, the parties are to confer with a view to agreeing the amount of costs payable by the Defendant pursuant to Order 7 above.

9.    In the absence of agreement in respect of the costs payable by the Defendant pursuant to Order 8 above, the Plaintiffs have liberty to apply for the taxation of their costs.

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

REASONS FOR JUDGMENT

DAVIES J:

1    On 27 May 2020, the Court delivered judgment in Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Edenborn Pty Ltd [2020] FCA 715 (primary judgment). The parties have agreed on the form of the proposed orders to give effect to the primary judgment, save for draft order 7. By draft order 7, the plaintiffs seek an order that:

Pursuant to r 40.02 of the Federal Court Rules 2011 (Cth), the plaintiffs are entitled to their costs of, and incidental to, this proceeding on:

(a)    a party and party basis up to and including 11 May 2016; and

(b)    an indemnity basis after 11 May 2016.

2    The parties were directed to provide written submissions as to costs, with a decision to be made on the papers.

3    The defendant (Edenborn) opposes order 7(b) and says that it should only be required to pay the plaintiffs’ costs on a party/party basis. The plaintiffs, in their submissions on costs, alternatively seek their costs on an indemnity basis after 1 September 2017, and in the further alternative after 11.00am on 18 February 2019.

4    Pursuant to the primary judgment the plaintiffs are entitled to judgment in the sum of $2,455,090.11 (the judgment amount), plus interest and costs. The plaintiffs made two Calderbank offers during the course of the proceeding on terms that were more favourable to Edenborn than the judgment amount. The first Calderbank offer was made by letter dated 11 May 2016 (the first offer). The second offer was made by letter dated 1 September 2017 (the second offer). Additionally, the plaintiffs served a formal offer to compromise on Edenborn in accordance with r 25.01 of the Federal Court Rules 2011 (Cth) (the Rules) on 14 February 2019 (the third offer), approximately two months before trial. The plaintiffs submit that it was unreasonable for Edenborn not to accept any of those offers. Edenborn argues that it was not unreasonable for it to reject those offers, and, in respect of the third offer, that the Court should exercise its discretion to make an order inconsistent with r 25.14(3) of the Rules.

Calderbank offers

5    It is well established that a failure to accept a Calderbank offer may justify the exercise of the Court’s discretion to award costs on an indemnity basis if, having regard to all the circumstances, the failure to accept the offer was unreasonable. As the Full Court explained in Kooee Communications Pty Ltd v Primus Telecommunications (No 2) [2011] FCAFC 141 at [19] (cited with approval in Trustee for The MTGI Trust v Johnston (No 2) [2016] FCAFC 19 at [21]):

… The purpose of the principles governing Calderbank offers and offers of compromise in accordance with court rules is to ensure that, when one party makes another an offer that contains a genuine element of compromise, the recipient of the offer is compelled to give real consideration to the costs and benefits of prosecuting its claim by reason of the prospect of suffering an indemnity costs order should its failure to accept the offer prove unreasonable.

The circumstances the Court can take into account in determining whether the rejection of a settlement offer was “unreasonable” are not exhaustive, but may include the state of the proceeding in which the offer was received, the time allowed to the offeree to consider the offer, the extent of the compromise offered, the offeree’s prospects of success (assessed as at the date of the offer), the clarity with which the terms of the offer were expressed and whether the offer foreshadowed an application for an indemnity costs order in the event of the offeree rejecting it: Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112 at [7]. The party seeking the award of indemnity costs has the onus to prove that the rejection of a settlement offer was unreasonable in the circumstances of the case: see eg Ford Motor Company of Australia Ltd v Lo Presti [2009] WASCA 115; 41 WAR 1 at 9 [21]–[23] per Buss JA (Wheeler JA agreeing).

6    By the first offer the plaintiffs offered to compromise their claims for the sum of $2 million, inclusive of costs, payable within one month of acceptance. Edenborn argued its rejection of the first offer was not unreasonable or imprudent having regard to the following matters:

(a)    the proceedings were at a relatively early stage at the time of the first offer;

(b)    as at the date of the first offer, the amount the subject of the action was $2,414,426, based on the alleged insolvency of Gunns from 3 July 2012;

(c)    during the currency of the first offer, the plaintiffs filed an amended statement of claim amending the date of the alleged insolvency from 3 July 2012 to 30 March 2012 and increasing the amount claimed to $3,772,906.15. The amendment was pursuant to leave granted by Middleton J on 6 May 2016, which expressly reserved to Edenborn (and the defendants in other related actions) liberty to raise “a limitation point” with respect to those amendments;

(d)    in the first offer, the plaintiffs denied the existence of a “running account” between Edenborn and Gunns, a proposition from which the plaintiffs partially resiled at trial;

(e)    the first offer was put on the basis that if Edenborn succeeded in establishing at trial that there was a “running account”, there was, the plaintiffs argued, a break in the continuing business relationship between 17 May 2012 and 8 August 2012, which would reduce the total of the claim $1,942,770.65. The relevant period of the break contended for by the plaintiffs changed, it was submitted for Edenborn, at a much later time to include payments made in September 2012 totalling $304,588.35;

(f)    of the “total value” of the plaintiffs’ claim of $3,772,906.15 set out in the first offer, $1,358,480.15 was the subject of the reserved issue relating to the limitation period which had not then been heard or determined. There was no suggestion in the Court’s judgment on that issue that the submissions made on Edenborn’s behalf (and the defendants in other related actions) were unreasonable: Bryant (Liquidator) v L.V. Dohnt & Co Pty Ltd, in the Matter of Gunns Limited (In Liq) (Receivers and Managers Appointed) [2018] FCA 238;

(g)    of that additional $1,358,480.15 the plaintiffs subsequently abandoned (shortly before trial) all but $321,465.47 of the same;

(h)    had Edenborn succeeded at trial solely on the “single transaction” issue, the value of the preference claim would have fallen to materially less than the amount offered in the first offer, namely $1,684,681.40;

(i)    had Edenborn succeeded at trial solely on the “peak indebtedness rule” issue, on the Court’s findings the judgment entered in the plaintiffs’ favour would have been less than the amount offered, namely, it was submitted, $1,930,321.76;

(j)    had Edenborn succeeded at trial on both the “single transaction” and “peak indebtedness rule” issues, the judgment entered in the plaintiffs’ favour would have been materially less than the amount offered, namely, it was submitted, $1,160,113.05;

(k)    Edenborn’s case based on the “single transaction” was not unreasonable, and nor is there anything in the primary judgment to suggest otherwise;

(l)    Edenborn’s case based on the “peak indebtedness rule” was not unreasonable, and nor is there anything in the primary judgment to suggest otherwise. Edenborn’s position in this regard was supported by a relatively recent decision of the New Zealand Court of Appeal, in circumstances where an Australian Court had not previously been asked to consider the issue in light of that decision. The “peak indebtedness rule” was also the subject of considerable academic criticism;

(m)    had the limitation point been resolved in Edenborn’s favour, based on the amount the plaintiffs eventually claimed at trial, then the amount referred to in (h) above at best would have been reduced to $1,644,017.33, the amount referred to in (i) above at best would have been reduced to $1,889,857.65 and the amount referred to in (j) above at best would have been reduced to $1,119,448.94;

(n)    well after the expiration of the first offer, on 14 October 2016, the plaintiffs served a supplementary list of documents, the schedule to which comprised 85 pages and discovered more than 7,000 further documents. Further, on 18 November 2016, the plaintiffs filed and served a supplementary expert report dated 10 November 2016 dealing with the issue of insolvency which had regard to many of the documents not discovered by the plaintiffs until 14 October 2016.

7    I accept those submissions and do not consider it was unreasonable for Edenborn not to accept the first offer. The first offer was made at a relatively preliminary stage of the proceedings, where there were shifting sands on the plaintiffs’ case. At the time there were complex factual and legal issues being raised for determination, which could have had a potentially significant impact on the amount recoverable by the plaintiffs, even if the plaintiffs were successful in establishing that preference payments were made. Moreover, it was not unreasonable for Edenborn to reject an offer which, on one view, having regard to Edenborn’s defences, did not represent a substantial reduction. Nor could it be said at the time that Edenborn’s defences were unlikely to have much merit.

8    By the second offer, made by letter dated 1 September 2017, the plaintiffs offered to compromise their claim for the sum of $1,800,000, inclusive of interest and costs, payable within 28 days of acceptance. The offer amount was calculated by reference to the plaintiffs’ estimate of the likely quantum of the claim if the Court were to find there was a continuing business relationship between Gunns and Edenborn. The offer was said to represent a discount of approximately 53% on the plaintiffs’ claim before the addition of any interest and costs which, it was asserted, were likely to exceed $1.5 million. The offer allowed Edenborn seven days to respond.

9    Again, I do not think that it was unreasonable for Edenborn not to accept that offer. The issue on the limitation period had yet to be resolved by determination of the preliminary question and, in terms of quantum, it was not a significant reduction from the first offer. Further, although it was asserted that the plaintiffs’ costs were likely to exceed $1.5 million, no breakdown was given of those costs nor, more particularly, did the second offer contain sufficient information for Edenborn reasonably to consider the accuracy of the costs claim, including whether those costs included the plaintiffs’ entire costs in relation to the prosecution of all of the Gunns Group companies’ preference claims, including as against other defendants.

10    Accordingly, the plaintiffs are not entitled to an order for indemnity costs on the basis of the first nor second offer.

Notice of offer to compromise

11    The third offer, made by way of notice of offer to compromise dated 14 February 2019 in accordance with r 25.01(1) of the Rules, was for the sum of $1,884,681.40, comprising the sum of $1,584,681.41 – said to be the lowest quantum of the plaintiffs’ claim assuming the existence of a running account ($1,684,681.40), less a commercial discount of $100,000 – and costs in the amount of $300,000. That offer was expressed to be open for 14 days after service and required payment within 28 days after acceptance. There was no dispute that the notice of offer to compromise complied with the requirements in r 25.01(1) or that the plaintiffs ultimately obtained a judgment more favourable than the terms of the offer.

12    The principles to apply when assessing whether to make an order for indemnity costs in the context of offers to compromise differ from the relevant principles in respect of Calderbank offers. By r 25.14(3) of the Rules, if an offer is made by an applicant and not accepted by a respondent, and the applicant obtains a judgment that is more favourable than the terms of the offer, the applicant is entitled to an order that the respondent pay the applicant’s costs on an indemnity basis after 11.00am on the second business day after the offer was served. Rule 25.14(3) creates a rebuttable presumption in favour of the award of indemnity costs. The Court has a discretion to dispense with the rule (r 1.35 of the Rules) but will only make an order inconsistent with r 25.14 where there are proper reasons for doing so: Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40 at [10]. Significantly, the difference between a Calderbank offer and an offer of compromise is that the reasonableness of the refusal to accept the offer is not a compelling reason by itself to displace the presumption: IFTC Broking Services Limited v Commissioner of Taxation [2010] FCAFC 31; 78 ATR 606 (IFTC Broking Services) at 610 [12]. As the cases illustrate, an order pursuant to r 1.35 is an “exception” to the prima facie presumption, and there must be reason for departing from the prima facie provision prescribed by r 25.14, such as a significant change in the way in which a case is advanced after the offer is made (Rakic v Johns Lyng Insurance Building Solutions (Victoria) Pty Ltd (Trustee) (No 2) [2016] FCA 783 (Rakic) at [37]), where a plaintiff significantly amends his or her case at trial (Rakic at [42], citing Shaw v Jarldorn (1999) 76 SASR 28 (Shaw v Jarldorn) at 34 [37] per Perry J), or where the entire basis of the dispute between the parties changes – for example, by reason of evidence served after the offer has been made (Sydney Equine Coaches Pty Ltd v Gorst [2017] FCAFC 34 at [37], [41]).

13    It was submitted for Edenborn that the Court should exercise its discretion under r 1.35 not to make an indemnity costs order against Edenborn under r 25.14(3) because:

(a)    as at the date of the third offer the plaintiffs’ pleadings were still not in order, noting that the plaintiffs only filed the second further amended reply on 19 March 2019;

(b)    as at the date of the third offer the plaintiffs had still not completed discovery. It was submitted that the plaintiffs provided to Edenborn further informal discovery of 173 documents by email on 13 April 2019, being two days before trial commenced;

(c)    the defences in the proceedings were genuinely raised and were reasonably arguable;

(d)    the plaintiffs changed their position two business days before trial commenced by electing to not call Bryan Hayes as a witness or to rely on his affidavit dated 13 December 2018, in circumstances where Edenborn had indicated it intended to cross-examine Mr Hayes;

(e)    the outcome of the proceedings were of considerable commercial importance to Edenborn, carrying serious financial consequences if the plaintiffs were successful, justifying its rejection of the third offer;

(f)    the correctness of Edenborn’s defences had not previously been tested in Australia because no Australian court had had the opportunity to consider the law as set out in Timberworld Ltd v Levin [2015] 3 NZLR 365;

(g)    the offer of compromise was made so close to trial, it is apparent that the offer of compromise was made to obtain a costs advantage in the proceedings; and

(h)    the plaintiffs shifted their position at trial, making the concession that the relevant date for the purposes of voidable transactions against Edenborn was after 16 May 2012.

14    In my view these matters are insufficient to rebut the presumption in r 25.14(3) that the plaintiffs are entitled to costs on an indemnity basis.

15    First, it may be accepted that Edenborn’s defences were genuinely raised and were reasonably arguable. I also accept that the outcome of the proceedings were of considerable commercial importance to Edenborn. But the fact Edenborn did not act unreasonably in refusing the third offer is an insufficient basis in itself to displace the presumption.

16    Secondly, r 25.14 “is not predicated on parties having a complete state of knowledge of the evidence; it is silent as to the time at which an offer may be made”: Robinson v Kenny (No 2) [2015] FCA 2 at [26]. The rule operates as an offer of compromise at any stage of the proceedings, whatever the state of the evidence: Visscher v Teekay Shipping (Australia) Pty Ltd (No 2) [2014] FCAFC 19 at [7]. It is not to the point that the plaintiffs had yet to file the second further amended reply, nor that the plaintiffs provided further informal discovery of a small number of documents just prior to the trial. Edenborn had sufficient information available to it at the time of the third offer about the essential facts underlying the plaintiffs’ claim and the second further amended claim made only minor changes based on the existing factual substratum. It certainly cannot be said that the “entire basis of the dispute” between the parties changed between the time the third offer was made and the trial.

17    Thirdly, the plaintiffs’ forensic decisions not to rely on the evidence of Mr Hayes and to elect a different date for the purpose of voidable transactions as against Edenborn did not rise to the level of “such a significant change in the manner in which the [plaintiffs’] case [was] presented at the trial… that it might fairly be said that the full dimensions of the [plaintiffs’] entitlement could not possibly have been foreseen before the hearing commenced”: Shaw v Jarldorn at 34 [36] per Perry J (Doyle CJ and Mullighan J agreeing), cited with approval in the context of r 25.14 of the Rules in Rakic at [37]. The factual matrix upon which the plaintiffs’ claims rested did not drastically change with the decision not to call Mr Hayes. There was extensive documentary evidence in support of the plaintiffs’ position and Edenborn should have been able to assess the relative strength of its case on the basis of that documentary evidence at the time of the third offer. Further, the plaintiffs’ decision at trial to nominate 16 May 2012 as the date from which to claim voidable transactions as against Edenborn did not represent a significant change to the plaintiffs’ case such that the quantum of the plaintiffs’ claims were not ascertainable at the time of the third offer.

18    Fourthly, there was nothing exceptional about the timing of the plaintiffs’ offer. Edenborn’s submission that it was apparent that the offer was made to give the plaintiffs a costs advantage has no merit. As noted above, r 25.14(3) is silent as to timing. Further, there is no suggestion that the offer was not a genuine compromise. That the plaintiffs sought to protect their costs position by making an offer under r 25.14(3) is entirely unremarkable.

19    I am not persuaded that there are any special features of this case that justify a departure from the presumption in r 25.14(3) of the Rules. The circumstances do not disclose an injustice against Edenborn that must be remedied by the exercise of the discretion in r 1.35 of the Rules. Accordingly, the plaintiffs are entitled to an order for indemnity costs from 11.00am on 18 February 2019.

Associate:

Dated:    30 July 2020