FEDERAL COURT OF AUSTRALIA

Billingsley v Napoli, in the matter of Biometric Identity Systems Pty Ltd (administrators appointed) (No 2) [2021] FCA 526

ORDERS

THE COURT ORDERS THAT:

1.    The first plaintiffs’ costs of the originating process dated 26 August 2019 up to and including 28 August 2019 be costs in the administration of Biometric Identity Systems Pty Ltd (the Company).

2.    Simon Mark Napoli (Mr Napoli) must pay the first plaintiffs’ costs of the originating process and of the interlocutory application dated 17 September 2019, including their application for costs, incurred on and from 29 August 2019 on an indemnity basis and in a lump sum of $71,000.

3.    Mr Napoli’s interlocutory application dated 28 October 2019 be dismissed with costs.

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

REASONS FOR JUDGMENT

FARRELL J:

INTRODUCTION

1    This judgment concerns competing applications for costs.

2    In Billingsley v Napoli, in the matter of Biometric Identity Systems Pty Ltd (administrators appointed) [2019] FCA 1640 (Billingsley v Napoli), I gave reasons for the following orders made on 30 September 2019:

(1)    Pursuant to s 447A of the Corporations Act 2001 (Cth), Part 5.3A of that Act is to apply to Biometric Identity Systems Pty Ltd (administrators appointed) (the Company) as though the appointment of Michael James Billingsley and David Ian Mansfield (first plaintiffs or administrators) as administrators of the Company on 8 August 2019 was valid (validating order);

(2)    Costs of the originating process filed on 26 August 2019 be reserved;

(3)    Pursuant to s 447A of the Corporations Act, Part 5.3A of the Corporations Act is to operate in relation to the Company such that, notwithstanding s 439A(2) of that Act, the second meeting of creditors of the Company be convened at any time during, or within five business days after the end of, 31 October 2019;

(4)    The administrators’ costs of and incidental to the interlocutory process filed on 17 September 2019 (the extension application) be reserved. That application sought the order referred to in (3) above;

(5)    The administrators file and serve any evidence and written submissions on the question of costs of the originating process and extension application by 14 October 2019; and

(6)    Mr Napoli file and serve any interlocutory process, evidence and written submissions on the question of costs by 28 October 2019.

3    I explained the background to those orders in Billingsley v Napoli at [5]-[20] and [31]-[32]. It is useful to note that:

(1)    The originating process sought a number of orders as well as the validating order, including orders for short service on Mr Napoli, an extension of the convening period to 30 September 2019 and orders with respect to the manner in which notices be given to creditors. The administrators sought an order that their costs be costs in the administration of the Company save that Mr Napoli should pay the costs of the validating order.

(2)    Following the first case management hearing in relation to the originating process, Lee J (as Commercial and Corporations Duty Judge) made an order dated 28 August 2019 extending the convening period to 30 September 2019 without opposition from Mr Napoli. However, as Mr Napoli’s counsel advised Lee J that Mr Napoli opposed the validating order, his Honour made orders that the administrators file points of claim, Mr Napoli file points of defence and that the parties give standard discovery in respect of the basis for the validating order.

4    In Billingsley v Napoli at [5]-[20] and [31]-[32], I said:

5    The Company’s business was to develop software which unifies biometric technology to enhance business processes through unique and secure identification of individuals. All of the Company’s employees had either resigned or were made redundant before 8 August 2019.

6    On 8 August 2019, Daniel Gerard Gough and Damien Simon Crabtree purported to pass a resolution pursuant to s 436A of the Corporations Act appointing the first plaintiffs as voluntary administrators of the Company. The appointment documents in evidence include minutes of a meeting of the directors signed by Mr Gough as chairman and an instrument of appointment signed by Messrs Gough and Crabtree. Searches of the register maintained by the Australian Securities and Investments Commission on 12 June 2019, 9 August 2019 and 13 September 2019 indicate that Mr Gough was appointed as a director on 27 October 2015, Mr Crabtree was appointed as a director on 17 May 2019 and neither resigned prior to 8 August 2019.

7    From the time of their appointment and until 14 August 2019, the first plaintiffs and their staff took a number of steps to advance the voluntary administration of the Company as detailed in Mr Billingsley’s affidavit sworn on 26 August 2019 at [14].

8    At around 5.45 pm on 14 August 2019, the first plaintiffs received a letter of the same date from Madison Marcus, lawyers for Mr Napoli and Human IQ Pty Ltd. The letter advised that in around November 2018, the Company, Mr Gough, Mr Crabtree and Human IQ entered into a shareholders agreement in relation to the Company. A copy of a document said to be that shareholders agreement was attached to the letter. The letter stated that:

(1)    Under the shareholders agreement, Messrs Gough and Crabtree have the right to appoint one director (and as at the date of signing the shareholders agreement, that director was Mr Gough) and Human IQ had the right to appoint one director.

(2)    The appointment of Mr Crabtree as a director on 17 May 2019 was in breach of the shareholders agreement.

(3)    On 5 August 2019, Human IQ sent a notice of appointment of Mr Napoli as a director by pre-paid post in accordance with clause 3.5 of the shareholders agreement with the result that his appointment took effect on 7 August 2019.

(4)    Under clause 4.1 of the shareholders agreement, a quorum of directors was a minimum of two directors and if there is no quorum a meeting cannot proceed.

(5)    Mr Napoli was not notified of, nor did he attend, the meeting of directors to consider the appointment of administrators, nor was he consulted in relation to that appointment.

(6)    Mr Crabtree was not entitled to vote at the directors’ meeting.

(7)    The first plaintiffs had therefore not been validly appointed pursuant to s 436A of the Corporations Act.

9    By a circular to creditors dated 16 August 2019, the first plaintiffs advised creditors that their appointment as voluntary administrators may be contested and of their intention to make an application to the Court concerning it. They said:

We would encourage all creditors to ventilate any concerns that they may have with respect to our appointment as Administrators of the Company and to indicate – whether at the first creditors meeting or in writing before or after that meeting – their consent or opposition with the course proposed by the Administrators in respect of the proposed Court action.

10    The first meeting of creditors of the Company was held on 19 August 2019. At the meeting, the first plaintiffs discussed the need to bring an application in relation to their appointment and no objection was raised to their appointment or the application. Mr Napoli was allowed to attend the meeting as an observer.

11    The first plaintiffs say that an order validating their appointment is justified and consistent with the overriding objects of Part 5.3A because:

(1)    The persons acting on the basis that they were directors on 8 August 2019 believed that the Company was insolvent or likely to become insolvent at the time the resolution was passed.

(2)    Mr Billingsley believes that the Company is insolvent based on:

(a)    The balance sheet of the Company as at 8 August 2019 created on that day discloses a deficit of assets over liabilities of $129,516.50. Since the first plaintiffs have had access to the Company’s books and records, it appears that there is further “decay” in the Company’s financial position to a deficit of $153,704.49;

(b)    The Company’s liability to the Australian Taxation Office (ATO) may increase because it has several outstanding lodgements. It also has a history of unfulfilled payment arrangements with the ATO;

(c)    The Company’s profit and loss statement for the period from 1 July 2019 to 8 August 2019 revealed a net loss of $326,015.81; and

(d)    The Company is no longer trading and it has no employees so that (save for revenue derived under the Licence Agreement referred to below and $1,0154.54 in cash at bank held as at 8 August 2019) it has no sources of revenue to meet existing liabilities.

(3)    On 7 August 2019, the ATO issued director penalty notices to Messrs Gough and Crabtree.

(4)    Having reviewed the Company’s bank statements for the period between June and August 2019, it appears that there have been movements of money between the Company’s bank account and Mr Gough’s. While it appears that all amounts taken out were returned, it bears investigation.

12    The Company had an unwritten service and maintenance agreement with a major client for about three years. The Company’s final services were to be completed in September 2019. The expected revenue for those final services is approximately $77,724. The first plaintiffs approved entry into a Licence Agreement with Mr Gough for use of the Company’s property to enable provision of those services to the client because:

(1)    The licence was necessary to enable Mr Gough to provide the service to a longstanding client.

(2)    Completion of the work was in the best interest of the creditors of the Company because it would preserve value in the Company’s business while the first plaintiffs attempt to initiate a sale of the Company’s business and assets, which remains a course they wish to exhaust.

(3)    Subject to the terms of the Licence Agreement it will generate income.

(4)    The Company did not have the funds to pay the upfront costs (wages, travel expenses and accommodation) necessary to perform the works required and Mr Gough agreed to fund those costs on the basis that he would be reimbursed.

(5)    The first plaintiffs in their absolute discretion may elect to terminate the Licence Agreement.

13    The fact of the Licence Agreement has been disclosed to creditors. The revenue derived under the Licence Agreement would not be sufficient to change the first plaintiffs’ view of the solvency of the Company.

14    The first plaintiffs believe that the intellectual property and client lists of the Company are assets which hold material value which could be sold to an interested purchaser. For reasons set out in the next paragraph, the first plaintiffs have not advertised the business for sale, but if their appointment is validated, Mr Billingsley would expect a sale process to take about four weeks, or perhaps longer depending on the number of interested parties.

15    Since learning of the issue concerning their appointment, the first plaintiffs have been unwilling to advance the voluntary administration as they are concerned that, if the relief sought in the originating process were not granted, they may face personal liability for any step they take in that respect. The unwillingness of the first plaintiffs to advance the administration was strengthened when the defendant opposed the relief sought at the first case management hearing held on 28 August 2019 before Lee J. The defendant’s opposition was only withdrawn on 25 September 2019.

16    Mr Billingsley says that the first plaintiffs would have pressed for orders under s 447A in relation to their appointment as administrators at the case management hearing on 28 August 2019 had the defendant not opposed the orders at that time. In his view, it will take the first plaintiffs four weeks to conduct their functions so that it is likely that an extension of the convening period to 30 September 2019 would have been sufficient if the relief they sought had been granted then.

17    The functions still to be undertaken are:

(1)    Exploring opportunities to turn the business of the Company around, sell the business or sell the assets of the Company (specifically its intellectual property) with a view to improving any return to the Company’s creditors;

(2)    Reviewing the books and records of the Company and taking advice in respect of any recovery actions that might be available were the Company to enter liquidation; and

(3)    Weighing the costs/benefits of any possibilities referred to in (1) against any possibilities referred to in (2) for the purposes of making a recommendation to creditors of the Company as to what ought to occur following the end of the convening period and producing a meaningful report pursuant to s 75-225 of Insolvency Practice Rules (Corporations) 2016 (Cth).

Accordingly, the extension now sought is until 31 October 2019.

18    The Company is not trading and there are no employees whose interests the Court would otherwise be concerned about when asked to extend the convening period. In relation to any prejudice to other creditors of the Company arising from the continuation of the statutory moratorium, the first plaintiffs have communicated their intention to apply to the Court for a further extension of the convening period and invited creditors to state whether they consent or oppose the application.

19    By a circular dated 19 September 2019, the first plaintiffs advised that the hearing of the application in relation to their appointment as voluntary administrators was set down for hearing on 30 September 2019 and the application for extension of the convening period until 31 October 2019 was listed for hearing on 27 September 2019. Copies of the interlocutory process and Mr Billingsley’s affidavits sworn on 26 August 2019 and 13 and 17 September 2019 were attached to the circular. Those affidavits, along with the affidavit of Christopher Athanassios sworn on 26 September 2019, were read on both applications. The hearing on 27 September 2019 was stood over to 30 September 2019.

20    Other than Mr Napoli, who withdrew his opposition to orders relating to the first plaintiff’s appointment as voluntary administrators on 25 September 2019, the first plaintiffs received no notice of any opposition to the request for extension of the convening period or orders in relation to their appointment as voluntary [administrators] and no creditor appeared at the hearings on 27 or 30 September 2019 to oppose those orders being made. Counsel for Mr Napoli appeared at both hearings seeking to establish a timetable for dealing with the issue of costs. A form of orders in relation to the issue of costs was agreed between Mr Napoli and the first plaintiffs.

…

COSTS

31    Both the first plaintiffs and Mr Napoli have advised the Court that they require an opportunity to make submissions concerning the appropriate orders to be made as to costs. Mr Napoli has foreshadowed an application that Messrs Gough and Crabtree be ordered to pay costs. The first plaintiffs also submitted that they would like an opportunity to make submissions concerning the nature of the orders that should be made as to costs.

32    The Court determined to make orders reserving costs on both the originating and interlocutory processes and the timetabling orders agreed by the first plaintiffs and Mr Napoli.

COSTS ORDERS SOUGHT

5    In submissions in chief on costs dated 14 October 2019, the administrators summarised the costs orders they sought as being:

(1)    Their costs of and incidental to the originating process up to and including the case management hearing held on 28 August 2019 be costs in the administration of the Company. They submitted that this would be the usual costs order made on the originating process and the administrators accept that Mr Napoli ought not to have to pay for aspects of the proceedings which the administrators would have had to attend to regardless of his intervention;

(2)    Mr Napoli pay the administrators’ costs of and incidental to:

(a)    the originating process incurred after 28 August 2019; and

(b)    in relation to the extension application;

           on an indemnity basis or failing that on the ordinary basis; and

(3)    In respect of the period after 28 August 2019, a lump sum costs order against Mr Napoli in the amount of $55,930.04 (inclusive of GST and disbursements). They estimate their costs of the costs application (which would not be covered by the lump sum costs order) to be between $12,000 and $13,000. The administrators indicated that, purely on a commercial basis, if Mr Napoli agreed to the making of a costs order and its amount, they would be prepared to accept $44,000 (inclusive of GST) and they would not seek costs of their costs application.

6    On 28 October 2019, Mr Napoli filed an interlocutory application (Mr Napoli’s interlocutory application) and a supporting affidavit sworn by Mr Napoli on that date. In Mr Napoli’s interlocutory application, he sought orders only against Messrs Gough and Crabtree in relation to his cost and the administrators’ costs.

7    He also filed written submissions dated 28 October 2019. Those submissions were in response to the administrators’ submissions in chief and in support of Mr Napoli’s interlocutory application. Mr Napoli sought orders that:

(1)    The administrators’ costs of the proceeding be costs in the administration;

(2)    The administrators pay Mr Napoli’s costs from 20 September 2019 and of and incidental to its costs application against him;

(3)    Messrs Gough and Crabtree pay Mr Napoli’s costs of the proceedings and the costs of and incidental to Mr Napoli’s interlocutory application; and

(4)    If the Court orders Mr Napoli to pay part of the administrators’ costs, an order analogous to orders made in Sanderson v Blyth Theatre Company [1903] 2 KB 533 (Sanderson order) or Bullock v The London General Omnibus Company [1907] 1 KB 264 (Bullock order) should be made against Messrs Gough and Crabtree.

Mr Napoli also submitted that if the Court were minded to make a lump sum costs order, further orders should be made following the Court’s determination of entitlement. Mr Napoli says this would be in conformity with the procedure set out in Practice Note GPN-Costs (the Costs Practice Note) at [4.4].

8    The administrators filed submissions in reply dated 13 November 2019. It is sufficient to note at this point that:

(1)    They did not wish to be heard or participate in any dispute between Mr Napoli and Messrs Crabtree and Gough save to say that it would be inappropriate that primary liability for the administrators’ costs rest with anyone other than Mr Napoli on the basis that it was steps taken by Mr Napoli which caused the administrators to incur costs that were ultimately incurred and they have no insight into the ability of Messrs Gough and Crabtree to meet such an order;

(2)    Having received no response to their offer, they withdrew the offer to accept a lump sum costs order for $44,000 (inclusive of GST) and instead pressed for a lump sum costs order of $82,885.54 comprised of:

(a)    $55,930.04 (inclusive of GST) in respect of the originating process and the extension application as previously asserted; and

(b)    $26,955.50 (inclusive of GST) in respect of costs incurred in respect of the question of costs;

(3)    They opposed the form of orders sought by Mr Napoli in the submissions dated 28 October 2019 at [78]-[79].

9    The parties, not without difficulty, ultimately agreed that the issues as to costs could be determined on the papers. The administrators sought, and the Court made (on 11 December 2019) orders to the effect that the administrators be excused from further participating in Mr Napoli’s interlocutory application save for the Court reading:

(1)    Paragraphs [42]-[48] of the administrators’ costs submissions in chief filed on 14 October 2019; and

(2)    Paragraphs [1]-[4] of the administrators’ costs submissions in reply filed on 13 November 2019;

in respect of prayer 2 of Mr Napoli’s interlocutory application and their costs in respect of that application were reserved.

10    In support of their position as to costs the administrators rely on:

(1)    Affidavits sworn by Christopher Athanassios of Miller & Prince Lawyers, the administrators’ solicitors, on 14 October 2019 and 13 November 2019 together with exhibits CA-1 and CA-2;

(2)    Their counsel’s written submissions in chief dated 14 October 2019 and in reply dated 13 November 2019 and their counsel’s written reply submissions to Mr Napoli’s further submissions on costs dated 2 December 2019.

11    Mr Napoli relies on the following material in respect of costs:

(1)    Mr Napoli’s affidavit in support of his interlocutory application sworn on 28 October 2019 and exhibit SMN-1;

(2)    An affidavit sworn by David Winston Low of Madison Marcus Law Firm Pty Ltd, Mr Napoli’s lawyers, on 10 December 2019; and

(3)    Mr Napoli’s counsel’s written submissions dated 28 October 2019; 28 November 2019; 10 December 2019; 18 December 2019; and 12 March 2020.

12    Messrs Gough and Crabtree rely on their counsel’s written submissions dated 26 November 2019 and 24 February 2020 opposing the orders sought by Mr Napoli. They filed no evidence.

BACKGROUND

Period to 8 August 2019

13    Mr Gough, as the sole director of the Company, purported to appoint Mr Crabtree as a director of the Company on 17 May 2019 and they both acted in the capacity of director until 8 August 2019.

14    Mr Napoli explained the background to the acquisition by entities controlled by him of all of the shares in Human IQ as follows. Between August 2018 and January 2019, Argus Global Pty Ltd (Human IQ’s then holding company) conducted a fundraising campaign in which entities Mr Napoli controlled invested about $2,582,872.50. Argus’ principal business was the provision of biometric solutions to correctional service facilities in Australia, including approximately 18 correctional facilities across New South Wales. In mid-April 2019, Argus’ sole director (Kenton Geoffrey Farrow) resolved to appoint administrators of Argus who were subsequently replaced (none of whom were the administrators of the Company). Following negotiations with Argus’ administrators, Mr Napoli caused an entity he controls to acquire the shareholding in Human IQ for $50,000. Human IQ then held 33% of the shares in the Company. After the acquisition, which occurred in about mid-June 2019, Mr Napoli was appointed a director of Human IQ on 14 June 2019.

15    Mr Gough and Mr Crabtree met with Mr Napoli in early July 2019 and Mr Gough sent an email to Mr Napoli and Graeme Webb dated 4 July 2019 concerning the future direction of the Company, including shareholding structure. Mr Gough corresponded with Mr Napoli and Mr Webb on 15 July 2019 which indicated that he and Mr Crabtree had heard nothing from Mr Napoli since meeting “two Tuesdays ago”, that they were no long prepared to pursue the path discussed, and that they “need to move on”. Mr Gough suggested buying back Human IQ’s 50 shares for $10,000, noting that neither he or Mr Crabtree had received even $1.00 out of Mr Napoli’s investment in Argus or in the purchase of the 50 shares in the Company held by Human IQ.

16    By a letter dated 5 August 2019, Madison Marcus served on the Company a notice from Human IQ purporting to appoint Mr Napoli as a director pursuant to cll 3.3 and 3.5 of a shareholders agreement with effect on and from 8 August 2019 and a consent to act as a director signed by Mr Napoli. That shareholders agreement is said to be between Messrs Crabtree and Gough, Human IQ and the Company, it is undated (save for a printed “2017”) but apparently executed in counterpart by the parties to it. In their written submissions, Messrs Crabtree and Gough concede that they received that letter on 6 August 2019.

17    On 8 August 2019, Madison Marcus sent emails to Messrs Gough and Crabtree to which were attached letters of the same date addressed to the Company at its registered office.

18    The first letter dated 8 August 2019 required the Company to rectify ASIC’s register to indicate that Human IQ’s shares in the Company were beneficially owned. It went on to say:

Request for copy of financial documents

7.    Human IQ has a reasonable suspicion that the Company has a cause of action against its directors, for breaches of the directors’ duties to act in the best interests of the Company, and not to trade whilst insolvent.

8.    Human IQ hereby requests that the Company provide it with copies of the following documents, to assist Human IQ with its investigations into the cause of action referred to in paragraph 7 above:

(a)    Copies of the financial reports for the Company for the financial years ending 30 June 2018 and 30 June 2019 respectively (including income statement, profit and loss statement and balance sheet);

(b)    Copies of the Company’s management accounts for the financial years ending 30 June 2018 and 30 June 2019;

(c)    Copies of any and all bank account statements in the name of the Company from 30 June 2018 to date; and

(d)    Copies of any tenders submitted by the Company to third parties for any proposed works between the period 30 June 2018 to date.

19    By a further letter dated 8 August 2019, Madison Marcus sought, pursuant to s 290 of the Corporations Act, all invoices, receipts, orders for payment of money, bills of exchange, cheques, promissory notes, vouchers, documents of prime entry and working papers and other documents needed to explain the methods by which the Company’s financial statements are made up and adjustments to be made in preparing financial statements.

20    On 8 August 2019, Mr Gough and Mr Crabtree purported to resolve to appoint Messrs Billingsley and Mansfield as voluntary administrators of the Company. In their written submissions dated 26 February 2020, Messrs Gough and Crabtree say that, rather than taking the course of appointing Mr Napoli as a director by 5 pm on that day (as required in the 5 August 2019 letter sent to them by Madison Marcus) they appointed the administrators in circumstances where the Company was, or was likely to be, insolvent, the ATO had issued director penalty notices for the Company’s failure to meet tax obligations and voluntary administration was consistent with the objects of Part 5.3A of the Corporations Act.

Period from 14 August 2019 to 30 August 2019

21    On 14 August 2019, Mr Napoli’s lawyers sent to the administrators by email a letter of that date casting doubt on the validity of their appointment: Billingsley v Napoli at [8].

22    On 15 August 2019, Mr Gough sent an email to the administrators’ staff to which was attached an unsworn statement prepared by him and dated that date. It said (as written):

Biometric Identity Systems Pty Ltd (BIS) began in late 2015.

Late 2016 we were approached by Argus Global Pty Ltd (AG) who were interested in acquiring BIS.

By late 2017 we had negotiated an agreement to become part of the Argus Group.

Argus represented an attractive opportunity for BIS to continue it’s pursuits with new resourcing and processes to fill operational gaps.

To commence this, a further 50 Ordinary Shares in BIS were issued and provided to Argus, in exchange for many back-end administration services, assistance with any financial obligations and full access to the services of their Marketing and Public Relations Teams to promote and improve BIS.

The relationship with Argus was centred around developing technical strengths, building a Team environment for “belonging”, significant business administration improvements and providing necessary funds for meeting the costs of the business.

While the relationship aged, the “attractions” weren’t exactly forthcoming. Late 2018 we were advised by Argus that it was time to complete the “acquisition” in order to maximise the benefits available from BIS to Argus and to further reduce costs. It was also at this time that BIS were given to understand that Argus would make arrangements for the outstanding liabilities to the ATO and SGC to be paid out.

By March 2019 there were several things that simply hadn’t happened to complete the acquisition:

•    No Employment Agreements were provided and/or signed.

•    No outstanding liabilities had been paid or brought up to date.

•    No arrangements were made for ongoing financial management of BIS, ie; how we were going to pay rent, wages and other bills etc.

•    Nothing was provided to explain our position within the new entity and what benefit we would receive in the Argus Employee Share Opportunity Program (ESOP).

•    The agreed amount of $20k was not paid to Damien and I for settlement of the purchase of our remaining Shares in BIS.

In mid-March, Argus underwent a significant internal restructuring of roles and approximately half of the staff were made redundant. Many middle managers were included in that change. This was the first sign to BIS that Argus were having major financial problems.

In Early April, Ken Farrow, the Managing Director of Argus Global Pty Ltd put the company into Voluntary Administration. This was really the end of the beginning for us as our “agreement” was with Ken and his Team.

The 50 BIS Shares were owned by a wholly owned subsidiary of Argus called Human IQ Pty Ltd (HIQ). That company was sold by the Argus Liquidators to Simon Napoli and Graeme Webb.

Our outstanding ATO liabilities had not been dealt with by Argus Global, as previously promised.

On Tuesday the 6th August both Damien Crabtree and Daniel Gough received Director Penalty Notices from the Australian Taxation Office for the full amount owing to the ATO.

On Wednesday the 7th August, most staff had advised of their intended resignation from BIS.

Being left in the position of having no senior technical staff and significant debt, the only choice left to the Directors was to place the company into Voluntary Administration.

23    On 16 August 2019, Messrs Billingsley, Mansfield and Athanassios held a teleconference with Mr Napoli and his lawyers, Bechara Shamieh and Lisa Boler (of Madison Marcus). Mr Napoli’s evidence is that at that meeting Mr Shamieh said words to the following effect:

My client, Mr Napoli is a director of Biometric. The only other director of Biometric is Mr Gough. Mr Crabtree was invalidly appointed a director of Biometric.

In order for the directors to pass a resolution, there needs to be a quorum of two directors. Therefore, both Mr Gough and Mr Napoli need to be present.

Mr Napoli had no knowledge of, and did not attend, the meeting of directors on 8 August 2019, which means there was no quorum and the meeting on this date could not proceed. Therefore, your appointment as administrators is invalid. Mr Napoli has requested Biometric provide him with a copy of books and records. To date, these requests have gone unanswered. As a director of Biometric, he is entitled to the books and records. Until our client has received a copy of the books and records he is unable to comment on the solvency or insolvency of Biometric. Please provide us with a copy of the documents.

Mr Napoli also says that he was very concerned about the Licence Agreement (defined below) because there may have been a collateral purpose for Mr Gough’s entry into that agreement, noting that it gives him rights over the Company’s intellectual property.

24    Following that meeting, at 11.10 am on 16 August 2019, Ms Boler sent an email to Mr Athanassios requesting copies of minutes of the directors meeting on 8 August 2019 at which the administrators were appointed, a copy of the Licence Agreement dated 12 August 2019 (referred to in Billingsley v Napoli at [12] (see at [4] above)), a copy of all sales agreements relating to intellectual property entered into by the Company either before or after the administrators’ appointment, and the Company’s balance sheet referred to during the conference.

25    By an email sent at 3.31 pm on 16 August 2019, the administrators’ solicitors sent a copy of the appointment documents executed on 8 August 2019, a copy of the executed Licence Agreement and “a copy of a document summarising BIS’s liabilities” and stating that the administrators are not aware of or in possession of any sales agreements entered into by the Company before or after their appointment with respect to intellectual property.

26    I note that:

(1)    The stated sole purpose of the Licence Agreement (at cl 3) is to permit and assist the Company to perform its obligations under a “Material Contract”, being the agreements, arrangements or understandings with an identified client (Honeywell Limited) and to ensure that the Company receives any and all revenues or income in respect of, or in connection with it. Under cl 2.3(a), (e), the Licence Agreement terminates when the Material Contract terminates or at any time in the administrators’ absolute discretion; and

(2)    The “document summarising BIS’s liabilities” indicated that the Company had liabilities of $309,415.60 as at August 2019 of which $249,524.60 was said to be owed to the ATO.

27    On 16 August 2019, the administrators sent a circular relating to a meeting of creditors to be convened on 19 August 2019. Among other things it said:

On 12 August 2019, we executed a Licence Agreement with Mr Daniel Gerard Gough (the Licensee) in order to preserve the value of the Company’s business as well as its operations and assets, effective from 8 August 2019. The purpose of the Licence Agreement, in broad compass, is to enable the Licensee to complete a project and, upon completion, to realise and apply the funds to the administration.

It has since come to our attention that a third party may contest our appointment as Administrators of the Company. The substance of the contentions raised are being duly considered by us and professionals advising us, however, as a result of these matters raised by this contention, amongst other potential issues, we intend to make an application to the Court to ratify our appointment.

The views of creditors of the Company are relevant in any applications which can be brought by voluntary administrators, including in respect of ratifying our appointment, and we intend to ask for those views at the first creditors meeting convened on Monday, 19 August 2019.

We would encourage all creditors to ventilate any concerns that they may have with respect to our appointment as Administrators of the Company and to indicate – whether at the first creditors meeting or in writing before or after that meeting – their consent or opposition with the course proposed by the Administrators in respect of the proposed Court action.

If any creditor wishes to oppose the proposed application, we will join that creditor as a defendant to any such proceeding and they will be given every opportunity to be heard. In fairness to all creditors of the Company, we reserve all rights on the question of costs.

28    On 20 August 2019 at 10.48 am, the administrators’ solicitors sent an email to the solicitors for Mr Napoli and Human IQ with an attached letter saying:

First Meeting of Creditors

We note that Mr Lachlan McIntosh, on behalf of your clients, attended as an observer at the First Meeting of Creditors whereby (amongst other things) it was noted that the Administrators circulated the enclosed circular to creditors on 16 August 2019.

We understand that your clients did not receive this circular however, at the First Meeting of Creditors we note that Mr Athanassios:

(a)    explained the contents of the circular at the First Meeting of Creditors; and

(b)    subsequently, requested:

i.    if any creditor had any objection to the Administrators being appointed to the Company; or

ii.    if any creditor wanted to be joined to the Administrators proposed application seeking to validate their appointment to the Company.

We note that your clients’ observer did not raise any objections at the First Meeting of Creditors (despite ventilating other concerns at the First Meeting of Creditors).

Remedying technical defect

The Administrators are conscious of incurring unnecessary legal cost to validate their appointment as Administrators of the Company. As such, there appears to be a pragmatic way forward, namely, Mr Napoli ratifies the appointment of the Administrators as resolved at the board meeting held on 8 August 2019.

If, for whatever reason, Mr Simon Napoli does not ratify the appointment of the Administrators, the Administrators will commence proceedings in the Federal Court of Australia seeking to ratify their appointment as Administrators of the Company.

Could we please have Mr Napoli’s ratification in respect of the appointment of the Administrators or Mr Napoli’s position in respect of this request by no later than 5:00 pm Tuesday, 20 August 2019. As you no doubt appreciate, the matter is of some urgency given the strict statutory convening period and inability of the Administrators to attend to the administration until this issue has been resolved.

We look forward to your urgent reply.

Our clients otherwise reserve their rights.

A copy of the circular to creditors was enclosed with the letter.

29    Mr Napoli’s solicitors responded at 12.16 pm on Tuesday, 20 August 2019 requesting an extension of time to notify the administrators of whether Mr Napoli would ratify their appointment to 5.00 pm on Wednesday, 21 August 2019. The administrators consented and advised Mr Napoli’s solicitors by email sent at 6.40 pm on the same day.

30    By letter dated 21 August 2019 sent by email at 11.58 am, the solicitors for Mr Napoli stated to the solicitors for the administrators that “[o]ur client requires full financial and operational information concerning the operations of the Company, so he may properly consider whether to ratify your client’s appointment as administrators of the Company”. The letter went on to make an extensive request for the documents referred to at [31] below to be provided by noon on 21 August 2019. The letter stated that if the administrators were unable to provide the requested documents in the time stipulated, Mr Napoli would respond to the request for ratification of the administrators’ appointment within 48 hours of receipt of that information. The letter warned that if the administrators failed or refused to provide the information and make an application to the Court, Mr Napoli would contend that the application was premature and produce the letter to the Court on the question of costs.

31    The requested documents included:

(1)    Financial statements for the year to 30 June in 2017-2019;

(2)    The client list;

(3)    Tenders made from 1 July 2018 to date and their responses;

(4)    Contracts to which the Company was a party from 1 July 2018 to date, including but not limited to the complete sales “pipeline” for customers and suppliers, all customer and supplier contracts including those in negotiation, all customer and supplier partnership, memoranda of understanding and non-disclosure agreements, and all third-party agreements for software maintenance and/or customer support;

(5)    Details of who possesses the Company’s source code (whether a service provider or a director);

(6)    Lists of software source code versions installed with each customer (relevant to future costs);

(7)    Details of all software source code in research and development;

(8)    The current software roadmap;

(9)    Bank statements from 1 July 2018 to date;

(10)    Third party agreements with any current or former director or executive of the Company;

(11)    Government research and development grants and applications; and

(12)    Any other historical or current information that is relevant to running the Company’s business.

32    By a letter dated 22 August 2019 sent by email to Mr Napoli’s solicitors by the administrators’ solicitors at 9.42 am on that day, the administrators advised:

Upon further review of the matters raised in Your Letter [of 21 August 2019], amongst other matters, we are of the view that ratification, even if forthcoming, is not capable of addressing the difficulties set out in Your Letter without order of the Court. For that reason, we are instructed to withdraw our clients’ request for ratification and will proceed with the proposed application.

We do not understand your assertion that any such application is premature in circumstances where regardless of the position adopted by your clients, our clients will require relief from the Court in respect of their appointment. In those circumstances, could you please clarify your clients’ position. …

In circumstances where your natural person client appears to wish to participate in any application ultimately brought by our clients, we hold instructions to join your client to the proposed proceedings to allow him the forum to be heard should he wish to (although he has no obligation to appear and is welcome to put on a submitting appearance if he wishes to). If your client does choose to take an active part in the proposed proceedings, our clients reserve all rights including as to the question of costs.

In respect of the request for information set out at paragraph 7 of Your Letter, we fail to see how any category other than the first could possibly be required by your natural person client to ascertain his views on the question of solvency – which is the only matter relevant to the resolution appointing our clients as voluntary administrators. To the extent that your natural person client presses for certain material, we invite you to refine your request having regard to what is set out above and we will take instructions on the matter.

33    By letter dated 22 August 2019 sent by Mr Napoli’s solicitors to the administrators’ solicitors by email at 4.59 pm, Mr Napoli’s solicitors confirmed they were instructed to accept service and asked for clarification as to what form of service they were being asked to accept; that is, whether the documents would be served on him and Human IQ as defendants, non-party interested persons or on some other basis.

34    In relation to the request for documents, the letter pointed out that the solvency test is in effect a cash flow test, not a balance sheet test, and stated that it was therefore relevant for Mr Napoli to be able to determine what the Company’s cash flow position was “as at the date of the purported appointment”. In relation to the statement of liabilities provided by the administrators, which had been collated from proof of debt forms submitted in the administration, it was noted that Mr Napoli was not aware of the age of the debts, when they fell due or income that was receivable or projected in or about the same period and that was the purpose of the request for books and records made in the letter dated 21 August 2019. The letter pressed for provision of those documents and said that, given Mr Napoli’s lack of substantive information about the Company’s financial position, it was premature to give any indication in relation to his attitude to the administrators’ proposed application. The letter noted s 70-10(2) of the Insolvency Practice Schedule (Corporations) and asserted that as Human IQ is a “contributory” of the Company it was entitled to inspect the Company’s records at all reasonable times. The letter requested advice as to the time at which Human IQ may inspect the Company’s books noting that it may be more convenient to provide true copies of those documents.

35    In reply, on Friday, 23 August 2019, Mr Athanassios sent an email to Mr Napoli’s solicitors at 10.56 am stating that Mr Napoli would be joined as a defendant to the originating process but if he elects to do nothing other than to lodge a submitting appearance then the administrators would not seek an adverse costs order against him. The email also said that Mr Athanassios’ firm would revert to Mr Napoli’s solicitors “separately about the information/documents sought” by their clients.

36    The originating process was filed on Monday, 26 August 2019. Affidavits were sworn on that date by Mr Athanassios (to which were annexed the emails and letters referred to at [28] to [33] above) and Mr Billingsley in support of the relief sought in the originating process. A copy of these documents and exhibit MJB and orders for short service made by Lee J on that day were served on the solicitors for Mr Napoli by email sent at 3.32 pm on 26 August 2019.

37    It is relevant to note that the administrators did not seek to be heard on the validity of the resolution which Messrs Gough and Crabtree purported to pass on 8 August 2019 but rather rested their application on the Company’s likely insolvency.

38    By Mr Billingsley’s affidavit sworn on 26 August 2019 and exhibit MJB the following evidence was provided:

(1)    An ASIC search relating to the Company dated 9 August 2019;

(2)    Copies of minutes of the directors’ meeting held on 8 August 2019 and the instrument of that date appointing the administrators;

(3)    Copies of the Report on Company Activities and Property executed by Mr Gough on 21 August 2019 to which were attached details of:

(a)    “Amounts the Company owes to its employees (priority creditors)”, showing an aggregate amount of $47,954.40;

(b)    “Amounts the Company owes to its creditors”, showing an aggregate amount of $68,265.30. This appears to be a list of trade creditors. It does not list the ATO as a creditor;

(c)     “Money owed to the Company”, being amounts owed by customers showing an aggregate amount of $43,400.83 and an asset register. The asset register appears to relate only to tangible assets;

(d)    A payroll register summary for the period 1 to 21 August 2019 setting out the wages and salaries payable to employees including net pay and expenses.

(4)    A copy of the Licence Agreement;

(5)    Mr Billingsley deposed to the steps taken in the administration to that date;

(6)    A copy of the circular sent to creditors on 16 August 2019 and a copy of the minutes of the creditors’ meeting on 19 August 2019;

(7)    A copy of the Madison Marcus letter to the administrators dated 14 August 2019 in relation to the validity of the administrators’ appointment with its attachments;

(8)    Copies of letters dated 5 and 8 August 2019 from Madison Marcus to the Company summarised at [16]-[18] and the Company’s constitution. Mr Billingsley deposed that these were provided to him by Mr Gough at approximately 12.44 pm on 15 August 2019.

(9)    Copies of proofs of debt received to that time, including a proof of debt from the ATO for an amount of $138,815.80; and

(10)    Mr Billingsley deposed as follows in relation to the Company’s solvency:

Solvency of the Company

38.    Based on my investigations to date, I believe that the Company is insolvent, and has been since at least 8 August 2019.

  39.    The basis for this belief is that:

(a)    the balance sheet of the Company as at 8 August 2019 (being the date the Administrators were appointed) discloses that the net assets of the Company is - $129,516.50 (negative);

(b)    the total liabilities are significantly higher than the total assets;

(c)    the ATO’s outstanding liability may increase to an amount which is presently unknown because the Company has several outstanding lodgements which, when lodged, may have the effect of increasing the ATO’s debt;

(d)    the Company's profit and loss statement for the current financial year, being 1 July 2019 to 8 August 2019, revealed a net loss of $326,015.81; and

(e)    given that the Company is no longer trading and there are no employees, there are no further revenue sources with which to meet the Company's existing liabilities.

40.    Exhibited to this affidavit behind Tab 10 is a copy of a file note prepared at my instruction dated 20 August 2019 which provides further solvency analysis in respect of the Company.

39    The file note behind Tab 10 of exhibit MJB at pages 149-155 contained:

(1)    On the first page:

(a)    A description of the Company’s assets to a total value of $201,192.99, including current assets (being cash at bank, trade debtors and inventory) to an aggregate value of $51,130.11 and non-current assets (being a rental bond, furniture and office equipment, a motor vehicle and intellectual property) to an aggregate value of $150,062.88 of which intellectual property was the major component at $120,000;

(b)    A description of the Company’s liabilities comprising current liabilities of $330,709.49, including a debt to the ATO of $270,818.49 with no non-current liabilities. The notes contained further detail as to the nature of tax liabilities (the ATO had notified the administrators of several outstanding lodgements which, when lodged, may have the effect of increasing the ATO’s claim); a disputed debt for work done for Argus; negative petty cash, a secured charge and salary sacrifice totalling $21,833.60; and priority creditors of $37,148 with respect to wages and superannuation;

(c)    An identified deficiency of $129,516.50 and statements in the notes on the first page which stated:

Based upon both the Company’s records and the Administrators’ initial assessment of same, the Company is unable to meet its existing liabilities from the assets available to it.

(2)    On the second page:

(a)    Under the heading “Business Ceased Trading”:

Prior to the Administrators’ appointment on 8 August 2019, all employees resigned and/or were terminated and the business ceased trading operations. Given that the business is no longer trading and there are no employees, there are no further revenue sources with which to meet the Company’s existing liabilities.

(b)    Under the heading “Other Indicators of Insolvency”:

The Company’s profit and loss statement for the current financial year, being 1 July 2019 to 8 August 2019, revealed a net loss of $326,015.81.

(c)    A summary of creditors’ claims received by the administrators to that date to a figure of $248,054.81 and a concluding statement that:

Given the recent timing of the appointment, and the ATO’s comments regarding outstanding tax lodgements, this amount may increase.

(d)    Mr Billingsley’s signature under a statement headed “Summary”:

Our initial analysis of the Company’s financial documents confirms that the Company is currently insolvent.

(3)    On the third and fourth pages, there is a document headed “Balance Sheet” as of 8 August 2019 which indicates that it was created on that date at 3.51 pm. It showed negative net assets and negative total equity of $129,516.50;

(4)    On the fifth and sixth pages there is a document headed “Profit & Loss Statement July 2019 to June 2020”. It indicated a net loss of $326,015.81;

(5)    On the seventh page there is a document which appears to have been prepared by Deloitte Financial Advisory Pty Ltd on 20 August 2019 in relation to the Company’s projected creditor claims based on formal proofs of debt for an aggregated amount of $248,054.81, being:

(a)    claims by Westpac Banking Corporation and the Commonwealth Bank of Australia for an amount of nil;

(b)    claims by employees for a total amount of $14,179.36. I note that two women with the surname Gough and (according to Mr Gough) Mr Crabtree’s nephew made claims for an aggregate amount of $9,970.19;

(c)    claims by Messrs Gough and Crabtree as directors for an aggregate amount of $22,970.35;

(d)    the ATO for $138,815.80; and

(e)    other unsecured creditors for an aggregate amount of $72,089.30.

40    On Tuesday, 27 August 2019, Mr Napoli’s solicitors sent a letter to the administrators’ solicitors by an email sent at 10.01 am. The letter noted that the administrators’ solicitors had not provided the requested information to Mr Napoli notwithstanding what was said in Mr Athanassios’ email of 23 August 2019. The letter went on to say:

We note that from a review of Mr Billingsley’s affidavit sworn in the Proceedings on 26 August 2019 (‘Affidavit’) he refers to having, inter alia:

•    “prepared a detailed file note assessing the solvency of the Company”: subparagraph 14(s) of his Affidavit;

•    reviewed the “Report on Company Activities and Property Part A”: subparagraph 14(w) of his Affidavit;

•    caused the Company to enter into a Licence Agreement with Daniel Gerard Gough dated 12 August 2019: subparagraph 14(y) of his Affidavit; and

•    “reviewed the books and records delivered by Mr Daniel Gerard Gough” to his office: subparagraph 14(v) of his Affidavit.

Therefore, it would appear that Mr Billingsley has access to the documents, which are sought by our client.

If our client had been provided with copies of the requested information/documents, before the Federal Court Proceedings were commenced, it may have been possible for our client to have consented to the order now sought under section 447A Corporations Act, in respect of the appointment.

We note that in paragraph 9 of our letter to you dated 21 August 2019, we had offered to notify you within 48-hours from the time of receipt of these documents, whether our client was willing to ratify the appointment of your clients as administrators.

Provision of access to information/documents, or copies of same

Provided that the documents previously sought by our client are satisfactorily provided to our client, or he is given suitable access to such material, and provided there are no material matters arising from our client’s review and inspection of those documents which would alter the position of our client with respect to your client’s appointment as administrators of the company, our client is likely to consent to the substantive order sought by your clients concerning their appointment (save as to costs).

The other orders concerning the extension of the convening period would be matters for the creditors of the company.

Noting that the Proceedings have been adjourned by Justice Lee until 9.00am on Wednesday, 28 August 2019, please inform us urgently whether your clients are willing to provide our client with access to, or copies of, the information/documents sought and, if so, whether they are able to do so today.

41    The administrators’ solicitors responded to Madison Marcus by letter attached to an email sent at 3.08 pm on Tuesday, 27 August 2019. The letter noted points made in previous correspondence concerning the documents Mr Napoli had requested including an invitation to refine his request. The letter went on to say (as written):

As you are aware, on 8 August 2019, the board of the Company resolved that, in the opinion of the directors:

(a)    the Company was insolvent or likely to become insolvent at some future time; and

(b)    the Administrators should be appointed by the Company.

Paragraphs 39 and 40 of the affidavit of Michael James Billingsley (Billingsley Affidavit) are consistent with the view that the Company was insolvent at the time the Administrators were appointed to the Company on 8 August 2019. In such circumstances, it is in the interests of the Company’s creditors that the Administrators remain and continue the voluntary administration. Without limitation as to the reasons why the voluntary administration ought to continue, we refer you specifically to the following matters in addition to the views of one of the voluntary administrators:

(a)    tab 10 of Exhibit and MJB, exhibits (amongst other things) the balance sheet of the Company as at 8 August 2019 and the profit and loss statement from July 2019 to June 2019 – being the relevant point in time for the purposes of the relevant resolution appointing the Administrators to the Company; and

(b)    tab 7 of Exhibit MJB, at page 94 of the exhibit, contains correspondence from your offices where Human IQ Pty Ltd (Human IQ) suspected that the Company was insolvent in any event (and prior to the appointment of the Administrators).

As you would have also seen from paragraph 36 of the Billingsley Affidavit, the convening period of the voluntary administration ends on 5 September 2019.

Whether intentionally or not, Mr Napoli’s insistence on access to the Requested Documents for which neither he nor Human IQ have any entitlement (for reasons set out below) will very likely prevent the Administrators’ section 447A application being heard and determined prior to the expiration of the convening period.

In circumstances where an extension to the convening period would not otherwise be sought by the Administrators, the Administrators will seek their costs of the Proceedings – including the extension of the convening period – from Mr Napoli should he take any position other than consent/not oppose the relief sought by the Administrators in the Proceedings.

To be clear, if Mr Napoli were to consent/not oppose the relief sought by our clients under section 447A of the Corporations Act 2001 (Cth) (Corporations Act) at the case management hearing listed tomorrow – our clients will not seek any costs from him.

42    The letter went on to assert that on a proper reading of s 70-10 of the Insolvency Practice Schedule (Corporations) the reference to “books” is confined to the “administration books” as detailed in s 70-10(1) and referred Mr Napoli’s lawyers to the Explanatory Memorandum to the Insolvency Law Reform Bill 2015 (Cth) at [6.66]. The letter concluded that, as none of the documents which Mr Napoli had requested were “administration books”, the administrators were under no obligation to provide those documents to him.

43    The letter went on to say:

Sale process post validation of the Administrators’ appointment

Subject to the Court validating the Administrators’ appointment to the Company (which is the very purpose of the Proceedings), the Administrators propose to engage in a sale process of certain assets of the Company. We note that it was recorded in the minutes of meeting of the first meeting of creditors of the Company that your client, Human IQ, is an interested party in respect of the sale of the Company’s business/assets. The Administrators are conscious of their obligations under the Corporations Act and confirm that they will engage in any such sale process in the usual way – having regard to their professional and ethical obligations. Further, we are instructed that, at this stage, the Administrators do not have certain documents/information sought in the Requested Documents. The Administrators will make enquiries about those documents if the Administrators’ section 447A application is ultimately successful.

Appearance on Wednesday 28 August 2019

As above, in the event that Mr Napoli seeks to take any position in the Proceedings other than to consent/not oppose the relief sought by our clients under section 447A of the Corporations Act – our clients will press for their costs of the Proceedings, including in respect of being forced to extend the convening period of the second meeting of creditors to facilitate whatever steps Mr Napoli wishes to take in the Proceedings.

If Mr Napoli is minded to consent/not oppose the relief sought under section 447A of the Corporations Act, could you please confirm that position in writing as soon as possible? We confirm that we hold instructions to mention your appearance should this occur.

44    As indicated above, the parties appeared before Lee J on 28 August 2019 at a case management hearing. Three issues were identified:

(1)    The need for an order extending the convening period to 30 September 2019, to which Mr Napoli was not opposed provided it did not prejudice his position concerning the proposed final relief (that is, the validating order);

(2)    The proposed validating order in relation to the administrators’ appointment. The administrators conceded that there was a defect in their appointment. Their counsel submitted that the validating order was justified on the basis that the Company was insolvent or (in the view of the directors on 8 August 2019) likely to be insolvent and a question of governance. The question of governance was that it would not be possible to govern the Company if two directors have fundamentally different views on that point. Counsel for the administrators submitted that all necessary evidence as to solvency had already been filed; and

(3)    Mr Napoli’s access to documents relevant to the contest as to the proposed validating order pursuant to a notice to produce. Counsel for Mr Napoli said that he wished to confirm for himself the question of whether or not the Company was insolvent. The administrators were concerned about providing access to the Company’s intellectual property and other commercially sensitive information on the basis that Mr Napoli had interests in a competitor of the Company (Argus) and he had indicated an interest in acquiring the Company’s business so that to give him access in this process would subvert a sale process conducted by the administrators.

45    From my consideration of the transcript of the proceedings on 28 August 2019, I accept that Lee J raised the issue of the parties filing points of claim and defence and that discovery referable to those pleadings would be more expedient than Mr Napoli’s proposed notice to produce.

46    On Wednesday, 28 August 2019 at 7.03 pm, Mr Napoli’s solicitors sent a letter by email to the administrators’ solicitors. In relation to communications before the commencement of proceedings, the letter noted that the administrators took the view that regardless of the position adopted by Mr Napoli concerning their appointment, they would require relief from the Court in respect of their appointment and the administrators withdrew their request that Mr Napoli ratify their appointment and asked him whether or not he wished to take an active part in the foreshadowed proceedings. The letter also noted the administrators’ request to refine the categories of documents sought but that they had not indicated what documents they had in their possession. The letter went on to say:

8.    In open Court during the directions hearing before the Justice Lee earlier today, your clients, through their Counsel, informed the Court that they concede their appointment as administrators of the Company was defective. Given that an order is sought by your clients pursuant to section 447A Corporations Act and the exercise of such power is, of course, a discretionary matter for the Court, for which our client’s consent alone would not be sufficient, our client Mr Napoli (being the person who brought the defects in the appointment of your clients to their attention) was not a catalyst for the application, but the innocent party. Messrs Gough and Crabtree, by their acts or omissions, are the persons who are responsible for your clients’ need to make the current application for orders validating their appointment and extending the convening period. Given the above facts and circumstances, if your clients are ultimately successful in obtaining the substantive orders they seek from the Court, in our view, our client would nonetheless be entitled to an order for the payment of his costs, given that he brought to the attention of your clients, the defects in the appointment purportedly effected by Messrs Gough and Crabtree on 8 August 2019.

Proposed resolution

9.    Our client has no desire to put your clients to additional cost and expenses. We understand from the submissions made by your clients’ Counsel to the Court earlier today, that the reason why your clients are reluctant to provide us with the documents and information sought is because they have concerns that these documents will be used by our client Mr Napoli for a collateral purpose, given that he is a competitor of the company. These concerns are unfounded. Our clients seek the documents and information because Mr Napoli, as a director of the Company, and Human IQ Pty Ltd, as a shareholder of the Company have an interest in the Company.

10.    We are instructed that the reason our client requires the documents and information is for the purpose of understanding the operations of the Company, including whether it was solvent at the time your clients were purportedly appointed administrators on 8 August 2019. In this respect, he is willing to provide your clients with an undertaking that all documents and/or information disclosed to him will be solely used for the purpose of the proceedings.

47    The form of orders proposed by Mr Napoli’s solicitor included orders requiring Mr Napoli to indicate whether he intended to oppose the originating process by 2 pm on Monday, 2 September 2019. By letter dated 29 August 2019, the administrators’ solicitors said:

Mr Napoli, through his Counsel, indicated that there would be opposition to the section 447A relief sought by our clients and that is the basis upon which standard discovery was foreshadowed in respect of documents relevant to the issues your client joins issue with once you have seen our clients’ Points of Claim and provided Mr Napoli’s Points of Response. Until that point in time, our clients maintain that Mr Napoli is not entitled to the information he seeks.

On the above basis, your proposed form of order is rejected.

If your client wishes to change his position, please indicate as such forthwith as it will have a material effect on the form of order sought and will likely mean that the matter will need to be relisted. Our clients reserve their rights on the question of costs.

Otherwise, could you please provide the confidentiality undertaking that Mr Napoli’s counsel indicated that he would take instructions on so that we may take further instructions.

48    The parties ultimately agreed a form of orders which were provided to Lee J and entered on Friday, 30 August 2019 (with a date of 28 August 2019).

49    In accordance with those orders, points of claim were filed by the administrators on 30 August 2019 and accepted for filing on 2 September 2019.

50    Among other things, the points of claim asserted that:

(1)    the Company was insolvent, or alternatively Messrs Gough and Crabtree believed the Company was insolvent or likely to become insolvent, on 8 August 2019;

(2)    it was not in the interests of creditors to return the Company to its directors on the bases that:

(a)    the administrators had taken steps in the administration and incurred “not insubstantial” costs;

(b)    Messrs Gough and Crabtree had been served with director penalty notices dated 5 August 2019; and

(c)    even if the Company was not insolvent on 8 August 2019, there was no utility in returning the Company to its directors as it did not trade and the creditors did not oppose the appointment of the administrators at the first creditors’ meeting.

Period of September 2019

51    On Tuesday, 3 September 2019, Mr Gough sent an email to the administrators’ staff to which were attached: a three page document headed “Information regarding BAS > HIQ Shareholders Agreement Prepared by Danny Gough 3/09/2019”; a letter on the letterhead of the Company dated 7 June 2019 addressed to named joint and several administrators of Argus and signed by Mr Gough; a copy of a document addressed to “Graeme and Simon” which appears to be in the same form as that attached to an email sent by Mr Gough to Mr Napoli on 4 July 2019; and a document dated 15 July 2019 containing correspondence sent to Mr Napoli by Mr Gough. Mr Gough said the following in his covering email (emphasis added):

Hi Tonni & Tenille, I am sending this stuff because, after reading all the docs you sent me a copy of yesterday, I realised it could be difficult for a Judge to make a determination in our favour due to a lack of detail about previous significant events.

I am in Sydney now, at least until middle of Wednesday, if you would like me to make some sort of “signed statement”, if it would help. …

52    Mr Napoli filed points of defence on Wednesday, 4 September 2019, a day later than required by Lee J’s orders. This was the subject of correspondence between the parties set out in exhibit CA-1 at tabs 35-37. A notice of appearance was filed by his lawyers at the same time.

53    The points of defence included:

(1)    A claim that, as the first plaintiffs had not been validly appointed, they commenced the proceedings in their personal capacity rather than as voluntary administrators and had no standing to seek relief under s 447A;

(2)    A claim that the Company had not authorised the commencement and maintenance of the proceedings on its behalf and “the Company’s purported solicitors” do not have a valid retainer such that the points of claim should be struck out to that extent;

(3)    Detailed factual allegations about the circumstances and timing of Mr Napoli’s appointment (including a denial that it occurred on 8 August 2019 but rather 7 August 2019) and the invalidity of Mr Crabtree’s appointment having regard to identified clauses of the shareholders agreement and the Company’s constitution;

(4)    Dispute as to the first plaintiffs’ pleading concerning the validity of their appointment;

(5)    Dispute that the work carried out by the first plaintiffs was carried out as voluntary administrators and the timing at which the administrators conceded the invalidity of their appointment (that is, on 20 August 2019);

(6)    Dispute as to the first plaintiffs’ ability to rely on a search of ASIC’s register in relation to the Company on 9 August 2019. Mr Napoli put them to proof as to when they became aware that Mr Napoli disputed the validity of their appointment;

(7)    Dispute about whether the Company was insolvent on 8 August 2019; and

(8)    Dispute about the Court’s power to make an order under s 447A validating the first plaintiffs’ appointment as administrators.

54    By letter dated 4 September 2019 sent by email from Mr Napoli’s solicitors to the administrators’ solicitors at 3.37 pm, Mr Napoli’s solicitors noted that the points of claim at [15] state that, on or about 20 August 2019, the administrators accepted Mr Napoli’s contentions in respect of their appointment as voluntary administrators, as a consequence of which they raised the following issues:

(1)    Whether the administrators had lawful authority to act on behalf of the Company, including commencing and maintaining proceedings on behalf of the Company and instructing solicitors. The letter asserted that Miller & Prince had not been validly retained on the Company’s behalf. The letter noted that, in those circumstances, the proceedings might validly be struck out. They sought an explanation by 10.00 am on 5 September 2019. This was on the basis that the Court had asked for proposed orders by 2.00 pm on that day. I note that a case management hearing had been set down for 6 September 2019;

(2)    The fact that the administrators had not advised ASIC of the invalidity of their appointment. The administrators were asked to explain the basis on which they continue to hold themselves out as voluntary administrators and to have commenced the proceedings;

(3)    The impact on the administrators’ authority to use or expend assets of the Company in pursuit of the originating process or the administration of the Company. The letter noted that, on the first page of the minutes of the creditors’ meeting held on 19 August 2019, it was recorded that:

The Chairperson advised that there has (sic) been no changes to the DIRRI forwarded to creditors on 9 August 2019. He further noted that of the indemnity of $40,000 (provided by the Company Director, Daniel Gough), $10,000 had been received by the Administrators, on 19 August 2019. The Chairperson advised the meeting that the indemnity was solely for the costs of the Administration and was not contingent on any outcome.

          and went on to request confirmation that:

(a)    the indemnity of $40,000, including the $10,000 which had been received by the administrators on 19 August 2019, had been and would be paid by Mr Gough from his own funds and not from the assets of the Company; and

(b)    the administrators will agree to not use funds of the Company pending resolution of the proceedings.

(4)    Mr Napoli’s position as to costs was reserved.

55    On Thursday, 5 September 2019 at 12.55 pm, the administrators’ solicitors responded by email to Mr Napoli’s solicitors attaching a letter of that date to the following effect:

(1)    On the issue of commencing and maintaining the proceedings: It is beyond serious contention that s 447A could not be invoked to cure defective administrator appointments. The administrators relied on Calabretta v Redpen Developments Pty Ltd (in liq) [2010] FCA 81; (2010) 183 FCR 47 at [26] (Yates J) for the proposition that invalidly appointed administrators who have acted on the basis of the appointment are interested persons within the meaning of s 447A(4)(f). Any opposition to the originating process on that basis was doomed to fail;

(2)    In relation to why the Company was joined as a plaintiff in the proceedings: It is uncontroversial that the Company was affected by the relief sought and it has been joined on that basis rather than to allow it to articulate any position in the proceedings and it is not taking any position in the proceedings. If, for no other reason, the application to extend the convening period required the Company to be joined and it would have been whether or not Mr Napoli had taken the position that he had;

(3)    In relation to the administrators holding themselves out as voluntary administrators: In circumstances where the Company is not trading, the administrators were not minded to take any further steps in this regard until the proceedings had been resolved;

(4)    In relation to the further conduct of the administration: Mr Billingsley’s affidavit sworn on 26 August 2019 makes the point that until the proceedings are resolved, the administrators were not minded to advance the voluntary administration;

(5)    In relation to Mr Gough’s indemnification of the administrators: Any such indemnification is a matter between the administrators and Mr Gough but in circumstances where the administrators are in control of the property of the Company, it is obvious that any indemnity from Mr Gough is not out of the Company’s assets;

(6)    In relation to the convening period: Given Mr Napoli’s unexplained delay in providing points of defence, the administrators required further time to comply with the standard discovery obligations ordered by the Court. Further, where the convening period expires on 30 September 2019, the proceedings will need to be heard and determined before then; and

(7)    The administrators’ proposed timetabling orders.

56    The parties were unable to agree consent orders for the progress of the proceedings. At the case management hearing held on 6 September 2019 before me:

(1)    Counsel for the administrators confirmed that the Company would be taking no active part in proceedings. Counsel for Mr Napoli indicated that his concern was the practical one of who was funding the administrators’ application. Noting that there had been correspondence between the parties on this issue, it was left to be sorted out between the solicitors;

(2)    It was agreed that the parties would give standard discovery by exchanging lists of documents and copies of documents by 10 September 2019;

(3)    Counsel for Mr Napoli did not oppose the administrators being required to provide any further evidence in chief by Friday, 13 September 2019;

(4)    Noting that the points of claim at [16] asserted that the Company was insolvent, counsel for Mr Napoli stated that “we want to see all of [the administrators’] evidence on solvency and decide whether or not we’re really wanting to get into all of this. We are – we don’t have to accept my friend’s word for it”. He emphasised that Mr Napoli did not wish to be forced to accept the administrators’ conclusions because “from what we can infer, [Mr Billingsley] is just saying what he is told by Mr Gough”;

(5)    Counsel for Mr Napoli indicated that the existence of the Licence Agreement suggested that the Company’s business continued;

(6)    Counsel for Mr Napoli suggested that a longer timetable was required so that Mr Napoli may obtain expert evidence concerning the Company’s solvency and no commitments could be made until the discovered materials had been considered; and

(7)    Counsel for the administrators foreshadowed that it may be necessary to file an interlocutory application further extending the convening period past 30 September 2019 and, if so, the administrators will seek an order that their costs of such an application be paid by Mr Napoli.

57    On 6 September 2019, I made orders extending the period in which the parties were to give standard discovery to Tuesday, 10 September 2019, permitting the administrators to file further evidence in chief by 13 September 2019, permitting Mr Napoli to file and serve any evidence upon which he intended to rely by Friday, 20 September 2019, permitting the administrators to file any evidence in reply by Tuesday, 24 September 2019, and the parties to put on submissions by Friday, 27 September 2019. The matter was listed for hearing on Monday, 30 September 2019.

58    On 6 September 2019 at 5.59 pm, an associate at Miller & Prince sent a letter by email to the solicitors for Mr Napoli in which the administrators called on Mr Napoli to withdraw the second paragraph of the points of defence and agree not to take issue with the Company being a party to the proceedings. The administrators noted the paragraphs of the points of defence which relate to the claim that Mr Napoli had been appointed as a director of the Company and drew his attention to cl 3.3 of the shareholders agreement which they said had the effect of Human IQ appointing Mr Farrow as a director of the Company as its nominee. The letter noted that cl 3.5 provides that every appointment and removal of a director must be in writing and takes effect when received at the Company’s registered office. The letter requested Mr Napoli to provide evidence of Mr Farrow’s removal, including evidence of a written notice of his removal signed by Human IQ and of its receipt at the Company’s registered office.

59    Discovery was provided by the administrators on 10 September 2019 and the discovery list appears in exhibit SMN-1 at pages 308-314.

60    On 13 September 2019, Mr Billingsley’s affidavit sworn on that date was filed. Matters referred to in Billingsley v Napoli at [11(2)(b)]-[14] (see [4] above) were canvassed in that affidavit. A number of the documents discovered on 10 September 2019 appear to have been included in exhibit MJB-2. Notable among the documents contained in exhibit MJB-2 are:

(1)    An ASIC search relating to the Company undertaken on 12 June 2019;

(2)    Director penalty notices dated 5 August 2019, one addressed to Mr Crabtree and one addressed to Mr Gough;

(3)    Unsworn statements made by Mr Gough to the administrators’ staff on 15 August 2019 and 3 September 2019 referred to at [22] and [51], including the documents attached to emails sent by Mr Gough to Mr Napoli on 4 and 15 July 2019 and Mr Gough’s letter to Argus’ administrators dated 7 June 2019 referred to in [51] above;

(4)    Bank account statements for the Company for the period from 1 April 2019 to 8 August 2019;

(5)    Correspondence with the ATO including:

(a)    A letter dated 16 August 2018, by which the ATO warned that it would start collection action for the sum of $51,494.24 relating to an activity statement and interest charges would be incurred;

(b)    A letter dated 10 September 2018 addressed to the Company indicating that a garnishee notice had been sent to the Commonwealth Bank of Australia because the ATO’s records showed that an amount of $61,282.56 remained unpaid;

(c)    Letters dated 20 November and 4 December 2018 warning about late lodgement of an activity statement for the period to 31 October 2018 and the penalties which may be incurred; and

(d)    A letter dated 23 April 2019 warning that the ATO would commence collection action for a debt of $92,970.03 relating to an activity statement;

(6)    A balance sheet for the Company as at 8 August 2019 generated from the Company’s MYOB account, to which the administrators gained access at 4.50pm on 28 August 2019; and

(7)    Income related to the provision of services by the Company to Honeywell. Mr Billingsley gave evidence that the unwritten Maintenance and Support Service Agreement between the Company and Honeywell was due to be completed by September 2019. That agreement was the “Material Contract” referred to in the Licence Agreement and Mr Billingsley explained that the Licence Agreement permitted the Company to complete that work for a long standing customer so as to preserve the value of the Company’s business so that the administrators could initiate a sale of the Company’s business and assets if their appointment was validated. The administrators anticipated that the Company would receive $77,724.35 in revenue for the work done and the administration did not have the up-front funds which would have enabled the Company to pay wages and related expenses for the performance of that work, which Mr Gough agreed to fund.

61    On 13 September 2019, Madison Marcus wrote to Messrs Gough and Crabtree concerning the shareholders agreement and alleging its breach by reason of the board meeting held on 8 August 2019 by which the administrators were appointed. It also advised that the administrators had filed the originating process in this Court. The letter asked Messrs Gough and Crabtree to confirm whether they had authorised Miller & Prince to act on behalf of the Company in those proceedings. It put them on notice of the hearing set down for 30 September 2019 and advised that Mr Napoli “considers your acts and omissions are the effective cause” of the proceedings in which Mr Napoli is a defendant, including the “Invalid Board Meeting” and the “Invalid Resolution”. The letter put them on notice of Mr Napoli’s intention to claim his costs from them and any costs which he becomes liable to pay the administrators. The letter also claimed that Human IQ was entitled to claim an indemnity from Messrs Gough and Crabtree under cll 6.3(e) and 8 of the shareholders agreement for loss or damage of whatever kind suffered arising from breach of, or default under, the shareholders agreement, and gave notice of a potential claim.

62    On 17 September 2019, the administrators filed the extension application and Mr Billingsley’s affidavit sworn on that date. In that affidavit, Mr Billingsley attributed the need for further extension of the convening period to the fact that it had not been possible to obtain a validating order as a consequence of Mr Napoli’s intervention. However, if the validating order were made on or around 30 September 2019, it was Mr Billingsley’s view that the administrators would need about four weeks to attend to the required tasks by 31 October 2019. Unsealed copies of those documents were sent by email to Mr Napoli’s solicitors on 17 September 2019 and sealed copies were served by email on Mr Napoli’s solicitors on 19 September 2019.

63    On 20 September 2019, the solicitors for Mr Napoli sent a letter to the solicitors for the administrators by email. The letter was marked “Without prejudice save as to costs”. It stated that, having now had the opportunity to review the documents discovered by the administrators together with Mr Billingsley’s affidavit dated 13 September 2019 and on a purely commercial basis, Mr Napoli was willing to make an offer of compromise which would expire at 4 pm on Tuesday, 24 September 2019 as follows:

(1)    Mr Napoli would not oppose the final orders sought in the originating process save as to costs;

(2)    There be no order as to costs as between himself and the administrators and the administrators’ costs of and incidental to the proceedings be an expense in the administration of the Company; and

(3)    Mr Napoli reserves the right to file an interlocutory process and supporting affidavit seeking orders that his costs of and incidental to the proceedings be paid by Messrs Gough and Crabtree and/or be an expense in the administration of the Company. The letter noted that the solicitors for Mr Napoli anticipated receiving instructions to file an interlocutory process seeking costs orders against Messrs Gough and Crabtree.

64    The administrators’ solicitors responded by letter dated 24 September 2019 sent to Mr Napoli’s solicitors by email. It was marked “Without prejudice save as to costs”. It stated that:

(1)    The administrators did not propose to be heard on any application for non-party costs orders save as the application made any reference to relief sought against the administrators;

(2)    The administrators’ correspondence before the originating process was filed made clear that should Mr Napoli elect to oppose the originating process, costs would be sought against him. Being fully informed of the consequences, Mr Napoli elected to take an active position in relation to that application until the day he was due to file and serve his evidence (being 20 September 2019). The administrators’ position has not changed.

(3)    Even if the administrators viewed Mr Napoli’s offer as a genuine compromise (which they did not), it is not in the best interests of the creditors of the Company to cause them to bear the costs of actions taken by Mr Napoli.

(4)    If Mr Napoli no longer wanted to press his opposition to the relief sought by the administrators, the administrators were prepared to seek the following orders:

(a)    by consent, Mr Napoli is to pay the administrators’ costs of and incidental to the originating process and the extension application up to and including costs incurred on 20 September 2019; and

(b)    the balance of the administrators’ costs of and incidental to the originating process and extension application be costs in the administration of the Company,

and this meant that the administrators would not press for any costs going forward in respect of the listings on 27 and 30 September 2019. However, if this offer were not accepted, the administrators’ solicitors were instructed to seek orders for costs of the originating process and extension application against Mr Napoli on a fixed sum basis. The offer was open for acceptance until 4:30 pm on Wednesday, 25 September 2019.

65    In the afternoon of 25 September 2019, Mr Napoli’s solicitors filed and served written submissions on the solicitors for the administrators. The submissions indicated that, having had the opportunity to review the administrators’ discovery and evidence, Mr Napoli did not oppose any of the orders sought in the extension application save for prayer 3 (which sought an order that Mr Napoli pay the administrators’ costs of and incidental to that application) and he did not oppose the validating order.

66    The submissions indicated that Mr Napoli did not oppose an order that the costs of the originating process be treated as costs in the administration of the Company but he did oppose any order for costs against him and he intended to seek a third-party costs order against Messrs Gough and Crabtree for his costs and he would seek an order in the nature of a Bullock or Sanderson order if the administrators sought a costs order against him. The submissions proposed next steps.

67    In the afternoon of 26 September 2019, the solicitors for the administrators served on the solicitors for Mr Napoli:

(1)    An affidavit sworn by Mr Athanassios on 26 September 2019 in support of the extension application. The affidavit related to notice given to creditors of the Company of the hearing of the extension application on 27 September 2019 by way of circular dated 19 September 2019; and

(2)    Written submissions addressing the application orders extending the convening period to 31 October 2019.

68    A hearing in relation to the extension application was held on 27 September 2019. Counsel for Mr Napoli indicated that his client did not oppose either the validating order or an extension of the convening period and foreshadowed that Mr Napoli would be seeking his costs as against Messrs Gough and Crabtree. The issue of costs as between the administrators and Mr Napoli was to be the subject of discussions between the parties. Counsel for the administrators indicated that they would be seeking an order for costs against Mr Napoli in relation to the originating process from 28 August 2019 and of the extension application, acknowledging that it would be necessary to set a timetable for submissions, which counsel proposed be done on 30 September 2019. Counsel for Mr Napoli indicated that he would like one hearing where the question of costs as between the administrators and Mr Napoli and his application for costs against Messrs Gough and Crabtree would be addressed.

69    On 30 September 2019, the hearing of the originating process and orders discussed at [2] above were made.

Period after 30 September 2019

70    On 14 October 2019, the administrators filed their written submissions in chief on costs and Mr Athanassios’ affidavit sworn on the same date.

71    Mr Napoli’s interlocutory application, his affidavit and written submissions were lodged after the close of business on 28 October 2019.

72    A case management hearing was held on 29 October 2019. No one appeared for Messrs Gough and Crabtree who filed notices of appearance on 30 October 2019.

73    On 30 October 2019, the administrators’ solicitors sent a letter to Mr Napoli’s solicitors in which they said:

We refer to the direction from the Court on 29 October 2019 for the parties to engage with each other in an attempt to agree on the approach to be taken to resolve the question of costs.

As communicated through our Counsel, our clients have no interest in a separate dispute between your client and third parties as to cost entitlements.

We have considered whether or not certain third parties ought to pay for the costs of the pre-28 August 2019 steps and subject to further instructions, we will not make that application for a variety of reasons – the main one being the inherent further cost of making any such claim.

In circumstances where our clients are not seeking any cost order against third parties, we invite you to withdraw prayer 2 of your client’s Interlocutory Application filed 28 October 2019 [that Messrs Gough and Crabtree pay the administrators’ costs] – being the only prayer for relief which concerns our clients.

The administrators then proposed timetabling orders.

74    On 4 November 2019, the administrators filed their report to creditors of the Company dated October 2019 with ASIC (s 439A report). It gave notice of the second meeting of creditors to be held on 7 November 2019. Mr Napoli relies on the following information in that report:

(1)    In relation to unreasonable director-related transactions, the administrators identified potential transactions of $64,298.55 made by Mr Crabtree and two other related parties in relation to employee entitlements immediately prior to the administrators’ appointment, of which $54,307.55 may be recoverable;

(2)    It is the administrators’ opinion that the Company may have been trading while insolvent from some time shortly after 1 July 2019, noting that significant liabilities became due and payable when the employees left the Company just prior to the administrators’ appointment;

(3)    The information set out at section 7.6 of the report as follows:

7.6 Potential Illegal Phoenixing

ASIC have been targeting illegal phoenixing activity and have an expectation that liquidators investigate this as part of their overall duties. Phoenixing is the process whereby business assets are transferred from an indebted company to a new company (often with a similar sounding name) in order to avoid paying creditors, tax or employee entitlements. The transfer usually takes place just prior to the appointment of a liquidator.

Our preliminary investigations reveal that Biode (which was established on 15 July 2019) operates a similar business as the Company and, in accordance with the terms of the proposed DOCA, former employees would be provided an offer of employment on the same or substantially similar terms as the terms of their employment including recognition that their service be regarded as a continuation of service.

We note that Biode does not appear to be a related entity, however, our investigations have identified that CSA, who holds a security interest on all present and after-acquired property of the Company have the same Director as Biode. Furthermore, we note that Biode is one of the Deed Proponents and the proposed DOCA does not recognise CSA as a secured creditor of the Company.

Based on our investigations conducted to date, it appears that the Directors and a number of former employees are currently employed by Biode. Further investigations are required in this regard.

In the event the Company transitions into liquidation, we will conduct further investigations regarding potential phoenixing activity.

75    On 7 November 2019, timetabling orders were made in relation to the filing of reply evidence and submissions by the administrators and the filing of evidence and submissions by the respondents to Mr Napoli’s interlocutory application, being Messrs Gough and Crabtree, and evidence and submissions in reply by Mr Napoli.

76    A further case management hearing was held on 21 November 2019 at which counsel appeared for the administrators, for Mr Napoli and for Messrs Gough and Crabtree.

77    On 22 November 2019, a deed of company arrangement (DOCA) was executed. The DOCA was propounded by Messrs Gough and Crabtree and Biode Pty Ltd. Biode agreed to acquire the intellectual property of the Company and employ “Continuing Employees”, including Messrs Gough and Crabtree and three of their relatives. The deed proponents were to pay $150,000 into the deed fund in instalments.

78    On Tuesday, 26 November 2019 at 3.50 pm, an associate at Frank Law, the solicitors for Messrs Gough and Crabtree, sent an email to the solicitors for the administrators and Mr Napoli, referring to the orders made on 7 November 2019 and indicating that one of their clients was on a flight and unable to sign his affidavit by close of business and that their best endeavours will be made to comply with the orders. At 5.45 pm, the associate sent a further email to the same recipients attaching a copy of submissions filed on behalf of Messrs Gough and Crabtree.

79    On Thursday, 28 November 2019 at 10.13 am, the associate at Frank Law sent an email to the solicitors for Mr Napoli and the administrators confirming instructions that no affidavits would be filed on behalf of Messrs Gough and Crabtree.

JURISDICTION TO AWARD COSTS

80    The Court’s power to award costs is contained in s 43 of the Federal Court of Australia Act 1976 (Cth) which relevantly provides as follows:

43 Costs

(1)    The Court or a Judge has jurisdiction to award costs in all proceedings before the Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which this or any other Act provides that costs must not be awarded. …

…

(2)    Except as provided by any other Act, the award of costs is in the discretion of the Court or Judge.

(3)    Without limiting the discretion of the Court or a Judge in relation to costs, the Court or Judge may do any of the following:

(a)    make an award of costs at any stage in a proceeding, whether before, during or after any hearing or trial;

(b)    make different awards of costs in relation to different parts of the proceeding;

   (c)    order the parties to bear costs in specified proportions;

   (d)    award a party costs in a specified sum;

(e)    award costs in favour of or against a party whether or not the party is successful in the proceeding;

   (f)    … ;

(g)    order that costs awarded against a party are to be assessed on an indemnity basis or otherwise;

   (h)    …

Note:    For further provision about the award of costs, see subsections 37N(4) and (5) and paragraphs 37P(6)(d) and (e).

81    In exercising the discretion to award costs, s 37N(4) of the Federal Court of Australia Act requires the Court to take account of any failure by a party to comply with the overarching purpose of the civil procedure provisions to facilitate the just resolution of disputes in a way that is consistent with the overarching purposes set out in s 37M(1), that is, according to law and as quickly, inexpensively and efficiently as possible.

82    Rule 40.02 of the Federal Court Rules 2011 (Cth) provides as follows:

40.02 Other order for costs

A party or a person who is entitled to costs may apply to the Court for an order that costs:

(a)    awarded in their favour be paid other than as between party and party; or

(b)    be awarded in a lump sum, instead of, or in addition to, any taxed costs; or

(c)    be determined otherwise than by taxation.

Note 1: The Court may order that costs be paid on an indemnity basis.

Note 2: The Court may order that the costs be determined by reference to a cost assessment scheme operating under the law of a State or Territory.

83    The term “costs on an indemnity basis” is defined in Sch 1 to the Federal Court Rules to mean “costs as a complete indemnity against the costs incurred by the party in the proceeding, provided that they do not include any amount shown by the party liable to pay them to have been incurred unreasonably in the interests of the party incurring them.”

84    An indemnity costs order may be made where there is wilful disregard of known facts or clearly established law, litigation is conducted with an ulterior motive, allegations or contentions are made that ought never have been made, a party imprudently refuses an offer to compromise or prolongs a case unnecessarily: see Colgate Palmolive Company v Cussons Pty Limited [1993] FCA 801; (1993) 46 FCR 225 at 232-234 (Sheppard J). The rationale for an indemnity costs order is not punitive; rather it is compensatory. Such orders are made on the basis that a Court considers it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of any costs: Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No 2) [2017] FCAFC 116 at [5], citing the Full Court decision in Hamod v State of New South Wales [2002] FCAFC 97; [2002] FCA 424; (2002) 188 ALR 659 at 665.

85    In relation to the discretion to make costs orders on a lump sum basis:

(1)    Rule 40.02(b) gives to the Court a broad discretion which should be exercised whenever the circumstances warrant it: Coshott v Burke (No 3) [2019] FCAFC 23 at [4] (Logan, Kerr and Farrell JJ). The Court should not be slow to exercise the discretion in an appropriate case. The rule serves to avoid the expense, delay and aggravation involved in a formal taxation of costs and associated litigation. In particular, in cases where the incurring of additional costs in taxing bills would result in an additional burden on the successful party, there is a strong reason for making a lump sum costs order: Bayley & Associates Pty Ltd v DBR Australia Pty Ltd [2014] FCA 346 (Bayley & Associates) at [17(b), (d)] (Foster J);

(2)    Any exercise of the discretion to make a lump sum costs order should have regard to whether the parties and their representatives have acted in accordance with the overarching purpose embodied in s 37M(1): see s 37N(4) of the Federal Court of Australia Act;

(3)    A lump sum costs order is not mandated in all proceedings, and the Court must exercise its discretion as appropriate in the circumstances: Paciocco v Australia and New Zealand Banking Group Ltd (No 2) [2017] FCAFC 146; (2017) 253 FCR 403 (Paciocco) at [19] citing Hudson v Sigalla (No 2) [2017] FCA 339 at [18]-[19]. In Paciocco, the Full Court (Allsop CJ, Besanko and Middleton JJ) noted (at [20]):

There is no particular characteristic that a case must possess for it to be suitable for the making of a lump sum costs order. Particular circumstances that may make a lump sum order especially appropriate include where in a large and complex commercial matter it would save the time, trouble, expense and aggravation of a taxation; where a taxation would require the parties to consume additional time and incur additional expenditure prolonging already protracted litigation; and generally to avoid an ongoing, counter-productive dispute as to costs, in the interests of achieving finality.

(4)    The approach to be taken by the Court in deciding whether to make such an order and in arriving at the quantum thereof should be a broad brush approach. It is one of estimation or assessment and not of arithmetic. The Court should avoid, in effect, carrying out a taxation under the guise of performing a lump sum costs assessment: Bayley & Associates at [17(e)]; Ginos Engineers Pty Ltd v Autodesk Australia Pty Ltd [2008] FCA 1051; (2008) 249 ALR 371 at [23] (Finn J); Sony Entertainment (Australia) Limited v Smith [2005] FCA 228; (2005) 215 ALR 788 at [197]-[200] (Jacobson J). That would defeat the entire purpose of the lump sum costs procedure as set out in the Costs Practice Note: Coshott v Burke (No 2) [2018] FCAFC 81 (Coshott v Burke (No 2)) at [27] (Logan, Kerr and Farrell JJ);

(5)    In assessing quantum the Court is entitled to take into account the evidence that is before it, its own observations of the proceeding and the Judge’s own experience: see Innes v AAL Aviation Limited (No 2) [2018] FCAFC 130 [18] (Tracey, Bromberg and White JJ). The evidence of an expert costs assessor is both relevant to and probative of whether a lump sum costs order ought to be made and the quantum of any such order: Bayley & Associates at [17(g)]

(6)    The discretion should be exercised logically, fairly and reasonably. On the one hand the Court must be astute to prevent prejudice to the respondents by overestimating the costs, and on the other hand must be astute not to cause an injustice to the successful party by an arbitrary “fail safe” discount on the cost estimates submitted to the Court: see Beach Petroleum NL v Johnson (No 2) (1995) 57 FCR 119 at 123C (von Doussa J); Bayley & Associates at [17(c)]. It is well established that a discount may be applied to the sum of costs claimed when making a lump sum order, but the appropriateness of any discount and the amount by which the lump sum is to be reduced is dependent on the facts of each case: see Coshott v Burke (No 2) at [21]. If the Court can be confident that there is little risk that the sum includes costs that might be disallowed on assessment, the case for a discount is seriously undermined: Hancock v Rinehart (Lump sum costs) [2015] NSWSC 1640 at [57] (Brereton J).

86    The principles governing the exercise of the Court’s discretion to make non-party costs orders have been considered in a number of cases. I accept the following expositions of those principles.

87    Although s 43 does not expressly state that the Court has power to make an order for costs against a non-party, there is such power: Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Pty Ltd (No 2) [2021] FCA 72 at [16] (Beach J).

88    Relevant principles in relation to the determination of non-party costs applications are set out in two often cited judgments. In Knight v F.P. Special Assets Limited [1992] HCA 28; (1992) 174 CLR 178, Mason CJ and Deane J observed (at 192-193):

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

89    In Wentworth v Wentworth; Estate of Wentworth [1999] NSWSC 317; (1999) 46 NSWLR 300 (Wentworth v Wentworth) at [25]-[26], Santow J relevantly said:

25    That there be jurisdiction to award costs does not of course mean that the discretion so to do should be exercised. …

26    Turning now to the question of discretion in relation to awarding costs against a non-party, I first set out some governing principles.

(1)    The discretion is to be exercised “judicially and in accordance with general legal principles pertaining to the law of costs”: Knight v F P Special Assets Ltd (at 192), per Mason J and Deane J; Vestris v Cashman (1998) 199 LSJS 159 at [21].

(2)    The context of the particular exercise of discretion is likely to be critical; ...

(3)    A connection with a judicial proceeding in which the cost order is to be made is a necessary condition of the proper exercise of the jurisdiction or power: Burns Philp & Co Ltd v Bhagat [1993] 1 VR 203 at 219; Bischof v Adams [1992] 2 VR 198; Vestris v Cashman; C E Heath Underwriting and Insurance (Australia) Pty Ltd v Daraway Constructions Pty Ltd (Supreme Court of Victoria, Batt J, 1 September 1995, unreported).

(4)    There must be a causal connection between the non-party and the occasion for ordering costs: Bischof v Adams; C E Heath Underwriting & Insurance (Australia) Pty Ltd v Daraway Constructions Pty Ltd; Vestris v Cashman.

(5)    Improper conduct of a non-party may be a factor, but is not a necessary feature: see Vestris v Cashman.

…

(8)    Finally, an order against a non-party should be approached by the court with caution: C E Heath Underwriting and Insurance (Australia) Pty Ltd v Daraway Constructions Pty Ltd and an order against a non-party will always be exceptional; Symphony Group Plc v Hodgson (at 192H); Aiden Shipping Co Ltd v Interbulk Ltd (at 980F), per Clarke JA; Najjar v Haines (at 249), per Clarke JA in relation to appeal proceedings; Vestris v Cashman.

90    There is no dispute between the parties as to the correctness of statements of principles made by Barrett AJA in In the matter of Condor Blanco Mines Ltd (No 3) [2017] NSWSC 65 (Condor Blanco Mines (No 3)). In the context of the matters in dispute in this case, it is useful to set out Barrett AJA’s reasoning at [12]-[20]:

12    The jurisdiction to order costs against a non-party has been described as exceptional. It is nevertheless clear that such an order may be made where the making of it is supported by considerations of justice underlying general principles as to the award of the costs of an action. The existence of the jurisdiction, based on both s 98 of the Civil Procedure Act 2005 (NSW) and general law principles, is undoubted: Knight v FP Special Assets Ltd (1992) 174 CLR 178; [1992] HCA 28.

13    Generally speaking, however, the persons against whom non-party orders are made in particular proceedings are confined to persons who have played an active and intimate role in the initiation or conduct of the proceedings themselves (or their defence) and have thus influenced the incurring and quantum of costs. A solicitor whose decision-making has shaped the course of litigation is an example of such a person, as is a sole or dominant director of a corporate party who has determined the stance taken by that party in the proceedings: FPM Constructions Pty Ltd v Council of the City of the Blue Mountains [2005] NSWCA 340 at [214]; Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [80] – [81]. In Ashby v Slipper (No 3) [2015] FCAFC 9; (2015) 317 ALR 623 (at [73] – [74]), the Full Federal Court used, in relation to the proceedings themselves, the words “prompted”, “supported”, “steered” and “influenced” in discussing the proposition that a costs order should be made in those proceedings against a non-party.

14    Mr Darby did not occupy any such position in relation to the substantive litigation in this case. As well as not being a party to the litigation, he played no role in deciding whether it should be brought, how any aspect of it should be structured or the course that a party should pursue in relation to the action. Mr Darby had no ability to influence the way in which either party proceeded or any decision that resulted in the incurring of costs or affected their quantum. Nor did he do so.

15    In contending that Mr Darby should be ordered to pay its costs, Condor points to a category of cases identified in Symphony Group Plc v Hodgson (above) at 192, being cases in which the person against whom a costs order is sought has “caused the action”. The only case mentioned in Symphony Group as within that category is Pritchard v JH Cobden Ltd [1988] Fam 22. That case was an appeal following trial of a negligence action in which the victim of a motor accident recovered damages for personal injuries. The English Court of Appeal held (at 51) that it had been open to the parties to agree in the court below that costs the plaintiff incurred in separate divorce proceedings precipitated by a change of personality attributable to injuries suffered in the accident (and therefore to the defendant’s negligence) were properly to be regarded as an element of the costs of the negligence action.

16    The appeal court in Pritchard v JH Cobden Ltd did not, in terms, recognise as a basis for the making of a costs order the circumstance that the person against whom the order was made had “caused” the litigation. As Peter Lyons J pointed out in Grocon Contractors (Qld) Pty Ltd v Juniper Developer No 2 Pty Ltd [2015] QSC 333 (at [34]), the true basis of the Pritchard decision seems to be that the personal injuries proceedings and the divorce proceedings were related; and that “all the circumstances” (including, no doubt, that the defendant’s tortious conduct caused the matrimonial proceedings and that defendant consented to the non-party order at trial) were such that the order at first instance should not be disturbed. His Honour correctly said that the Pritchard case does not stand as authority for “the proposition that where any conduct whatsoever of a non-party is causally related to the bringing of litigation, then an order for costs may be made against that person”.

17    In Yu v Cao (above), the Court of Appeal (at [144]) noted the reference in Symphony Group to cases in which the respondent to the costs application “caused the action” as a category relevant to the non-party costs jurisdiction. The Court of Appeal had no occasion to examine that concept. But the substance of its decision tends against the recognition of any category broadly defined in the abstract way for which Condor contends. In Yu v Cao, a plaintiff had sued a defendant for defamation by reference to material which, while ostensibly composed and disseminated by that defendant, had in fact been composed and disseminated by her husband in her name – a circumstance of which the plaintiff was aware. The court set aside a non-party costs order made at first instance against the husband.

18    The thesis propounded by Condor, on the basis of the findings in the principal judgment, is that there would have been no litigation but for the purported appointment of Mr Calabretta as administrator, that there would have been no appointment but for actions of Mr Darby and his co-director Mr Stops and that Mr Darby, in becoming party to those actions, acted in breach of duties he owed to Condor. It may be that wrongful conduct of Mr Darby, as against Condor, was causally related to the subject matter of the litigation in that there would have been no occasion for litigation but for results of those actions. But that, in my view, is insufficient to form a basis for the making of a non-party costs order against him in the litigation. Otherwise, there would be a group of potential respondents to a non-party costs application in every action against a company in which an outsider plaintiff succeeds in establishing that some corporate action or decision is voidable because of motives or purposes on the part of the company’s directors determined to be legally impermissible. In such a case – as in the present case – the actions of the directors, although causative in an abstract sense, are too remote from the conduct of the litigation subsequently emerging to justify the making of an order against them in the litigation.

19    Condor did not join Mr Darby as a defendant to the substantive proceedings in order that it might pursue against him there allegations of misfeasance in relation to the appointment of Mr Calabretta. If Condor were to commence new proceedings against him on that basis and recover damages or equitable compensation for such misfeasance, the award might well include an element compensating Condor for expense to which it was put by way of costs in the principal proceeding. But that is a separate issue unrelated to any question of liability for costs as such in that proceeding itself.

20    I am not satisfied that principled exercise of the discretion as to costs warrants the making of a non-party costs order against Mr Darby in the present proceedings.

ADMINISTRATORS’ COSTS

91    It is uncontentious that the Court should order that the administrators’ costs of the originating process up to 28 August 2019 be costs of the administration.

Administrators’ submissions summarised

92    Put briefly, it is the administrators’ primary contention that Mr Napoli should bear their costs of the originating process after 28 August 2019 and the costs of the extension application because:

(1)    Nothing arose after 27 August 2019 (Mr Billingsley’s affidavit sworn on 26 August 2019 and exhibit MJB were served on Mr Napoli’s solicitors on 26 August 2019) which made it reasonable or appropriate for Mr Napoli to continue his opposition to the validating order;

(2)    Mr Billingsley’s affidavit sworn on 26 August 2019 made it clear that the Company was, or was likely to be, insolvent as at 8 August 2019 and thereafter;

(3)    Mr Napoli put on no evidence or submissions in support of his points of defence and capitulated on 25 September 2019 (not 20 September 2019 as contended by Mr Napoli);

(4)    It was not appropriate for the administrators to carry out functions until the validating order had been made. Had Mr Napoli not opposed the making of a validating order on 28 August 2019 and until 25 September 2019, it would not have been necessary to apply for orders extending the convening period to 31 October 2019;

(5)    It is inappropriate for the creditors of the Company to suffer diminution of the assets available to them because of actions undertaken by a person who is not a creditor; and

(6)    The consequence of causing costs to be incurred by another party should be that costs follow the event.

93    The administrators submit that Mr Napoli should pay those costs on an indemnity basis because:

(1)    While mere weakness of a case is not necessarily sufficient to warrant an award of indemnity costs, Mr Napoli’s failure to adduce any evidence or articulate any argument in support of matters raised in his points of defence meant that his opposition to the validating order enjoyed less than reasonable prospects of success. His opposition ought not have been raised at all and it should certainly have been withdrawn long before it was, on 25 September 2019;

(2)    It was not reasonable for Mr Napoli to sit by while the administrators adhered to the timetable set by Lee J on 28 August 2019 for the filing of points of claim and discovery and, at a case management hearing held on 6 September 2019, seek an extension of time to file expert evidence as to the Company’s solvency until 20 September 2019 in the circumstances described at [92] above; and

(3)    In this case, Mr Napoli’s primary objective appeared to be to obtain documentation to which he was not entitled. There is no other sensible explanation for Mr Napoli’s participation in the proceedings given his counsel’s concession at the case management hearing on 6 September 2019 that it would be a very dubious prize to become a director of an insolvent company. That reality became plain on 26 August 2019 at the time Mr Billingsley’s affidavit sworn on that date was served on Mr Napoli’s solicitors. Where a party takes a position in legal proceedings for a purpose collateral to the determination of the issues being disputed, the Court is often satisfied that an award of indemnity costs is appropriate: see, for instance, Packer v Meagher (1984) 3 NSWLR 486 at 500 (Hunt J).

94    The administrators say that assessing the administrators’ costs of the originating process and the extension application on an indemnity basis and without discount would come closest to preventing the creditors of the Company from being out of pocket due to steps taken by a non-creditor. However, if the Court is not minded to order indemnity costs, it should order Mr Napoli to pay those costs on the ordinary basis. Failing that, the administrators seek an order that their costs be costs in the administration.

95    In their submissions in chief, the administrators claimed that their costs in the proceedings were $83,592.79 (inclusive of GST and disbursements), of which $55,930.04 (inclusive of GST and disbursements) was incurred after 28 August 2019. That estimate did not include costs of the application for costs which they estimated would be in the order of $12,000 to $13,000.

96    In his affidavit sworn on 14 October 2019, Mr Athanassios deposed that:

(1)    The administrators are entitled to claim input tax credits in respect of GST relevant to the claims in the costs summary and have complied with section 6 of the Costs Practice Note and that the costs summary had not been prepared with the assistance of an expert on costs.

(2)    The administrators are not claiming more than they are liable to pay for costs and disbursements, the calculations are correct, and the matters noted are a fair and accurate summary of the costs and disbursements that the administrators are entitled to claim. The amounts claimed are capable of verification through source material.

(3)    Because the administrators were concerned about having insufficient funds to meet ongoing professional fees, the payment of professional fees was conditional on the administrators being successful in their application. The administrators’ costs agreement with Miller & Prince and counsel’s fee agreement are included in exhibit CA-1.

(4)    At tab 65 of exhibit CA-1 are tax invoices issued by Miller & Prince to the administrators for total professional fees of $41,415 (inclusive of GST) and disbursements in the sum of $42,177.79 (inclusive of GST where relevant). Each of the invoices indicate the date at which itemised work was undertaken by fee earners at Miller & Prince, the aggregate number of units of time on that day for that fee earner and the amount charged by reference to each fee earner. The invoices were as follows:

(a)    Invoice 886 for the period from 15 to 30 August 2019 in an aggregate amount of $27,927.75 comprising professional fees of $11,920 (plus GST of $1,192) and disbursements of $13,597.05 (plus GST of $1,218.70). That amount was inclusive of counsel’s invoice 907 for $12,150 (plus GST of $1,215), ASIC search fees of $37.05 (plus GST of $3.70) and the filing fee for the originating process of $1,410;

(b)    Invoice 923 for the period from 2 to 30 September 2019 in an aggregate amount of $55,014.47 comprising professional fees of $25,730 (plus GST of $2,573) and disbursements of $24,585.43 (plus GST of $2,126.04). Of that amount, $20,475 (plus GST of $2,047.50) relates to invoice 910 from the administrators’ counsel; and

(c)    Invoice 994 for an amount of $591.42 (plus GST of $59.15) for hearing transcripts.

(5)    Of this amount, the claimed costs are professional fees of $30,393 (inclusive of GST of $2,763) and disbursements of $25,537.04. Disbursements include counsel’s fees of $23,512.50 (inclusive of GST of $2,137.50), ASIC search fees of $74.85 (inclusive of GST of $6.80), the filing fee for the extension application of $510 and transcript fees of $1,439.69 (inclusive of GST of $130.88).

(6)    A summary of categories of work which Mr Athanassios says were fairly and reasonably incurred in the conduct of the litigation after 28 August 2019, including an estimate (in percentage terms) of the proportion that each category of work constitutes relating to professional fees and counsel’s fees are as follows:

(a)    preparing and reviewing points of claim – 5%;

(b)    reviewing points of defence – 5%;

(c)    preparing and reviewing list of documents for discovery – 30%;

(d)    preparing for and attending the hearing of the extension application on 27 September 2019, including preparing and reviewing the interlocutory process, affidavit evidence and submissions – 15%; and

(e)    preparing for and attending the final hearing with respect to the validating order on 30 September 2019 (including case management hearing on 6 September 2019, and preparing and reviewing affidavit evidence and submissions) – 45%.

(7)    The breakdown of costs attributable to each person who performed work comprised in the claimed costs (on an inclusive of GST basis) is as follows:

(a)    Counsel: $23,512.50 at the rate of $495/hour for 47.5 hours;

(b)    Mr Athanassios: $16,852 at the rate of $440/hour for 38.3 hours;

(c)    Tereana Suhle: $10,615 at the rate of $275/hour for 38.6 hours;

(d)    George Gerges: $2,068 at the rate of $440/hour for 4.7 hours; and

(e)    Justin Gerges: $858 at the rate of $220/hour for 3.9 hours.

97    As noted above, the administrators were prepared to accept a liquidated sum of $44,000 (inclusive of GST) if Mr Napoli consented to a lump sum costs order in that amount. As Mr Athanassios deposed in his affidavit sworn on 14 October 2019, this would have represented a discount of more than 20%. They warned that if Mr Napoli did not accept that offer, they would seek their costs of the costs application which Mr Athanassios then estimated to be in the order of $12,000 to $13,000. Mr Napoli did not do so.

98    In response to Mr Napoli’s submissions, on 13 November 2019, the administrators filed an affidavit sworn by Mr Athanassios on 13 November 2019 and exhibit CA-2. Exhibit CA-2 included:

(1)    Tab 2, comprising tax invoices issued by the administrators’ counsel as follows:

(a)    Invoice 907 for the period from 16 to 30 August 2019; and

(b)    Invoice 910 for the period from 4 to 30 September 2019.

(2)    Tab 4, comprising tax invoices in relation to the costs application as follows:

(a)    Invoice 994 issued by Miller & Prince for the period from 2 October to 13 November 2019 for professional fees of $11,005 plus GST of $1,100.50 and disbursements. Disbursements were identified as being for invoices numbered 918 and 931;

(b)    Invoice 918 was issued by the administrators’ counsel for the period 3 to 30 October 2019 for an amount of $12,375 plus GST of $1,237.50; and

(c)    Invoice 931 issued by the administrators’ counsel for work done on 13 November 2019 for an amount of $1,125 plus GST of $112.50.

(3)    I note that each invoice issued by counsel contained a recital of work done by counsel on individual dates, with the specification of the aggregate time taken on the relevant date and the amount claimed at counsel’s hourly rate. Miller & Prince’s invoices followed the same pattern as previous invoices.

Mr Napoli’s submissions summarised

99    Mr Napoli submitted that there should be no departure from the usual rule that the administrators’ costs be costs in the administration where the administrators seek to resolve invalidity or an extension of a convening period. He made the following submissions.

100    First, Mr Napoli contended that an appropriate analogy is the situation where parties settle litigation before a hearing, relying on the principles summarised by McHugh J in Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622 (Lai Qin) at 625 (citations omitted):

If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases.

Mr Napoli noted that that principle had been applied in a number of cases cited in his submissions in chief at [43]. Implicitly (in those submissions at [45]), Mr Napoli acknowledged the passage that preceded the one on which he relied, where McHugh J said:

Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. … But such cases are likely to be rare.

101    Mr Napoli contends that it was reasonable for him to contest the validity of the administrators’ appointment until he had an opportunity to review the discovered material because:

(1)    The administrators conceded the invalidity of their appointment at the case management hearing before Lee J on 28 August 2019 and in their points of claim and therefore objection to their appointment was reasonable;

(2)    Mr Napoli had requested financial documents going to the question of solvency before the litigation commenced but those requests were rejected by the administrators until they were compelled to provide it by the Court. Given that solvency was the primary reason given to Lee J to support the administrators’ application for the validating order, it was reasonable for Mr Napoli to want to see financial statements and records going to that issue in order to form a view as to whether to oppose that order. This was a matter repeatedly stated in correspondence with the administrators in which Mr Napoli requested financial statements, tax records and primary documents;

(3)    The reasonableness of Mr Napoli’s desire to examine financial records must also be assessed in the circumstances in which Mr Napoli found himself. It was reasonable for him to be concerned that the appointment of the administrators was responsive to the steps he had taken on 5 and 8 August (referred to at [16]-[19] above), not for a purpose consistent with Part 5.3A, and to want to assess the situation by reference to objective documents. There was nothing in his communications with Messrs Gough and Crabtree after he acquired Human IQ that suggested that the Company was in a poor financial state. Then, immediately after Human IQ appointed Mr Napoli as a director and he requested access to documents, he was informed that the administrators had been appointed without notice or compliance with the shareholders agreement. While many of his requests of the administrators were rebuffed, he was given a copy of the Licence Agreement under which the administrators licensed the Company’s intellectual property rights to Mr Gough in circumstances where the administrators said the Company was not trading;

(4)    Although the administrators suggest that Mr Napoli’s requests for information were too wide, acting reasonably, they should have at least provided documents they regarded as relevant to solvency (including at least financial statements) to try to resolve the matter before the commencement of proceedings. That would have been consistent with the overarching purpose established in s 37M of the Federal Court of Australia Act. The information that was provided before the litigation commenced and in Mr Billingsley’s affidavit sworn on 26 August 2019 and exhibit MJB did not include financial statements; and

(5)    If there was some delay by Mr Napoli after he obtained access to the discovered material (which is denied, given the volume of the material), the cost consequences should be confined to the period between when the Court considers that Mr Napoli should have reasonably communicated his withdrawal and when he in fact did so on 20 September 2019.

102    Mr Napoli contends that there was no certainty that the administrators would obtain the orders they did obtain on 30 September 2019. To reach the conclusion that making of those orders was inevitable it would be necessary for the Court to assess the outcome of a hypothetical trial which might have been conducted had Mr Napoli pursued his opposition to the validating order. However, that course would be inappropriate. Further, the grant of relief under s 447A is discretionary. He says that where, as here, the administrators admitted the invalidity of their appointment, they bore the onus of satisfying the Court that it should exercise its discretion. If he had chosen to oppose the validating order, it would have been necessary for the Court to consider the factors set out in his submissions at [48(d)], being matters enumerated in Hayes v Doran [No 2] [2012] WASC 486 (Hayes v Doran [No 2]) at [406] (relevantly, the quoted submissions [279(d), (g), (h), (k) and (l)]) and other matters, including the fact that the Court took account of the lack of opposition in making orders on 30 September 2019 and the decision in McIntosh & Anor v CMX Technologies Pty Ltd (Administrators Appointed) [2005] NSWSC 1282; (2005) 56 ACSR 283 where the Court refused to validate the appointment of administrators under s 447A where newly appointed directors were not given notice of the meeting at which they were appointed.

103    Mr Napoli states that he chose not to oppose the validating order for commercial reasons once he had access to records that allowed him to assess the Company’s financial position properly. He acknowledges that had he successfully opposed the validating order, he would either have been exposed to being a director of a company in the Company’s situation (which I take to be an insolvent company or one which was likely to be insolvent) or the Company would have been placed in some form of external administration.

104    Second, Mr Napoli says that the other relevant analogy is that which applies in relation to indulgences, where it is well established that the person seeking the indulgence must pay the costs of the application, relying on Re: Nardell Coal Corporation (In Liq) v Hunter Valley Coal Processing [2003] NSWSC 642; (2003) 178 FLR 400 at [144]-[147]. In the present case, the administrators’ appointment was admittedly invalid and they sought an indulgence pursuant to s 447A to cure that deficiency. In relation to their costs, Mr Napoli seeks only that the administrators’ costs be costs in the administration and that they pay him his costs from 20 September 2019.

105    Third, Mr Gough gave the administrators an indemnity and the administrators refused to answer Mr Napoli’s questions about it on the basis that it was a matter between them and Mr Gough. Yet, one of the administrators’ reasons for seeking an order that Mr Napoli pay their costs incurred after 28 August 2019 (rather than the usual order) is that the assets available to be paid to the Company’s creditors should not be diminished in that way. Upon the deed of indemnity’s disclosure to Mr Napoli in exhibit CA-2, Mr Napoli submitted that:

(1)    The administrators negotiated a deed of indemnity with Mr Gough whereby the Company’s assets bore the primary risk of costs and expenses of the administration (including the application to validate their appointment), with Mr Gough bearing only a secondary liability for any shortfall up to $40,000. Whether or not such a deed of indemnity is “run-of-the-mill” in a voluntary administration, the administrators accepted that their appointment was affected by invalidity at an early stage and that they would have to apply to the Court for a validating order. They filed the originating process without taking any steps to secure funding from Messrs Gough and Crabtree or an indemnity for their costs and any costs exposure to a third party, such as Mr Napoli, who they knew opposed that order. That is curious in a context of an application which is unlike litigation that an administrator might typically undertake in the ordinary course of the Company’s business;

(2)    If the administrators were acting in the best interests of the Company’s creditors in those circumstances, one might have expected that they would demand either funding or a more extensive indemnity. By not seeking a more extensive indemnity, the administrators chose to cast the risk of the originating process on the Company’s assets and it is not a reason to depart from the usual position. As the administrators have led no evidence as to why they took that course, the Court should infer that any explanation would not assist them;

(3)    The fact that they have not sought an order that Messrs Gough and Crabtree pay their costs, which would relieve the creditors of that burden, underscores the point. The administrators should not be able to rely on the fact that payment of their costs after 28 August 2019 would diminish the assets available to creditors where they have orchestrated that outcome; and

(4)    The Court should note that Mr Napoli was concerned from an early stage to ensure that the assets of the Company were not used in the litigation and wrote to the administrators about that issue (see Madison Marcus’ letter dated 4 September 2019, which I take to be the letter referred to at [54] above), but the administrators said that they were not answerable to him (see Miller & Prince’s letter dated 5 September 2019 at [55] above). The administrators should not be heard to complain about the assets of the Company being depleted in the litigation, given that Mr Napoli’s own concerns and enquiries as to that very issue were cursorily rebuffed.

106    Fourth, in relation to the originating process, in any event, Mr Napoli should not be required to pay any costs incurred in and incidental to obtaining the validating order, such as preparation of evidence, written submissions and appearances. He should not be required to pay costs of an application that he did not oppose and that had to be made. Further, it would not be appropriate for Mr Napoli to be ordered to pay any costs after 20 September 2019, given that he conveyed that he did not oppose the application from that date.

107    Fifth, Mr Napoli should not, in any circumstance, be liable for costs of and incidental to the extension application because he did not oppose it at any stage and a costs order should not be made against a party who did not oppose it. Further, it was unnecessary to depart from the approach adopted on 28 August 2019 (following which Lee J made an order extending the convening period to 30 September 2019) so that it was unnecessary for the administrators to prepare a detailed affidavit and written submissions in relation to the extension application as though in preparation for an opposed hearing.

108    Sixth, an indemnity costs order should not be made on the basis that Mr Napoli’s opposition to the validating order was futile or that the position he took or continued was for some ulterior motive or in wilful disregard of known facts or clearly established law. He says that:

(1)    Mr Napoli did not contest the originating process and, as previously noted, the Court should not conduct the hypothetical trial that would be necessary to demonstrate futility. There were reasonable arguments that could have been made (as outlined at [48] of Mr Napoli submissions). It is presumptuous of the administrators to assume that their success was inevitable and it demonstrates a misconception concerning the balancing process undertaken in the proper exercise of discretionary judicial power;

(2)    There is no basis to allege that Mr Napoli was seeking discovery for a motive ulterior to the proceedings:

(a)    It is Mr Napoli’s evidence that he sought discovery for the purpose of the proceedings and Madison Marcus’ correspondence expressly stated that. Mr Napoli was subject to a Harman undertaking and he signed a written undertaking at the administrators’ request reflecting that obligation. The administrators’ submissions in this regard effectively allege a contempt of court based on nothing more than inexact proofs, indefinite testimony and indirect inference and in the absence of putting the allegation to Mr Napoli in cross-examination. The submission is inappropriate and should not have been put; and

(b)    Contrary to the administrators’ submission that that is the only sensible explanation of Mr Napoli’s participation in the proceedings, Mr Napoli’s evidence, borne out by the documents, is that he sought documents relevant to the issue of solvency and, upon those documents being discovered, he withdrew his opposition to the validation order. By definition, documents produced on general discovery are those relevant to the proceedings. The withdrawal of opposition to the validation order can be explained by Mr Napoli’s assessment of the discovered materials.

109    Mr Napoli submitted that he had no conceptual opposition to the Court making a lump sum orders in relation to the administrators’ costs at some point, but submitted that it should not be made at this stage on the bases that:

(1)    The Costs Practice Note at [4.4] suggests that applications for indemnity costs give rise to complexity and the appropriate course is for the entitlement to costs to be determined and then the question of whether a lump sum order should be made. Mr Napoli submitted that there are too many “unknowns” so that it is difficult to put submissions that deal with “every permutation of outcome”. Further, it is necessary to establish the appropriate approach to that determination, including whether to involve a registrar or costs consultant or alternative dispute resolution.

(2)    The evidence led by the administrators is insufficiently detailed to permit an assessment by Mr Napoli and the Court as to whether the work was fairly and reasonably incurred. That remark applies in particular to the claim made in relation to counsel’s fees. Mr Napoli relies on remarks made by Colvin J in Sandalwood Properties Ltd (Subject to a Deed of Company Arrangement) v Huntley Management Ltd (No 2) [2019] FCA 647 at [20], but it is useful to set out his Honour’s remarks at [19]-[21] as follows:

19    The application for a lump-sum assessment must be supported by affidavit. The affidavit must provide a sufficient basis for the court to undertake a robust assessment of the reasonableness of the costs claimed on a lump-sum basis. In particular, it should include a clear, concise and direct costs summary. The costs summary should adopt a breakdown that suits the nature of the particular case and the forensic course of the proceedings. It should not be as itemised as a bill of costs as that would defeat the whole purpose of the procedure. It should not be expressed at such a level of generality that an assessment of the reasonableness of the costs is not assisted by the breakdown in the summary. It should not be expressed by reference to categories that are meaningless, such as the time spent by named practitioners rather than categories of work to be done. The former may be used to determine the later, but the extra step must be taken.

20    So, by way of example, in this case, the breakdown could identify those costs actually incurred that related to each of (a) commencing the application (including taking initial instructions and formulating the basis for the claim); (b) preparing the affidavits to be relied upon by SPL; (c) interlocutory hearings; (d) retaining and briefing counsel; (e) considering the evidence filed on behalf of Mr Scott; (f) preparing written submissions; and (g) preparing for and attending at the final hearing. Each item may include the costs of solicitors and the costs of counsel. It may show actual amounts incurred and the amounts claimed. Alternatively, the costs of counsel may be claimed separately by describing in general terms what they were briefed to do and then identifying the amount charged by counsel that is claimed on the lump-sum assessment, perhaps separated into costs of preparing written submissions, other preparation and appearances.

21    The whole process of lump sum assessment depends upon the preparation of a sensible costs summary that has a form of breakdown of costs that logically assists the task of undertaking the lump-sum assessment in the particular case. The costs summary then becomes a practical document with which the party who is liable under the costs order is able to engage by way of response. The parts that are disputed can be identified and brief reasons given for disputing the particular amount and why a different amount should be assessed.

(3)    If, contrary to those submissions, the Court determines to make a lump sum order:

(a)    Costs relating to pleadings and discovery should be excluded because it was reasonable for Mr Napoli to oppose the application until he was provided with financial statements which enabled him to assess the key question of solvency;

(b)    Costs concerning the extension application should be excluded because Mr Napoli did not oppose it and the work was not reasonable in the circumstances;

(c)    Costs relating to the validating order should be excluded because it had to be made whether or not Mr Napoli consented to, opposed or did not object to it; and

(d)    Costs after 20 September 2019 should be excluded because Mr Napoli had conveyed that he did not oppose the originating process on that date.

110    In relation to the administrators’ counsel’s invoices appearing at tab 2 of exhibit CA-2, Mr Napoli submitted that the Court would not be satisfied that all the work carried out on behalf of the administrators represents reasonable costs. Mr Napoli says he should not be called upon to compensate the administrators for anything close to what is sought. He relied on the following:

(1)    Counsel’s costs for the period between 16 August and 30 September 2019 total $35,887.50 (including GST), representing 72.5 hours work. Mr Napoli says that the overall impression is that these are significant costs for a matter involving:

(a)    a shortened substituted service application on 26 August 2019;

(b)    case management conferences on 28 August and 6 September 2019;

(c)    uncontested applications to extend the convening period heard on 27 September 2019 and for the validating order heard on 30 September 2019; and

(d)    total court time of approximately two hours, leaving approximately 70 hours of preparation.

(2)    In relation to the contention that work done on the administrators’ points of claim and discovery explains the “huge cost”, counsel spent only two hours drafting and finalising the points of claim on 30 August 2019 and counsel spent part of six hours on 11 September 2019 reviewing discovery, albeit that the precise amount of time cannot be ascertained because that task is listed together with a variety of other tasks on that day.

(3)    In relation to the balance of the time, Mr Napoli contends that it appears to have been taken up by extensive preparation for court appearances, numerous teleconferences (at least 15), preparing/reviewing numerous notes (at least 19), vast amounts of “consideration” and the like, which was disproportionate to the circumstances.

(4)    It is not possible to conclude that the cost of any one particular task charged by counsel was reasonable because all of the tasks carried out on a given day have been grouped together. For example, it is not possible to assess how much time counsel has charged for appearing at a short substituted service application before Lee J on 26 August 2019 because that is grouped together with numerous other tasks resulting in a conglomerate 4.5 hours charged. Mr Napoli also took issue with the 2.5 hours charged by counsel on the day that the extension application was heard, on 27 September 2019, and 2.5 hours charged on 30 September 2019, the day that the application for the validating order was heard. In each case, Mr Napoli contends that the hearing time was about half an hour and the applications were unopposed. Mr Napoli submitted that these examples demonstrate why it would be more appropriate that the matter should proceed to taxation where, if the costs are not resolved through mediation processes that precede formal taxation, there will be a detailed inquiry.

(5)    Any award of costs should be based on what was reasonably necessary to do justice between the parties and with an eye to efficiency and proportionality.

Administrators’ submissions in reply summarised

111    In relation to Mr Napoli’s first point:

(1)    The factual position in this case is unlike any of the cases cited by Mr Napoli. It is the facts and circumstances of the case before the Court which informs its discretion on the question of costs. Analogies need to be drawn with great care. The submission that a defendant can insist on having a matter pleaded, discovery provided and a timetable for exchanging evidence complied with by the administrators, which ultimately proved to be entirely unnecessary, without the defendant facing the consequences of having required those steps to be taken is without basis and must be rejected as a general proposition.

(2)    The steps taken by Mr Napoli in contesting the application for a validating order were plainly unreasonable. In relation to the matters raised by Mr Napoli set out at [101] above:

(a)    If Mr Napoli had taken no part in the proceedings, the administrators would have sought relief under s 447A of the Corporations Act instead of s 447C regardless. The exchange of correspondence makes this clear;

(b)    The financial information relevant to the material issue in the proceedings, namely whether the Company was insolvent or likely to be insolvent was provided as evidence in support of the originating process in Mr Billingsley’s affidavit sworn on 26 August 2019 and exhibit MJB. No part of the discovery process was something that Mr Napoli was entitled to nor did it assist the determination of the originating process; and

(c)    Notwithstanding being under no requirement to do so, on 22 August 2019, the administrators invited Mr Napoli to refine his request for information to assist him to determine whether or not he wished to contest any application ultimately brought by the administrators. That invitation was ignored without explanation. Both requesting the information and ignoring the invitation to refine the request was plainly unreasonable. The administrators should not incur costs because they interrogated the validity of a request for information by a non-creditor and Mr Napoli should have narrowed his request.

(3)    The administrators do not accept the proposition that their case needed to be “certain to win” in order to obtain a costs order against Mr Napoli. They say the assessment of reasonableness is not one which centres on prospects of success, but rather one’s motivation to take particular positions. The fact that Mr Napoli might have been able to argue a particular point is of no consequence. The costs the administrators now seek to recover did not evaporate because he changed his position after they had been incurred. The administrators say that Mr Napoli’s submissions in chief at [48] (see [102] above) ought to be withdrawn, since he had every opportunity to make those submissions by pressing his opposition to the validating order. The administrators say that none of it matters in any event, because if Mr Napoli had been successful in his opposition it would have resulted in him being a director of a Company likely to be insolvent, in circumstances where his co-directors had received director penalty notices from the ATO and those matters were squarely known to Mr Napoli before 28 August 2019.

(4)    The fundamental difficulty with Mr Napoli’s position with respect to costs flows from his concession that he chose not to pursue his application for commercial reasons (see [103] above). In his solicitors’ letter to Messrs Gough and Crabtree of 8 August 2019, they asserted that Human IQ had a “reasonable suspicion” that the Company has a cause of action against the directors for breach of their obligation not to allow the Company to trade while insolvent. As Mr Napoli was Human IQ’s sole director, he must have held that suspicion.

112    In relation to Mr Napoli’s second point, being the analogy to indulgences, the administrators submit that they did not seek an indulgence and the relevant principle has no application. The originating process seeking orders under Part 5.3A was for the benefit of creditors having regard to the purposes of that Part. Further, that principle does not benefit parties who acted unreasonably, as Mr Napoli did in his resistance to the validating order until 25 September 2019.

113    In relation to Mr Gough’s indemnity, the administrators say that it is usual for qualified persons who contemplate accepting appointment as a voluntary administrator to obtain indemnification from the appointing person as a condition of accepting the role. The indemnity was not connected to the originating process, but rather to the voluntary administration of the Company. Accordingly, consideration of the indemnity does not assist the Court in determining costs entitlements in the proceedings. In circumstances where the administrators have no entitlement to the indemnity where they are able to reimburse themselves from the property of the Company under the statutory lien provided by ss 443D-443F of the Corporations Act, the indemnity has no bearing on the question of the appropriate order as to costs in the proceedings.

114    The suggestion that the administrators ought to have sought indemnification in anticipation of the unreasonable and inappropriate steps taken by Mr Napoli is absurd. It must be remembered that the indemnifying party (Mr Gough) did not take the position that Mr Napoli took in the proceedings, which was the direct cause of the costs the administrators claim. The administrators have always been of the view that Mr Napoli’s application for a third-party costs order was doomed to fail and they were not willing to participate or join in any such application as it would involve them incurring further expenses and expose them to the costs of that application failing, a risk they were not willing to take. If, contrary to those submissions, the Court thought it appropriate to make a third-party costs order, the way forward is to order that Mr Napoli pay the administrators’ costs and order that the third parties indemnify him for such costs as may be appropriate.

115    In relation to Mr Napoli’s submission that the administrators would need to have incurred costs in relation to the originating process in any event so that no costs order should be made against him, the administrators say:

(1)    They accept that position with respect to pre-28 August 2019 costs;

(2)    It was not until 25 September 2019 that Mr Napoli capitulated unconditionally. The work required to prepare the matter for final hearing had already been incurred in very large compass by that stage; and

(3)    Having failed to take up the administrators’ offer made on 24 September 2019 (see [64] above), Mr Napoli’s capitulation so close to the final hearing was of no consequence to the costs incurred by the administrators.

116    In relation to Mr Napoli submission that he should not be required to pay any of the administrators’ costs after 20 September 2019, they repeat the submissions set out at [115].

117    In relation to Mr Napoli’s submissions concerning the extension application, the administrators submitted that Mr Napoli’s position is misconceived. Whether or not Mr Napoli consented to, opposed or abstained from expressing a view concerning the extension application has no consequence; he was not a creditor and his sentiment concerning the extension of the convening period was irrelevant. Further:

(1)    Whether an application is opposed or not, the administrators and their legal representatives are entitled to do what is necessary to put themselves in a position to obtain the relief sought. Courts have made it clear since the commencement of Part 5.3A that applications to extend the convening period, particularly when the extension is not the first extension, are not merely administrative and proper regard must be had to the position of creditors and the overarching mandate of Part 5.3A which is what was addressed by the evidence and submissions filed in connection with the extension application; and

(2)    Mr Napoli’s continued opposition to the validating order eroded the first extension of the convening period to 30 September 2019 effected by the orders made by Lee J dated 28 August 2019. The administrators made it clear at the case management hearing on 6 September 2019 that Mr Napoli’s continued opposition to the validating order would mean that an extension to the convening period would be necessary and that they would seek a costs order against Mr Napoli in that event.

118    In relation to Mr Napoli’s submissions concerning indemnity costs:

(1)    Regardless of what Mr Napoli now says about the strength of his case opposing the validating order, that opposition was not pressed;

(2)    His opposition to the validating order was plainly unreasonable when the commercial realities that he faced on 25 September 2019 were the same as those that he faced on 28 August 2019 and thereafter; and

(3)    The administrators press their position that Mr Napoli’s opposition to the validating order was, at all material times, unreasonable and nothing in Mr Napoli’s costs submissions disavows the presumption that it occurred for a collateral or anterior purpose:

(a)    Mr Napoli’s opposition fell away proximate to the hearing of the originating process and without any real explanation of his change in position. Mr Napoli did not rebut the submissions set out at [93(2)-(3)] above. Mr Napoli’s self-serving statements about what his purpose was in seeking particular material does not advance his position;

(b)    In relation to Mr Napoli’s submission that it was not open to the administrators to point to a collateral purpose for Mr Napoli’s position in the proceedings because matters were not put to him in cross-examination:

(i)    The presumption that Mr Napoli had a collateral purpose is made clear from the contents of the exchange of correspondence predating the commencement of proceedings;

(ii)    A Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 inference ought to be made that the evidence of Mr Napoli would not have assisted his position in the proceedings in circumstances where he elected not to press his points of defence and not to adduce any evidence; and

(iii)    The allegation that Mr Napoli’s participation in the proceedings was for a collateral purpose was made clear at every case management listing of the proceedings. Where it is obvious that the evidence of the witness is challenged, the failure to state this expressly is not a breach of the rule in Browne v Dunn (1893) 6 R 67.

119    The administrators also claim $26,955.50 (inclusive of GST) in respect of costs incurred in relation to the question of costs, supported by the information in tab 4 of exhibit CA-2.

120    They say that Mr Napoli’s approach to the question of costs is demonstrative of the approach taken by him to the substantive proceedings at all times prior to 25 September 2019, which is the reason that the costs figures are what they are. A review of the points of defence (see [53] above) makes clear the matters that needed to be considered and addressed. The administrators submit that Mr Napoli’s decision to raise every possible point was a calculated forensic choice which has inevitable cost consequences when they fail. Just as it was not open to the administrators to restrict the matters raised by Mr Napoli in opposition to the originating process, it is not now open to Mr Napoli to criticise the administrators for taking that opposition seriously.

121    In response to some of the detailed matters addressed by Mr Napoli, the administrators say:

(1)    The small amounts of time taken at oral hearings ought to be attributed to the detailed written material produced to assist the Court and not to the apparent “simplicity” of the applications put before the Court;

(2)    Mr Napoli has exhibited repeated misunderstandings as to the position at law, for instance, in relation to what is required of the administrators in establishing a basis for the Court to make an order further extending the convening period; and

(3)    The Court is not required to second-guess the amount of time spent on particular tasks as though it were taxing those costs. The Court is required to consider the reasonableness of costs incurred having regard to the whole of the facts and circumstances before the Court. None of the steps taken by the administrators was unreasonable and Mr Napoli does not suggest that any of the work said to have been performed by the administrators’ legal representatives was not in fact performed; and

(4)    If Mr Napoli was genuine in his claim that the administrators’ costs claimed were excessive, the administrators provided a way forward in their offer to accept $44,000 inclusive of GST. Mr Napoli forced the administrators to engage with a further raft of material on the question of costs which has, inevitably, produced more costs.

Consideration

122    I accept the administrators’ submission set out at [92] above.

123    The coincidence of the timing of Messrs Gough and Crabtree’s resolution purporting to appoint the administrators as voluntary administrators of the Company with their receipt of Madison Marcus’ letter purporting to appoint Mr Napoli as Human IQ’s nominee as a director of the Company under the shareholders agreement was grounds for a reasonable person in Mr Napoli’s position to query their motivation in appointing the administrators. Mr Napoli moved promptly to raise his concerns about the validity of that resolution with the administrators. As disclosed by the correspondence set out above, the administrators acted promptly to address the issue and in the meantime paused the further conduct of the administration.

124    In seeking an order under s 447A, the administrators did not seek a declaration that they had been validly appointed. They sought to address the central issue, that is, whether the Company was, as at 8 August 2019 and thereafter insolvent or likely to be insolvent such that it should remain in administration and a validating order should be made.

125    At the case management hearing on 6 September 2019, Mr Napoli’s counsel explained that “we want to get into the discovery, which is general discovery, and actually see what the documents are and not be forced to just accept conclusions put by … the voluntary administrator, who, from what we can infer, is just saying what he is told by Mr Gough”. That is consistent with Mr Napoli’s evidence that he wished to establish for himself from primary materials whether the Company was insolvent by the demand for information in the letter sent by his solicitors on 21 August 2019 (see [30]-[31] above) and that he was not satisfied to rely on the administrators’ opinion in Mr Billingsley’s first affidavit.

126    In his submissions relating to the administrators’ costs at [50], Mr Napoli explained that, once he had had the opportunity to consider the records of the Company, he chose not to pursue his opposition to the validating order for commercial reasons. As Mr Napoli said, that reflects the reality that had he successfully pursued his opposition to a validating order, he would be exposed to being a director of an insolvent or likely insolvent company which would have to be placed in some form of external administration.

127    While it is Mr Napoli’s evidence that he did not have sufficient material to satisfy himself as to the Company’s financial position until he had received the discovery material, I accept the administrators’ submission that Mr Napoli was in a position to come to that realisation based on the information in Mr Billingsley’s first affidavit sworn on 26 August 2019 and exhibit MJB which his solicitors were given on 26 August 2019. That information is summarised at [38]-[39] above.

128    It is true that the discovery material and Mr Billingsley’s second affidavit sworn on 13 September 2019 and exhibit MJB-2 likely better satisfied Mr Napoli’s concerns than Mr Billingsley’s first affidavit and exhibit MJB did because:

(1)    The ASIC search related to the Company included in exhibit MJB was dated the day after Messrs Crabtree and Gough purported to pass the resolution appointing the administrators so that it was not clear that the administrators had relied on what was apparent from the ASIC register when they accepted appointment. Exhibit MJB-2 contains a search dated 12 June 2019 which clarifies that issue;

(2)    In his first affidavit, Mr Billingsley deposed to the fact that “the terms of the Licence Agreement” were discussed at a meeting with Mr Napoli and his advisers held at 10.00 am on 16 August 2019 and a copy of the Licence Agreement was provided to Mr Napoli’s solicitors that afternoon. From that time, Mr Napoli was in a position to understand the matters set out at [26(1)] above. At the case management hearing on 6 September 2019, counsel for Mr Napoli explained that it did not seem consistent with the Company’s business having ceased that the Licence Agreement would have been entered into to allow Mr Gough to complete a client’s work on the Company’s behalf and for the money earned in that way to come back to the Company. Mr Billingsley’s second affidavit clarified that the Honeywell project to which the Licence Agreement related would be completed shortly (September 2019) and the amount that the Company might expect to receive (see [60(7)] above), matters which could not be discerned from the Licence Agreement and which do not appear to have been canvassed in correspondence prior to that point; and

(3)    It contained copies of director penalty notices, bank statements and a final balance sheet obtained from MYOB records for the period to 8 August 2019 (obtained by the administrators on 28 August 2019), which indicated further decay in the net asset position of the Company from that which had been included behind tab 10 of exhibit MJB (see [60] above).

129    Having said that:

(1)    The question of when the administrators conducted an ASIC search relating to the Company does not go to solvency, albeit that it might go to one factor relevant to the exercise of the discretion to validate an administrators’ appointment: see Hayes v Doran [No 2] at [406] (quoted submissions at [279(b)]);

(2)    On 20 August 2019, Mr Napoli’s solicitors were provided with a copy of the circular to creditors dated 16 August 2019 in which it was said that “[t]he purpose of the Licence Agreement, in broad compass, is to enable the Licensee to complete a project and, upon completion, to realise and apply the funds to the administration” (see [27]-[28] above). That explanation was entirely consistent with the Company having ceased business; and

(3)    Although Messrs Gough and Crabtree had been issued director penalty notices dated 5 August 2019 by the ATO (which is a strong indicator that a company may be insolvent), that fact was not referred to in Mr Billingsley’s first affidavit or prior correspondence. Nonetheless, it was referred to in the points of claim, an unsealed copy of which was given to Mr Napoli’s advisors in the afternoon of 30 August 2019.

130    Further:

(1)    Mr Billingsley’s first affidavit contained the opinion of a public accountant and registered liquidator from a company associated with a large, reputable accounting firm. He deposed to a belief that the Company was insolvent as at 8 August 2019, having regard to the fact that its employees had all resigned or been terminated, it had ceased business and it had an excess of liabilities over assets based on a balance sheet and profit and loss statement as at 8 August 2019 (then the only one for that period in their possession) and proofs of debt which had been lodged with the administrators all of which were included in exhibit MJB. The characterisation of the administrators’ opinion as just parroting Mr Gough is plainly inaccurate. The fact that Mr Napoli might reasonably have concerns about the coincidence of timing of the administrators’ purported appointment with Human IQ’s purported appointment of him as a director of the Company does not establish a reasonable basis for doubting Mr Billingsley’s independence and qualifications to provide the opinion that he did. It was a credible opinion given by someone qualified to give it;

(2)    Mr Billingsley’s evidence given in his first affidavit and exhibit MJB was confirmatory of a suspicion relating to the Company’s financial state which Human IQ (through its sole director, Mr Napoli) had on the day the administrators were appointed: see [18] above. In light of that fact, Mr Napoli’s evidence, on which he relied in submissions, of not having been told by Mr Gough or Mr Crabtree that the Company was in financial difficulty has no relevance; and

(3)    The concern expressed by Mr Napoli’s counsel at the case management hearing held on 6 September 2019, that the administrators were relying on Mr Gough for their opinion, does not hold water in circumstances where Mr Billingsley was plainly qualified to give the opinion that he did and the books and records Mr Napoli sought were those on which the administrators relied and they were created when the Company was subject to the governance of Messrs Gough and Crabtree.

131    It is not appropriate that the assets available to creditors of the Company be diminished by bearing the costs of the steps which the administrators were required to take after 28 August 2019 in order to satisfy Mr Napoli’s desire to conduct a personal assessment of the Company’s operations and financial position from primary materials. It is clear from the documentary evidence (the letters dated 21 August 2019 (see [30] above) and 28 August 2019 (see [46] above) that Mr Napoli’s desire to assess the Company’s operational capacity, not merely its financial position, was a motivating factor in Mr Napoli persistence in his opposition to the validating order. That finding is consistent with the fact that Mr Napoli (as the sole director of Human IQ) “reasonably suspect[ed]” that the Company had been trading while insolvent as at 8 August 2019. I do not accept that it was necessary for Mr Napoli to be cross-examined before reaching those conclusions.

132    In those circumstances, I do not consider that Mr Napoli’s continued opposition to the validating order after 28 August 2019 until it was withdrawn on 25 September 2019 was reasonable or consistent with the overarching purpose set out in s 37M(1) of the Federal Court of Australia Act and he should pay the administrators’ costs of the originating process incurred after 28 August 2019.

133    In making those findings, it is not necessary for me to make any finding concerning the prospects of success of Mr Napoli’s points of defence, or of the other matters to which he has adverted in his submissions at [48]. Nor is it necessary to conduct a hypothetical trial of the kind eschewed by Mc Hugh J in Lai Qin at 624-625. It is sufficient to say that, for reasons acknowledged by Mr Napoli, his continued opposition had no utility once it was shown that the Company was, or was likely to be, insolvent based on credible evidence given by Mr Billingsley. That point was reached by 28 August 2019 (allowing Mr Napoli time to consider the first affidavit served in the afternoon of 26 August 2019). Up to that point, consistently with Lai Qin at 624-625, the administration will bear the administrators’ costs and Mr Napoli will bear his costs.

134    Further, Mr Napoli’s unreasonable persistence resulted in the need for the extension application.

135    When Mr Napoli finally indicated that he would cease his opposition to the Court making a validating order on 25 September 2019 (not 20 September 2019 when he made an offer to withdraw his opposition on a particular basis which was not acceptable to the administrators), the convening period was due to end on 30 September 2019. Consistent with both the administrators’ decision that they should not pursue steps in the administration until a validating order was obtained and Mr Napoli’s strenuous injunctions to them not to spend the Company’s money having regard to the invalidity of their appointment, the administrators had not been able to undertake the work necessary to make a recommendation to the Company’s creditors as to the course that they should take at the second court meeting in accordance with r 75-225(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth). I also accept the administrators’ submission that it is irrelevant that Mr Napoli did not oppose the extension application in circumstances where neither he nor Human IQ was a creditor of the Company. In my view, the administrators’ cost of the extension application should also not be at the Company’s creditors’ expense, but rather at Mr Napoli’s.

136    In relation to Mr Napoli’s other submissions on the issue of whether he should be required to pay the administrators’ costs incurred after 28 August 2019:

(1)    I do not accept that there is a relevant analogy to the situation where a person seeks an indulgence from the Court. The validating order resolved an uncertainty which arose in circumstances involving no fault of the administrators or the Company’s creditors (or at least, not a significant number of them);

(2)    I do not accept any of Mr Napoli’s submissions concerning the extent of the indemnity which the administrators obtained from Mr Gough. The administrators had no obligation to seek further indemnity from Messrs Gough and Crabtree to facilitate Mr Napoli’s unreasonable opposition to the validating order in circumstances where the administrators had provided credible evidence that the Company was, or was likely to have been, insolvent on 8 August 2019 and thereafter, which is a position the lawyers for Mr Napoli and Human IQ had asserted to be the case in writing on 8 August 2019;

(3)    While it is true that Mr Napoli ultimately did not oppose the making of the validating order, the administrators were required to incur substantial costs on the basis that Mr Napoli did oppose the making of that order from 28 August until Wednesday, 25 September 2019. I accept the administrators’ submission that, having regard to the short timetable to a hearing on Monday, 30 September 2019, it was necessary for their legal representatives to prepare for that hearing, having regard to the points of defence, even though Mr Napoli ultimately offered no evidence or submissions in support of it. Further, Mr Napoli’s approach to pursuit of his interlocutory application after 25 September 2019 involved the administrators incurring unnecessary costs, including the costs of attending a number of case management hearings, which neither the administrators nor the administration should be required to bear;

(4)    It is true that the administrators would have needed to seek the validating order in any event. It is on that basis that it is appropriate that the administrators do not seek a costs order against Mr Napoli in relation to the period up to 28 August 2019 and that their costs incurred in that period be costs in the administration. In that regard, a short review of the correspondence indicates the truth of the administrators’ submission that Mr Napoli sought out and pressed every conceivable point of opposition, many of which persisted in the points of defence despite the administrators pointing to clear authority on their capacity to bring an application under s 447A, the Court’s jurisdiction to make the order sought and the fact that the Company was a necessary party to the proceedings. Those are well settled points of law as is evident from Hayes v Doran [No 2] at [406] on which Mr Napoli relied; and

(5)    For reasons previously given, it is appropriate that Mr Napoli pay the administrators’ costs of the extension application. Contrary to Mr Napoli’s submission recorded at [107] above, it was necessary for the administrators to prepare and submit to the Court evidence and submissions to support the application for a second extension of the convening period for the reasons given by the administrators recorded at [117] above. The Court does not rubber stamp such applications. In the circumstances, the fact that Mr Napoli did not oppose that application is irrelevant.

137    I am also satisfied that the costs orders against Mr Napoli should be made on an indemnity basis. That flows from the fact that I have found that his continued opposition to the validating order after 28 August 2019 was not reasonable and it necessitated the administrators’ compliance with Lee J’s orders dated 28 August 2019 and the extension application. While I accept that the use of points of claim, points of defence and discovery was a process suggested by Lee J, rather than by Mr Napoli, that did not mean that it was reasonable for Mr Napoli to persist in his opposition to the validating order after he had had an opportunity to consider the evidence in Mr Billingsley’s first affidavit and exhibit MJB. Whether or not Mr Napoli sought discovery for the purposes of the proceedings, the pursuit of opposition to the validating order and detailed discovery was futile once the Company’s likely insolvency had been credibly demonstrated by Mr Billingsley’s evidence. Mr Napoli accepts that he did not wish to be a director of an insolvent or likely insolvent company and some form of external administration was inevitable.

138    Applications for relief under s 447A should be conducted expeditiously and protracted discovery exercises for the purpose of satisfying a person who is not a creditor as to a company’s operations, including its financial position, from primary materials does not serve the purposes of Part 5.3A. The creditors of the Company should not be prejudiced by the diminution of the Company’s assets by paying the administrators’ costs incurred by Mr Napoli’s insistence on pursing the course he did after 28 August 2019.

139    Mr Napoli has shown a willingness to protract these proceedings throughout and to take all conceivable points in a pursuit relevant only to him as a controller of a shareholder of the Company. That is not consistent with the object of Part 5.3A in relation to companies which are or may be insolvent, which provides the context of the administrators’ application.

140    Having attended all case management hearings since 6 September 2019, the hearings of the application for the validating order and the extension application, and having considered the extensive submissions on costs as well as the evidence filed, I accept the administrators’ submissions concerning Mr Napoli’s approach to these proceedings. It is appropriate that no further costs be incurred in taxing costs.

141    I accept the administrators’ submissions that the shortness of the hearings on 27 and 30 September 2019 is attributable to the fact that written submissions and evidence had been prepared which the Court had had an opportunity to consider and no one appeared at those hearings to oppose the applications, since Mr Napoli’s opposition was withdrawn on 25 September 2019. The length of the hearings is not a measure of the work required to achieve the outcomes. I accept that it was necessary for the administrators’ solicitors and counsel to undertake work to address the points of defence on which Mr Napoli relied, in relation to discovery and in support of the extension application.

142    There is no evidence from a costs expert which would assist the Court in forming a view of the reasonableness of the costs claimed by the administrators on an indemnity basis. It is also true that the invoices before the Court do not indicate costs incurred for every individual item of work but rather indicate a composite amount in respect of each individual fee earner at Miller & Prince for a day and a similar approach was taken by counsel for the administrators.

143    However, on an application for a lump sum costs order, it is not the role of the Court to perform a detailed assessment of costs which a taxing officer would undertake. I am satisfied that my familiarity with the matter enables me to form a concluded view as to the reasonableness of the amounts claimed without engaging in the process set out in the Costs Practice Note at [4.4].

144    The aggregate amount claimed for the period between 29 August 2019 and 30 September 2019 is $55,930.04 (inclusive of GST). The Costs Practice Note at [6.5] suggests that, where a costs applicant is entitled to claim input tax credits, then fairly and reasonably incurred costs should be claimed on a GST exclusive basis. Having regard to [96(5)] and [98(1)] above, this would suggest that the claim made by the administrators should be no more than $50,891.85. While I generally do not accept Mr Napoli’s submissions concerning the appropriateness of the amounts claimed and his assessment of the necessity for some of the work, I do consider it appropriate to apply some discount to take account of what I perceive to be some duplication in work done as between the solicitors and in some cases between solicitors and counsel for the administrators. Accordingly, applying the principles set out at [85] above, I consider it appropriate to order that Mr Napoli pay the administrators’ costs in an amount of $46,500 in respect of that period. I should say that Mr Napoli’s submissions with respect to the reasonableness of the administrators’ costs in the period before 29 August 2019 were irrelevant and many of his submissions concerning work done and claimed by the administrators’ counsel were patently unfair and should not have been made. For instance, counsel did work on discovery on at least three dates not identified in Mr Napoli’s submissions.

145    Having regard to the Costs Practice Note at [6.5], the maximum amount that the administrators are entitled to claim in respect of the application for costs is $24,505, not $26,955.50 (inclusive of GST). I am satisfied that although this is a substantial amount, the administrators have been required to incur costs over a longer period than was necessary due to Mr Napoli’s decision to pursue third-party costs orders (as to which, see below) and his general approach of taking every point and refusing what has proved to be a reasonable lump sum offer made by the administrators. While he was entitled to take that approach, it has cost consequences. Having considered the invoices in evidence and applying the principles discussed at [85] above, I will make a lump sum costs order in respect of the administrators’ costs application in the amount of $24,500.

MR NAPOLI’S INTERLOCUTORY APPLICATION FOR THIRD PARTY COSTS

146    Mr Napoli seeks orders that Messrs Gough and Crabtree pay his costs of the proceedings and orders in the nature of Sanderson or Bullock orders against them in respect of his liability to pay the administrators’ costs.

Mr Napoli’s submissions summarised

147    Mr Napoli submitted that all of the costs of the present litigation were incurred to fix a problem created by Messrs Gough and Crabtree:

(1)    Messrs Gough and Crabtree are parties to the shareholders agreement which conferred rights on Human IQ to appoint one of two directors, that there be no quorum without the attendance of the director appointed by Human IQ and that Madison Marcus was to be the Company’s solicitors in relation to its business;

(2)    Human IQ exercised its right to appoint a director of the Company on 5 August 2019 and that appointment took effect on 7 August 2019, but Messrs Gough and Crabtree nonetheless convened a directors meeting and purported to pass the resolution appointing the administrators on 8 August 2019 without notifying Mr Napoli, in breach of the shareholders agreement;

(3)    Messrs Gough and Crabtree did not make the administrators aware of the shareholders agreement, Human IQ’s rights under it or the exercise of its right to appoint a director and the invalidity in Mr Crabtree’s appointment. They thereby misled the administrators as to the validity their appointment; and

(4)    That led to the need for the validating order and to both Mr Napoli and the administrators incurring the costs that they did.

148    Mr Napoli relied on Wentworth v Wentworth at [26] and Yu v Cao [2015] NSWCA 276; (2015) 91 NSWLR 190 (Yu v Cao) at [139]-[140]. In Yu v Cao, McColl JA (with whom Sackville AJA and Adamson J agreed) said, at [137]-[140] (citations omitted):

137    The s 98 discretion is not subject to any express limitations. Such an order may be made “where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation.” While some criteria have been identified as present when a non-party costs order is made, those criteria are not closed or exhaustive and it is not necessary for each to be present before a costs order may be made under s 98.

138    Non-party costs orders have been said to be exceptional. They should not be made where “an exercise of the jurisdiction against a non-party would be extravagant and unjust.” Elsewhere it has been said that such applications should be treated “with considerable caution” and that the power should be “exercised sparingly”.

139    “[E]xceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense … [t]he ultimate question [being] whether in all the circumstances it is just to make the order.” The power to order non-party costs “is inevitably to some extent a fact-specific jurisdiction and … there will often be a number of different considerations in play, some militating in favour of an order, some against.”

140    As will be apparent from Knight, the non-party’s connection to the proceedings is central to the inquiry whether a non-party costs order should be made. Further, there must be a causal connection between the actions of the non-party and the occasion for ordering costs.

149    Mr Napoli submitted that it would be consistent with principle to order Messrs Gough and Crabtree to pay his costs because:

(1)    It is clear that they have a connection with the proceedings in that it is their conduct that led to the passing of an invalid resolution purporting to appoint the administrators without the administrators’ prior knowledge of critical facts;

(2)    For the same reason it is clear that there is a causal connection between their conduct and the costs incurred by the parties to the proceedings. Had they either complied with the shareholders agreement or advised the administrators of critical facts, it is likely that the application for the validating order would have been unnecessary;

(3)    Their conduct was demonstrably improper in the sense that it breached the shareholders agreement and it was unreasonable in the circumstances; and

(4)    Given that their conduct was the root of the parties’ legal costs and the compensatory principle underlying the exercise of the costs discretion, it is appropriate that they compensate the parties inconvenienced by their conduct in the sense of incurring a cost liability.

Messrs Gough and Crabtree’s submissions summarised

150    Messrs Gough and Crabtree say that Mr Napoli’s argument that they should bear his costs of these proceedings is misconceived as a matter of law, even if it can be shown that they acted inappropriately in relation to the appointment of the administrators and that act caused these proceedings to occur.

151    They rely on the decision in Condor Blanco Mines (No 3) in which Barrett AJA refused to make a non-party costs order against a director (Mr Darby) in circumstances where Condor Blanco Mines Ltd sued a person purportedly appointed as administrator and was successful in having the appointment declared invalid, void and of no effect. The “administrator” was required to pay one half of Condor’s costs of the application. In a later interlocutory application Condor sought a third-party costs order against Mr Darby on the basis that the substantive proceedings were an inevitable consequence of his actions as a director of Condor in passing the resolution to appoint the administrators for an improper purpose.

152    They submitted that, in so finding, Barrett AJA held that:

(1)    Generally speaking, the class of persons against whom non-party costs orders may properly be made is confined to persons who have played an “active and intimate role in the initiation or conduct of the proceedings themselves (or their defence) and have thus influenced the incurring and quantum of the costs”: Condor Blanco Mines (No 3) at [13];

(2)    Mr Darby did not occupy any such position in the litigation: he was not a party, he played no role in deciding whether to bring it, how it should be structured, or how any party should respond to it: Condor Blanco Mines (No 3) at [14]; and

(3)    Even if Mr Darby’s wrongful conduct was causally connected to the subject matter of the litigation in that there would have been no occasion for the litigation but for that conduct, that was insufficient to justify a non-party costs order, being too remote from the conduct of the litigation itself to attract such an order: Condor Blanco Mines (No 3) at [18].

153    They say that, while that is sufficient to dispose of the application, the facts of this case do not rise to the same level as in Condor Blanco Mines (No 3) because:

(1)    Condor had been successful in its substantive application but even that did not justify the third-party costs order. Mr Napoli was wholly unsuccessful in his challenge to the validating order;

(2)    Despite the administrators having explained to Mr Napoli from an early stage that the Company was insolvent and had ceased to trade, Mr Napoli chose to take a highly active and adversarial approach to opposing their appointment; he only withdrew his opposition at the last moment after causing the costs which are now in issue;

(3)    As in Condor Blanco Mines (No 3), costs cannot fairly be said to flow from the circumstances of the administrators’ appointment but rather decisions made by Mr Napoli regarding how he would conduct the proceedings; and

(4)    Unlike Condor Blanco Mines (No 3), where Condor had the benefit of findings of breach of duty against Mr Darby and an ultimate finding that the administration should not be upheld, in this case, on 30 September 2019, the Court found that the Company was insolvent or likely to be insolvent, the ATO had issued director penalty notices in respect of the Company’s failure to meet its tax obligations, and voluntary administration was consistent with the objects of Part 5.3A of the Corporations Act. That is, Messrs Gough and Crabtree caused the administrators’ appointment in precisely the kind of circumstances where it is objectively appropriate for such an appointment to occur.

Mr Napoli’s submissions in reply summarised

154    Mr Napoli noted that Messrs Gough and Crabtree had elected not to adduce any evidence. Noting the correspondence set out at [78]-[79] above, he submitted that this was a deliberate, forensic decision in circumstances where the administrators put in evidence the covering email that Mr Gough sent to them on 3 September 2019 (to which was attached a statement prepared by Mr Gough regarding the evidence he was prepared to give (see [51] above)).

155    In this regard, Mr Napoli says:

(1)    The covering email is notable because it proves that there was significant interaction between the administrators and Mr Gough concerning the proceedings, Mr Gough wanted to assist in the application and he regarded the application as an application to his benefit. Mr Napoli notes that Mr Gough said that “I realised it could be difficult for a Judge to make a determination in our favour due to lack of detail about previous significant events”, offering to make a signed statement “if it would help” (emphasis added);

(2)    The statement attached to the covering email is notable because it records Mr Gough’s desire and attempts to acquire Human IQ’s shares in the Company before the resolution purporting to appoint the administrators was passed, which gives colour to the propositions that:

(a)    They intended to acquire the business of the Company months before they purported to appoint the administrators;

(b)    The purported appointment of the administrators was in the context of failed attempts to acquire Human IQ’s shares in the Company; and

(c)    One of the benefits of the voluntary administration to Messrs Gough and Crabtree is that it gave them the opportunity to acquire the Company’s business free from Mr Napoli’s ownership interest through Human IQ;

(3)    The statement is also significant because in it Mr Gough admits that he and Mr Crabtree received and were aware of the notice of Mr Napoli’s appointment as a director of the Company before they purported to appoint the administrators. The chronology in it demonstrates that notice of Mr Napoli’s appointment was received on 6 August 2019, the director penalty notices were received the next day and after that they made “no attempt to discuss” Mr Napoli’s appointment with him because they wanted to act quickly; that is, they decided to ignore the notice of Mr Napoli’s appointment;

(4)    The timing is particularly poignant when one considers that, based on the s 439A report to creditors ahead of the second creditors’ meeting (see [74] above):

(a)    The Company only likely became insolvent after 1 July 2019 in circumstances where it had sufficient assets to meet its current liabilities as at 30 June 2019 and significant liabilities became due and payable when the employees left the Company just prior to the administrators’ appointment;

(b)    Immediately before 8 August 2019 there were $64,298.55 of potential director related transactions in favour of related parties which “obviously” impacted on the state of solvency as at that date; and

(c)    The administrators are concerned as to whether there has been phoenixing achieved via the DOCA, having regard to the similar nature of Biode’s business (established on 15 July 2019, after Mr Napoli rejected Mr Gough’s buyout offers but before the issue of the director penalty notices) and Biode’s employment of a number of former employees of the Company before any DOCA was approved and those employees (five of nine of whom are Messrs Gough and Crabtree and their relatives) will be treated as continuing employees. The administrators stated that “[i]n the event the Company transitions into liquidation, we will conduct further investigations regarding potential phoenixing activity”;

(5)    Drawing on the above it might be observed that Messrs Gough and Crabtree would benefit from the proposed DOCA by virtue of their (and their relatives’) continued employment by Biode, and they would benefit from a voluntary administration that ended by way of DOCA, rather than a liquidation of the Company, in that:

(a)    The right to sue them in respect of intellectual property rights of the Company would not be assigned to any third party, whereas they could potentially be assigned to an interested purchaser upon liquidation;

(b)    The potential unreasonable director-related transactions would not be investigated, whereas they would be investigated upon a liquidation;

(c)    The potential illegal phoenixing of the Company’s business would not be investigated, whereas they would be investigated in a liquidation; and

(d)    Those benefits crystallise upon the execution of the DOCA on 22 November 2019, which was only possible because the validating order was made; and

(6)    It is notable that Biode was incorporated on 15 July 2019 and its registered office is that of the current solicitors representing Messrs Gough and Crabtree in these proceedings. It would be a fair inference that Biode was incorporated as a special purpose vehicle for the purpose of acquiring the assets and undertaking of the Company and that, accordingly, the acquisition of the assets and undertaking by Biode was a concept that dated back to at least that date.

156    In relation to Messrs Gough and Crabtree’s submission that, having regard to the decision in Condor Blanco Mines (No 3), Mr Napoli’s interlocutory application cannot succeed, it is well-established that the costs discretion conferred by s 43 of the Federal Court of Australia Act is a wide one. Differently constituted Full Courts have variously referred to it as a “largely unfettered discretion” (see Summers v Repatriation Commission (No 2) [2015] FCAFC 64 at [13] (Kenny, Murphy and Beach JJ) and a “broad discretion” (see Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union v ALS Industrial Australia Pty Ltd (No 2) [2015] FCAFC 166; (2015) 235 FCR 366 at [4] (Dowsett, Tracey and Katzmann JJ)). Further, in Minister for Immigration and Border Protection v Singh [2014] FCAFC 1; (2014) 231 FCR 437 at [42] (Allsop CJ, Robertson and Mortimer JJ), the Full Court said that, in the context of assessing the proper exercise of a discretionary power, it would be wrong to use the facts of the previous case in creating some kind of factual checklist to be followed and applied in terms of determining the proper exercise of a discretionary power in a subsequent case. The outcome will depend on the application of the relevant principles to the facts, rather than on a factual similarity or difference with other cases. Accordingly, the submission advanced by Messrs Gough and Crabtree is erroneous and should be rejected.

157    In any event, a careful reading of Condor Blanco Mines (No 3) indicates that Messrs Gough and Crabtree have overstated its significance and there are material differences:

(1)    In Condor Blanco Mines (No 3), Mr Darby did not have a connection with the commencement of the proceedings which were commenced to reverse the consequences of a resolution passed by him with what was found to be improper motives. The proceedings were against his interests. I understand the submission to be that Mr Darby certainly did not take any steps to “prompt”, “support”, “steer” or “influence” the proceedings.

(2)    In contrast, there is a much greater nexus between the actions of Messrs Gough and Crabtree and the commencement of the proceedings:

(a)    They wanted the appointment of voluntary administrators and the proceedings were brought for the purposes of validating the administrators’ appointment. They “supported” the initiation and continuation of the proceedings;

(b)    Their actions in failing to give notice of the meeting on 8 August 2019 to Mr Napoli rendered the proceedings a necessity. They “prompted” the initiation and continuation of the proceedings. There was no necessity for Condor to bring proceedings;

(c)    Their action “steered” or “influenced” the proceedings, as is evident from the covering email sent on 3 September 2019 (at [51] above) which demonstrates that Mr Gough was in communication with the administrators and offering to assist them, referring to a Judge making a determination in “our favour” (emphasis added), which is a far cry from the situation in Condor Blanco Mines (No 3); and

(d)    In short, the originating process was necessary for the purpose of curing a deficiency in the administrators’ appointment so that the resolution passed by Messrs Gough and Crabtree could stand. It was an outcome that they desired, supported and thought of as theirs.

(3)    The policy concern expressed by Barrett AJA in Condor Blanco Mines (No 3) at [18] (that “there would be a group of potential respondents to a non-party costs application in every action against a company in which an outsider plaintiff succeeds in establishing that some corporate action or decision is voidable because of motives or purposes on the part of the company’s directors determined to be legally impermissible”) does not arise in this case. This action was brought by the administrators, not some outsider plaintiff, seeking to avoid a decision of the Company based on the intentions of its directors. There is therefore no “floodgates” risk.

(4)    Nothing in the decision in Condor Blanco Mines (No 3) undercuts other factors that the Court may take into account in deciding whether to make a third-party costs order. A classic category identified in the seminal decision of Knight v F.P. Special Assets Ltd at 192-193 (Mason CJ and Deane J with whom Gaudron J agreed) was where “some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation”. This case falls within that recognised category because Messrs Gough and Crabtree are people who appointed the party to the litigation and who have an interest in the subject of the litigation having regard to the benefits discussed previously. Their interests have been well served by the proceedings.

158    The contention that Mr Napoli is liable for his own conduct because “substantially all of the costs in issue relate to Mr Napoli’s challenge to the Administrator’s application in respect of which he was wholly unsuccessful” is erroneous because:

(1)    He was not “wholly unsuccessful”. He did not commence the application nor did he ultimately contest the application. It is wrong to characterise a party who has functionally submitted to an application for the exercise by the Court of a discretionary statutory power as a wholly unsuccessful party;

(2)    Mr Napoli’s costs are his costs of the proceedings up until the point where he had an opportunity to assess the discovery, which enabled him to properly assess the financial position of the Company and make a decision as to whether he would oppose the application. That is his evidence, on which he has not been cross-examined, set out in his affidavit sworn on 28 October 2019 at [70]-[71]; and

(3)    He would not have been in the position of being sued and having to consider his position in respect of the litigation at all had Messrs Gough and Crabtree given proper notice of the meeting to pass a resolution to appoint a voluntary administrator. His position, particularly in incurring costs to get to a point where he could make an informed decision, was reasonable and a consequence of the conduct of Messrs Gough and Crabtree. It is “a bit rich” for them to suggest that the only reasonable cause of action was for Mr Napoli to accept the administrators’ assertion that the Company was insolvent and had ceased to trade given their role in running down the financial position of the Company immediately before the administrators’ appointment and without disclosure to Mr Napoli. Mr Napoli again refers to the matters set out at [155(4)] derived from the s 439A report to creditors in relation to the second creditors’ meeting.

159    The assertion made by Messrs Gough and Crabtree that there are no findings or allegations against them is curious as, by Mr Napoli’s interlocutory application, he is inviting the Court to make adverse findings concerning their conduct. Their assertion that the appointment of administrators in the Company’s circumstances was objectively appropriate skirts around the actual issues identified above. The fact that the Court concluded that a voluntary administration was consistent with the objects of Part 5.3A does not address how the Company got to that point in the first place, including the need for a validating order, and Messrs Gough and Crabtree’s role in that respect. It also does not gainsay the proposition that it is an appropriate exercise of the Court’s cost discretion that they should pay Mr Napoli’s costs in view of their conduct and the benefit they derived from the litigation. It cannot be disputed that, had they conducted themselves appropriately and the resolution appointing the administrators been passed properly, there would be no occasion for the litigation or for Mr Napoli to incur costs in assessing his position.

Further submissions by Messrs Gough and Crabtree summarised

160    Having regard to the nature of the submissions made by Mr Napoli, I determined that it is appropriate to grant Messrs Gough and Crabtree leave to rely on their further submissions.

161    In relation to Mr Napoli’s “insinuations” concerning the possibility that Messrs Gough and Crabtree engaged in illegal phoenixing activities and entered into the DOCA in furtherance of that conduct, they say:

(1)    There are no allegations clearly made and in that circumstance, the insinuations made by Mr Napoli based on the administrators’ report to creditors in relation to the second creditors’ meeting are irrelevant and should not have been made. Allegations of serious wrongdoing should be clearly and unequivocally stated so that they can be addressed squarely and Messrs Gough and Crabtree should not be expected to prove their innocence of matters not squarely put and made without a clear evidentiary basis;

(2)    They had nothing to produce in response to a notice to produce issued to them by Mr Napoli in relation to the beneficial ownership of the shares in Biode. For the avoidance of doubt, they deny any beneficial ownership of Biode and say that the issue is irrelevant to the present dispute;

(3)    Whatever allegations Mr Napoli intended to make in relation to the DOCA are legally irrelevant to the costs dispute which arises from Mr Napoli’s opposition to the administrators’ application for the validating order. If Mr Napoli wishes to press allegations concerning the DOCA, the proper process is to make an application to have it set aside. Not even on Mr Napoli’s construction of the authorities could it be a proper exercise of the Court’s power to order costs against Messrs Gough and Crabtree on the basis of complaints about a DOCA that post-dates all of the costs actually in issue; and

(4)    Mr Napoli’s submission in relation to the DOCA are illustrative of the error in his approach to this litigation and to the costs dispute. That is, the proceedings were commenced by the administrators for a specific and defined purpose. However, Mr Napoli appears to have used it as a vehicle for a roving inquiry going beyond that purpose, including to impugn the DOCA. If he elects to act that way, Mr Napoli acts at his own risk as to costs.

162    In relation to Mr Napoli’s submissions concerning receipt of Human IQ’s notice of Mr Napoli’s appointment as a director of the Company, they submitted that:

(1)    Messrs Gough and Crabtree do not dispute that the notice of appointment was received by the Company on 6 August 2019. It required that Mr Napoli’s appointment be effected and registered by ASIC by 5 pm on 8 August 2019;

(2)    Rather than giving effect to Mr Napoli’s appointment, they appointed the administrators. The reasons why that was appropriate are set out in their submissions in chief at [17] (summarised at [153(4)] above); and

(3)    Whether or not Mr Napoli accepts that Messrs Gough and Crabtree could validly have appointed the administrators on 7 August 2019 and whether or not it was wise of Messrs Gough and Crabtree to do what they did on 8 August 2019, is not to the point. Aside from the fact that it is all moot because the Court made the validating order, whatever allegations Mr Napoli may make about the procedural appropriateness of the administrators’ appointment, they are not a basis for a costs order against Messrs Gough and Crabtree.

163    In relation to Mr Napoli’s submissions concerning the Court’s power to make third-party costs orders and the decision in Condor Blanco Mines (No 3), Messrs Gough and Crabtree submitted that:

(1)    Mr Napoli does not suggest that Condor Blanco Mines (No 3) was wrongly decided or that any of the statements of principle in it are incorrect. Rather, he alleges that the present case is distinguishable; and

(2)    The grounds on which Mr Napoli seeks to distinguish Condor Blanco Mines (No 3) cannot be accepted for reasons set out in their further submissions at [25]-[30].

164    Insofar as Mr Napoli sought to put reliance on alleged potentially voidable pre-administration transactions, Messrs Gough and Crabtree say he is attempting to indirectly litigate separate causes of action that are not before the Court and are demonstrative of Mr Napoli’s error in treating these proceedings as a vehicle to pursue such matters which were relevant to the administrators’ originating process.

Consideration

165    Having considered these submissions, Mr Napoli’s interlocutory application should be dismissed with costs.

166    There is some superficial attraction to a proposition that Messrs Gough and Crabtree should bear some liability for costs incurred on an application for a validating order where their actions led to there being serious questions as to the validity of their appointment of the administrators. In the context of this case, even that superficial attraction would be limited to Mr Napoli’s costs incurred up to 28 August 2019 since I have already found that his opposition to the validating order was unreasonable once there was credible evidence given by Mr Billingsley in his first affidavit that the Company was insolvent or was likely to be insolvent as at 8 August 2019 and thereafter.

167    However, I accept that it would be an inappropriate exercise of the discretion conferred by s 43 of the Federal Court of Australia Act to make an order that Messrs Gough and Crabtree pay any part of Mr Napoli’s costs incurred in the proceedings for the following reasons.

168    There is no dispute between the parties that s 43 of the Federal Court of Australia Act confers power on the Court to make orders against Messrs Gough and Crabtree or anyone else. However, while s 43 of the Federal Court of Australia Act confers a broad discretion on the Court which is unfettered in its terms, that discretion “must be exercised judicially, not arbitrarily or capriciously, and must relate to the litigation in question”: see Summers v Repatriation Commission (No 2) at [14]. The discretion, being a judicial one, is to be exercised with proper regard to established principles and precedent. The fact that the discretion must relate to the litigation in question is the very essence of what was addressed at length in Condor Blanco Mines (No 3) at [13]-[20] and the reason why Mr Napoli’s interlocutory application should be dismissed with costs.

169    I accept the submission made by Messrs Gough and Crabtree that, relevantly to the context of this case, in Knight v F.P. Special Assets Ltd at 192, set out at [88] above, Mason CJ and Deane J were referring to a category of case where a non-party had an interest in litigation and then, through a person they control, a “man of straw”, brings proceedings in which the non-party then plays an active role, such as where a receiver causes an insolvent company to conduct litigation where the receiver is the effective litigant. The High Court did not endorse the view that it is appropriate to make non-party costs orders merely because the non-party played a role in appointing a person who goes on to conduct successful litigation merely because the non-party has some indirect financial interest in the litigation. The example of a shareholder who benefits from litigation conducted by directors in which the shareholder plays no active role is apt in demonstrating the cases to which the principle enunciated in Knight v F.P. Special Assets Ltd at 192 does not apply.

170    In my view, Mr Napoli’s relies on a misreading of the shortened quotation of that passage from Knight v F.P. Special Assets Ltd in Yu v Cao at [137] and on what is said in Yu v Cao [139] to suggest a broader application of the principle which requires only that the person created the circumstances from which the litigation arose and may benefit from the outcome of the litigation. In my view what is said by Barrett AJA in Condor Blanco Mines (No 3) at [13] is consistent with Yu v Cao at [137]-[140] and represents a correct understanding of the relevant principle enunciated in Knight v F.P. Special Assets Ltd at 192. That is for the reasons given by Barrett AJA in Condor Blanco Mines (No 3) at [14]-[18] (see [90] above).

171    Accordingly, I accept that, even if it were established that Messrs Gough and Crabtree acted improperly and for improper motives in relation to the administrators’ appointment and that was the immediate occasion for the proceedings commenced by the administrators, it would not be appropriate to make a third-party costs order in this case.

172    I accept that the power to order non-party costs is inevitably to some extent a fact-specific jurisdiction and there will often be a number of different considerations in play, some militating in favour of an order, some against: Yu v Cao at [139]. However, I do not accept that there is any relevant distinction between the circumstances of Condor Blanco Mines (No 3) at [14] and this case. I do not accept that either of Messrs Gough or Crabtree can, in the required sense, be said to have “prompted”, “supported”, “steered” or “influenced” the administrators to make their application or prosecute for the reasons given by Mr Napoli. That is because:

(1)    Mr Napoli’s contentions based on the fact that the administrators were the applicants in relation to the validating order while the administrator was the defendant in Condor Blanco Mines (No 3) should be rejected because it is a distinction without a difference. It would put form over substance to suggest that the proper exercise of the Court's cost discretion would turn upon which party is the formal “applicant” in the proceeding;

(2)    To the extent that the indemnity given by Mr Gough might have been drawn on to fund the proceedings, there is no evidence that it was given for that purpose. The administrators’ position, which I accept, is that it is a standard form of indemnity which was given as a condition of the administrators accepting appointment, it was capped in an amount of $40,000 and it applied only to the extent that the Company’s assets were not sufficient to fund their expenses and remuneration;

(3)    I do not accept Mr Napoli’s contentions based on the language of the covering email dated 3 September 2019 and Mr Gough’s offer to give evidence or assistance if requested by the administrators in connection with the originating process because:

(a)    Pursuant to s 438B of the Corporations Act, Mr Gough (as a director) and Mr Crabtree (as at least a de facto director of the Company) were under a statutory duty to assist the administrators and give them such information as they reasonably required. Compliance with that statutory obligation should not be regarded as “support” or “prompting” of the originating process which sounds in a third-party costs order;

(b)    Offering to provide evidence or information to a party does not amount to controlling that party’s litigation;

(c)    The financial position of the Company as at 8 August 2019 justified the appointment of an external administrator, irrespective of the circumstances leading to this positions; and

(d)    Most importantly, I accept there is no evidence that the administrators did anything other than make their own independent decisions as to the initiation and conduct of the proceedings whether or not either of Messrs Gough or Crabtree was in favour of the validating order being made;

(4)    I accept that Messrs Gough and Crabtree did have an interest in the validating order being made, since there is evidence that the Company was, or was likely to be insolvent on 8 August 2019 and as directors of the Company they were subject to obligations to ensure that the Company did not trade while it was insolvent. However, that interest is not sufficient to found a third-party costs order. Insofar as Mr Napoli sought to rely on the fact that the DOCA was approved and executed, that was not an inevitable outcome of the administrators’ appointment even though it undoubtedly had the effect of removing Human IQ’s indirect interest in the Company’s intellectual property and Messrs Gough and Crabtree and members of their family benefited from employment by Biode. There is nothing in evidence to suggest that the administrators acted on the instruction or direction of either of Messrs Gough or Crabtree or that they did not undertake a sale process open to any suitable offer for the Company’s intellectual property.

173    Further, the originating process was not an application under s 447C in which the administrators sought to assert the validity of their appointment. In the context of an application of that kind, it may have been necessary to determine the matters on which Mr Napoli relied. In contrast, the originating process was an application for a validating order under s 447A. Once the administrators accepted that there was substantial doubt about the validity of their appointment arising out of Mr Napoli’s claims and the documents he provided in support of them and Mr Billingsley had provided credible evidence that cast substantial doubt on the Company’s solvency in his first affidavit and exhibit MJB, these proceedings were an inappropriate vehicle for determination of what, if any, rights were conferred on Human IQ under the shareholders agreement and the validity of the appointments of either Mr Crabtree or Mr Napoli or whether or not they were involved in “phoenixing”.

174    If Mr Napoli wished to establish and vindicate any rights Human IQ may have had against Messrs Crabtree and Gough arising out of any breach of the shareholders’ agreement and any loss Human IQ might have suffered as a result, it should have been litigated in proceedings Human IQ brought against Messrs Gough and Crabtree for that relief. The same can be said for the issues raised by Mr Napoli on the basis of what the administrators said in their s 439A report (see [155(4)] above), including taking any available action to have the DOCA set aside.

175    As I do not accept that a costs order should be made against Messrs Gough and Crabtree, no occasion arises for me to determine whether a Sanderson or Bullock order should be made. Accordingly, I have not set out Mr Napoli’s submissions in that regard in these reasons, although I have considered them. Suffice it to say, I consider that the application for such an order was misconceived in the circumstances of this case, including the fact that neither of Messrs Gough or Crabtree was joined as a defendant in relation to the originating process and therefore the principles relevant to such orders were not engaged.

MR NAPOLI’S COSTS AS AGAINST THE ADMINISTRATORS

176    In his submissions, Mr Napoli claimed that the administrators should pay his costs of the originating process after 20 September 2019. Since I consider that it was unreasonable for Mr Napoli to pursue his opposition to the validating order after 28 August 2019, most of the work required in support of the validating order and extension application had been undertaken by 25 September 2019 (when Mr Napoli actually withdrew his opposition) and Mr Napoli’s interlocutory application unreasonably prolonged the administrators’ involvement in the proceedings, I reject that submission.

CONCLUSION

177    For the reasons previously given, I will make orders to the following effect:

(1)    The administrators’ costs of the originating process be costs in the administration of the Company up to and including 28 August 2019;

(2)    Mr Napoli must pay the administrators’ costs of the originating process incurred after 28 August 2019 and their costs of the extension application on an indemnity basis in an aggregate amount of $71,000 in accordance with my reasons; and

(3)    Mr Napoli’s interlocutory application be dismissed with costs

.

Associate:

Dated:    19 May 2021