Federal Court of Australia

Passey v South American Trading Company Pty Ltd as trustee for the Gardner Family Trust No 4 (No 2) [2022] FCA 537

ORDERS

THE COURT ORDERS THAT:

1.    The plaintiff pay the first, second and third defendants’ costs of and incidental to this proceeding on an indemnity basis.

2.    The plaintiff pay the fourth, fifth, sixth and seventh defendants’ costs of and incidental to this proceeding on a party and party basis for the period prior to 11.00am 26 November 2021 and thereafter on an indemnity basis.

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

REASONS FOR JUDGMENT

DOWNES J:

1    This proceeding was commenced by the plaintiff (Ms Passey) against the first to third defendants (who are directors of the seventh defendant), fourth to sixth defendants (which are shareholders of the seventh defendant) and the seventh defendant (Company). The first to third defendants were Mr Leigh Wallis, Mr Gregory Gardner and Mr Darren Wallis, respectively.

2    By her originating application, Ms Passey claimed certain relief against the first to third defendants: Passey v South American Trading Company Pty Ltd as trustee for the Gardner Family Trust No 4 [2022] FCA 295 (J) at [23]. The claim for this relief was dismissed during the trial, which dismissal was not opposed. The parties made submissions as to the appropriate costs order in relation to the first to third defendants during closing submissions.

3    As to the remaining defendants, Ms Passey sought certain relief such as an order pursuant to s 233 Corporations Act 2001 (Cth) that her shares in the Company be acquired and that the Company be wound up: J [24]. Her claim was dismissed by Order made on 29 March 2022 and the parties were invited to make submissions as to the appropriate costs orders to be made in relation to the remaining defendants. Submissions were filed by the parties on 4 April 2022 and in reply on 8 April 2022.

4    The issues to be decided are:

(a)    what costs order should be made in relation to the claim against the first to third defendants (if any)?

(b)    should Ms Passey pay the fourth to seventh defendants’ costs on a party and party basis or on an indemnity basis and, if the latter, for all or part of the proceeding?

5    For the following reasons, the appropriate orders are:

(a)    Ms Passey pay the first, second and third defendants’ costs of and incidental to this proceeding on an indemnity basis;

(b)    Ms Passey pay the fourth, fifth, sixth and seventh defendants’ costs of and incidental to this proceeding on a party and party basis for the period prior to 11.00am 26 November 2021 and thereafter on an indemnity basis.

costs order in relation to first to third defendants

6    The first to third defendants apply for indemnity costs. They rely in particular on Ms Passey’s conduct in seeking relief against them in the originating application and her subsequent failure to formally withdraw the claim.

7    Ms Passey submits that there should be no order as to costs in relation to the claim against the first to third defendants. She submits that the Company has paid all costs of this proceeding, that she has acted reasonably in commencing and maintaining the litigation against the directors “until it was apparent that pursuing the relief … was commercially futile” and that the proceeding would not have been litigated any differently if the first to third defendants had not been parties.

8    In Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112 (Nicholas, Yates and Beach JJ), the Full Court observed at [5] that:

Section 43 of the Federal Court of Australia Act 1976 (Cth) confers a broad discretion on the Court to award costs in proceedings. In Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151, Black CJ at 152 stated the principles applicable to a claim for indemnity costs:

… it is well established that the starting point for any consideration of an application for indemnity costs is that in the ordinary case costs will follow the event and the Court will order the unsuccessful party to pay the costs of the successful party, on a party and party basis, a basis which will fall short of complete indemnity.  Nevertheless, the Court has an absolute and unfettered jurisdiction in awarding costs, although the discretion must be exercised judicially.  So indemnity costs may properly be awarded where there is some special or unusual feature in the case justifying the Court in exercising the discretion in that way.

9    Examples of circumstances in which an indemnity costs order could be appropriate include the fact that proceedings were commenced or continued for some ulterior motive and the making of allegations which ought never to have been made: Colgate-Palmolive v Cussons Pty Limited [1993] FCA 801; (1993) 46 FCR 225 at 233–234, cited with approval by the Full Court in Clifton v Kerry J Investment Pty Ltd (No 2) (2020) 277 FCR 382; [2020] FCAFC 112 (Besanko, Markovic and Banks-Smith JJ) at [30]. In that case, the Court observed at [31] that:

… The point which we wish to emphasise is that to justify a special costs order, there must be conduct deserving of criticism and resulting in greater expense to the innocent party.

(emphasis original)

10    The resolution of the form of any costs order to be made against Ms Passey therefore requires an examination of her conduct of this proceeding as against these defendants.

11    By the originating application filed on 18 December 2020, Ms Passey sought the following relief (which is relevant to these defendants):

(a)    declarations that “the Directors have acted in contravention of Sections 180, 181 and 182 of the Act”;

(b)    “equitable damages against the Directors” for losses arising from such alleged breaches;

(c)    costs.

12    It should be observed that these claims against the first to third defendants were very serious ones which would have caused significant consternation to these defendants, who are natural persons. Not only did they include a claim for payment of damages, it was plain that Ms Passey’s case was that the directors had breached the Act.

13    On 18 December 2020, Ms Passey also filed an interlocutory application which sought, amongst other things, leave pursuant to s 237 of the Act to bring an action on behalf of the Company against the first to third defendants seeking declarations that they had contravened the Act and for compensation pursuant to s 1317H of the Act or for equitable damages. Ms Passey did not take steps to prosecute this application. However, it is inevitable that legal costs were incurred in relation to it (even if the Company was the party which paid those costs). Ms Passey’s conduct in filing but not pursuing this application therefore added to the legal costs which were, in the end, wasted.

14    Nothing happened in the matter until 11 May 2021 when a consent order was made by Greenwood J which included an order referring the matter to mediation.

15    When the matter came on for case management on 19 August 2021 before me, an order was made that Ms Passey advise the Court and the defendants whether she intends to press her interlocutory application by 23 September 2021.

16    At a case management hearing on 28 September 2021, Ms Passey’s counsel informed the Court and the defendants that she would not be pursuing the “statutory derivative” proceeding.

17    Having regard to the findings in J [17]–[23], and particularly J [20], and by reason of Ms Passey’s failure to take any subsequent steps to bring the interlocutory application on for hearing, I infer that Ms Passey brought the proceeding against the first to third defendants because she was seeking to extract a better deal in the negotiations being conducted between her solicitors and the Company in 2020, rather than because she had any genuine intention of pursuing a claim against those defendants.

18    Regardless, it is unacceptable for such serious claims to be made against directors of a company in mid-December 2020 but then for nothing to be done to advance them (but also not purport to withdraw them) until late September 2021 and only then when prompted to do so by the Court.

19    I say that Ms Passey purported to withdraw her claims because she did not seek to amend her originating application, and her statement of claim filed on 14 October 2021 pleaded material facts which continued to make factual allegations against and to seek relief from the first to third defendants. For example, paragraph 54 alleged that the first to third defendants (amongst others) had been using the Company’s funds to pay their legal costs associated with the dispute the subject of this proceeding. The prayer for relief sought a costs order against the first to sixth defendants.

20    Ms Passey submits that the statement made at the case management hearing on 28 September 2021 and the relief sought in her statement of claim made it “abundantly clear” that she was not pressing her case against the directors, but having regard to the unexplained failure to amend the originating application, I am unable to accept this submission.

21    Ms Passey submits that she abandoned the relief against the directors when it became apparent to her that pursuing them was “commercially futile”. However, there is no evidence to demonstrate that Ms Passey held this view or why this view was unable to be formed by her at any time prior to September 2021.

22    Contrary to Ms Passey’s submissions, it is not to the point that the Company paid the legal costs of the first to third defendants (which complaint is addressed at J [196]–[204]). What is to the point is that Ms Passey’s conduct in bringing and then not formally withdrawing her claims against the directors would have added to the legal costs of the proceeding. These costs were, in the end, wasted. Further, taking into account the findings at J [207], [208] and [210], my finding above as to Ms Passey’s motivation in bringing the proceeding against the directors, and the serious nature of the claims which were made, Ms Passey acted unreasonably in commencing the proceeding against the first to third defendants. Further, Ms Passey’s conduct of the proceeding against the directors, including her unexplained failure to prosecute her interlocutory application, her delay in making the decision not to proceed against the directors and her claim for a costs order against the directors (which was only abandoned during the trial) are further reasons to criticise her conduct in this proceeding. On no reasonable view could it be concluded that Ms Passey complied with her obligations under s 37N(1) Federal Court of Australia Act 1976 (Cth).

23    For all of these reasons, the appropriate order is that Ms Passey pay the costs of the first to third defendants of the proceeding on an indemnity basis.

costs order in relation to fourth to seventh defendants

24    The fourth to seventh defendants seek their costs on an indemnity basis as follows:

(a)    for the entire proceeding;

(b)    from 22 September 2021 (with costs on the standard basis prior to this); or

(c)    from 26 November 2021 (with costs on the standard basis prior to this).

25    Although Ms Passey appears to accept that she should pay the costs of these defendants, she submits that it should be on a party and party basis for the entire proceeding.

Whether indemnity costs should be ordered for entire proceeding

26    In Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No 2) [2017] FCAFC 116, the Full Court (Jagot, Yates and Murphy JJ) stated at [4]–[5]:

Usually the Court will award costs to the successful party on a party/party basis, but where the circumstances of the case warrant a departure from the usual course the Court may order indemnity costs. The principles relevant to an award of indemnity costs are well-established. There can be no exhaustive list of the circumstances that may warrant the exercise of the discretion.

In broad terms an order for indemnity costs requires that some special or unusual feature arises: Cirillo v Consolidated Press Property Ltd (formerly known as Citicorp Australia Ltd) (No 2) [2007] FCA 179 at [3] (Finn J). Indemnity costs are not punitive but are designed for “compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the Court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs”: Hamod v New South Wales (2002) 188 ALR 659 at 665 (Gray J, with whom Carr and Goldberg JJ agreed). Such circumstances may include where allegations are made “which ought never to have been made”, where the case is “unduly prolonged by groundless contentions” (Ragata Developments Pty Ltd v Westpac Banking Corporation [1993] FCA 115 at [15], [17] (Davies J)), and where “the applicant, properly advised, should have known that he had no chance of success” (Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401 (Woodward J)) or “persists in what should on proper consideration be seen to be a hopeless case” (J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (WA Branch) (No 2) (1993) 46 IR 301 at 303 (French J)).

27    It is correct to submit, as the defendants do, that findings were made of the weaknesses in Ms Passey’s case and the lack of evidence about aspects of her claims. It is also correct that Ms Passey was wholly unsuccessful in her claims against the defendants.

28    However, the facts underlying Ms Passey’s claim were, in some respects, atypical having regard to previous case law. Further, the particular focus of Ms Passey’s initial complaints was upon transactions which saw funds being transferred out of the Company to related companies in which she had no interest. It therefore could not be said that Ms Passey’s claim against the fourth to seventh defendants lacked such merit that it was obvious that it should not have been brought at all.

29    For these reasons, Ms Passey’s case does not rise as high as being one which was untenable and misconceived from the beginning, as submitted by the defendants. This is not a situation where allegations were made “which ought never to have been made” or where “the applicant, properly advised, should have known that [she] had no chance of success”. It follows that I decline to order that Ms Passey pay the fourth to seventh defendants’ costs of the entire proceeding on an indemnity basis as is sought.

Whether indemnity costs should be ordered for part of the proceeding

30    Rule 25.14(2) of the Federal Court Rules 2011 (Cth) provides that if an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant’s proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent's costs:

(a)    before 11:00am on the second business day after the offer was served – on a party and party basis; and

(b)    after the time mentioned in paragraph (a) – on an indemnity basis.

31    In Anchorage Capital Partners, the Full Court observed at [6]–[8] that:

A well-established circumstance justifying an award of indemnity costs is an imprudent refusal of an offer to compromise. In such cases, a key question is whether the offeree’s refusal of the offer was “unreasonable” when viewed in light of the circumstances existing at the time the offer was rejected.

The circumstances to be taken into account in determining whether rejection of an offer was “unreasonable” cannot be stated exhaustively but may include, for example:

(a)    the stage of the proceeding at which the offer was received;

(b)    the time allowed to the offeree to consider the offer;

(c)    the extent of the compromise offered;

(d)    the offeree’s prospects of success, assessed as at the date of the offer;

(e)    the clarity with which the terms of the offer were expressed; and

(f)    whether the offer foreshadowed an application for an indemnity costs in the event of the offeree rejecting it.

An unsuccessful party is not liable to pay indemnity costs merely because it received an offer to settle on terms more favourable than it achieved at trial and rejected that offer. … assessment of the “unreasonableness” of an offeree’s refusal of a settlement offer is a broad-ranging inquiry that is not restricted to consideration of the extent or quantum of the compromise offered.

(citations omitted)

32    This passage was cited with approval in Wills v Chief Executive Officer of the Australian Skills Quality Authority [2022] FCAFC 43 (Logan, Griffiths and Perry JJ) at [23].

33    On 20 September 2021, the defendants’ lawyers wrote to Ms Passey’s lawyers on a “without prejudice except as to costs” basis stating why, on multiple grounds, Ms Passey’s application was misconceived and bound to fail. The letter contained what was the first offer by the defendants to pay Ms Passey the sum of $330,000, inclusive of costs, in accordance with the principles stated in Calderbank v Calderbank [1975] 3 All ER 333 as well as pursuant to Part 25 of the Rules.

34    The first offer was expressed to be open for acceptance until 4 October 2021, was in full settlement of the claim and, by way of cover letter, was expressed to be $260,000 for the value of Ms Passey’s shares in the Company and $70,000 for costs on a standard basis.

35    The first offer was not accepted.

36    When Ms Passey commenced this proceeding, she filed an affidavit which expressed concerns about matters concerning the Company about which she said that she lacked information.

37    By the time the first offer was made, Ms Passey had been provided with a large volume of documents, including financial information, relating to the Company. The documents provided are listed in Schedule A to the consent order of Greenwood J dated 11 May 2021. In addition, Ms Passey had been served with an expert report of Mr Peter Haley which evaluated the information about the financial position and transactions of the Company and which valued her shares at between $204,383 and 239,445. She had also been served with affidavit material of the three directors which contained information which should have addressed many of the concerns she had expressed at the commencement of the proceeding. This was comprised of an affidavit of Mr Darren Wallis filed on 16 September 2021 (approximately 300 pages in length), an affidavit of Mr Leigh Wallis filed on 16 September 2021 (more than 80 pages in length) and an affidavit of Mr Gardner filed on 24 September 2021.

38    However, it is likely that, having regard to the volume of material served on Ms Passey in September 2021 and the timing of service of that material, Ms Passey (and her legal advisers) were not able to consider it and form a view about the prospects of success of her claim in the time between the receipt of that material and the date of expiry of the first offer.

39    In these circumstances, I am unable to conclude that Ms Passey acted unreasonably in failing to accept the first offer.

40    On 28 September 2021, trial dates were allocated. On 14 October 2021, Ms Passey filed her statement of claim. On 8 November 2021, the defendants filed their defence. Ms Passey filed a reply on 16 November 2021.

41    By reason of these matters and properly advised, Ms Passey was aware (or ought to have been aware) by mid-November 2021 of the legal and factual issues in the case, the matters on which she bore the onus of proof and the impediments to her success at trial. She had also had sufficient time to digest the documents, affidavits, expert report and defence served by the defendants. This information was more than sufficient for a view as to her prospects of success to be formed.

42    On 24 November 2021, the defendants made a second offer pursuant to r 25.01. The second offer was open to be accepted until 8 December 2021. It included an offer of $401,000 for the shareholders (or their nominee) to purchase Ms Passey’s shares in the Company and an offer to pay Ms Passey’s costs of the proceedings on a party and party basis, in an amount to be agreed, or failing agreement, to be taxed. The second offer was not accepted, the matter proceeded to trial and Ms Passey’s claim was dismissed.

43    Contrary to the submissions made by Ms Passey and for the reasons explained above, Ms Passey was in a position to assess the “full force” of the case against her when she received the second offer. The fact that further affidavits were served by the defendants and a joint expert report prepared after 8 December 2021 does not affect this conclusion. It follows that Ms Passey unreasonably failed to accept the second offer.

44    Accordingly, pursuant to r 25.14(2), the fourth to seventh defendants are entitled to an order that Ms Passey pay their costs of the proceeding on a party and party basis up to 11.00am on 26 November 2021 and thereafter on an indemnity basis.

Associate:

Dated:    11 May 2022

SCHEDULE OF PARTIES