Federal Court of Australia

Sandys Swim Pty Ltd v Morgan (No 2) [2023] FCA 107

ORDERS

THE COURT ORDERS THAT:

1.    The applicant pay the respondent’s costs on a lump-sum basis in the amount of $33,720.90.

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

REASONS FOR JUDGMENT

SARAH C DERRINGTON J:

Introduction

1    This matter concerns an application to set aside a creditor’s statutory demand for payment dated 26 July 2022 following the refusal of the application by a Registrar of this Court. The central issue was whether, the Applicant, Sandys Swim failed to make and serve the application and supporting affidavit within 21 days after it was brought to the attention of the sole director, Mr Brown, such that the application fails to meet the statutory threshold in s 459G of the Corporations Act 2001 (Cth).

2    On 23 December 2022, following a de novo hearing of the application on 19 December 2022, the Court delivered its reasons for judgment concerning the substantive issues in dispute in the matter: Sandys Swim Pty Ltd v Morgan [2022] FCA 1574. The Court dismissed the application and invited the parties to provide short written submissions on the appropriate costs orders.

3    Both parties filed written submission on 20 January 2023. The Respondent, Mr Morgan relied on three affidavits of Melany Karen Dowse filed on 26 September 2022 (September Aff-MKD), 18 November 2022 (November Aff-MKD), and 20 January 2023 (January Aff-MKD). To the extent that leave was required to file the latter affidavit, leave should be granted. Sandys Swim relied on the affidavit of Alex Sandy Brown sworn on 30 September 2022(Aff-ASB).

4    Relevant to the determination of the issue as to costs, by order of a Judge made on 9 December 2022, Sandys Swim was granted leave pursuant to r 1.34 of the Federal Court Rules 2011 (Cth) to be represented by its director, who is not legally qualified, Mr Brown. Mr Brown appeared at the hearing of the substantive application and made oral and written submissions. It is apparent that he also prepared the Sandys Swim’s submissions on costs.

5    In its submissions, Mr Morgan contended that Sandys Swim and Mr Brown should pay, jointly and severally, his costs of the proceeding, including the hearing before the Registrar, on the indemnity (or alternatively standard) basis, fixed in the sum of either $42,671.80 (indemnity) or $33,720.90 (party and party). Alternatively, Mr Morgan seeks an order against Sandys Swim alone either on the indemnity or standard basis.

Sandys Swim’s contention

Should Mr Morgan be denied his costs?

6    In its submissions, Sandys Swim contends there should be no order as to costs on two bases: first, Sandys Swim has lodged an appeal against the substantive judgment; secondly, the alleged default, non-compliance and contempt of court by Mr Morgan. Further, Sandys Swim contends there should be no costs order against Mr Brown personally, essentially for the same reasons as given by Bowskill J in Onza Industries Pty Ltd v Tingalpa Tyre & Mechanical Pty Ltd (No 2) [2021] QSC 32.

7    It suffices to observe that the commencement of appeal processes against orders of the Court does not provide a basis for resisting an order for costs in relation to the proceedings from which the appeal is brought. As to Sandys Swim’s second basis for resisting a costs order, Sandys Swim relied on Aff-ASB in support of its allegations against Mr Morgan, which are said to support its submission that Mr Morgan should be denied his costs. Sandys Swim submitted there were eight occasions of deliberate non-compliance by Mr Morgan with orders of the Court and that in such circumstances, there should be no order as to costs, relying particularly on Crawford v Australian Capital Territory [2015] ACTSC 282; Monaghan v Australian Capital Territory [2015] ACTSC 187; Leonard v Northside Community Services Ltd [2016] ACTSC 90; Arkaroola Pty Ltd v Niugini Mining (Australia) Pty Ltd [2001] QSC 410; and Law Institute of Victoria v Nagle [2005] VSC 47.

8    Sandys Swim appears to rely on Crawford, Mongahan, and Leonard as authority for the proposition that a non-party costs can be made against a defaulting party’s legal advisors. The proposition is, on its face, uncontroversial. No such order was made in either of those cases: rather, liberty to apply for such an order was granted. Further, Sandys Swim has not sought an order for costs against Mr Morgan’s solicitors.

9    In Crawford, there had been six directions requiring the service of an expert’s report and ten directions hearing before a deputy registrar of the Court in a period spanning 24 March 2014 to 19 June 2015. The passage on which Sandys Swim relies is at [22]:  

[i]t is fundamentally important that case management directions of the Court are recognised as being orders of the Court rather than administrative suggestions that may be disobeyed if inconvenient. The manner in which the solicitors for the plaintiff have addressed the plaintiff’s non-compliance with orders of the Court appears to reflect an attitude that non-compliance with the directions made by the Court is an administrative matter from which a party will be excused, that in the event of non-compliance no explanation needs to be given on oath or affirmation of the reasons for the non-compliance and that non-compliance will have few if any consequences for the defaulting party. 

10    Those observations by Mossop AsJ were made in the context of proceedings where there had been persistent non-compliance by the plaintiff with numerous orders of the Court causing significant delay to the conduct of the proceedings (at [30]). In those circumstances, the plaintiff was ordered to pay the costs of each hearing after 24 May 2014 and the costs of the unsuccessful defendant’s application to dismiss the proceeding for failure to comply with directions and/or for want of prosecution.

11    Arkaroola was also concerned with an application to dismiss proceedings for want of prosecution. The successful applicant/defendant was denied the usual costs order in its favour on the basis that it had failed to comply with r 444 of the Uniform Civil Procedure Rules (Qld), which had been introduced “with a view to minimising costs and it is important that the Court is astute to enforce compliance with the rule.” (per Fryberg J).

12    In Nagle, Mr Nagel was charged with 49 separate charges of contempt for breaching an undertaking given to the Court not to engage in legal practice. He was found guilty of contempt in relation to 44 of the charges. It was in the context of such serious misconduct that Gillard J observed, at [5]:

It is vital to the administration of justice in this State that a person bound by an Order obeys it. Disobedience of an order poses a threat to the administration of justice and attacks its very foundation. It threatens the rule of law and its destruction results in anarchy and a return to the law of the jungle. If a person bound by an order wilfully refuses to obey it and is not severely punished for wilful disobedience then parties in litigation will have no confidence in the legal system. Respect for the system must be maintained. There is a public interest factor in punishing a contemnor in most cases, especially where the contempt is a criminal one.

13    The conduct which Sandys Swim contends disentitles Mr Morgan, as the successful party, to an order for costs in his favour is hardly comparable to that referred to in the above authorities. Aff-ASB in fact deposes to only two occasions on which “the Respondent and his solicitors have disobeyed Federal Court Orders” (Aff-ASB at [14]). The first was a failure to comply with an order to file and serve any affidavits in reply and written submissions by 4pm on 23 September 2022, for which an extension of time was sought at 2.40pm on 23 September 2022, and granted, to 26 September 2022 (Aff-ASB at [4]-[6]). The second was the failure to meet the extension that had been granted by emailing the affidavit and submissions at 5.32pm on 26 September 2022 after close of the Registry at 4.30pm.

14    I am not persuaded that there has been any contumelious disregard of the orders of the Court that would displace the general principle that costs should follow the event.

Mr Morgan’s contentions

15    The remaining questions are:

(1)    whether an order for costs should be made against Sandys Swim only or also against Mr Brown personally;

(2)    whether costs should be awarded on a lump sum basis;

(3)    whether the sum awarded should be calculated on a party and party basis or on an indemnity basis.

Should a non-party costs order be made against Mr Brown?

16    As to the first question, although it is rare for costs to be awarded against a non-party, in Consolidated Byrnes Holdings Ltd v Hardel Investments Pty Ltd [2009] FCA 399; 176 FCR 348 at [314], Lander J held that s 1335(2) of the Corporations Act does not limit the operation or reach of s 43(1) of the Federal Court of Australia Act 1976 (Cth) (FCA Act) so as to prevent the Court from making an order for costs against non-parties in proceedings brought under the Corporations Act.

17    In Knight v FP Special Assets Ltd [1992] HCA 28; 174 CLR 178 at [192]-[193], Mason CJ and Deane J (with whom Gaudron J agreed) stated:

Obviously, the prima facie general principle is that an order for costs is only made against a party to the litigation. As our discussion of the earlier authorities indicates, there are, however, a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party. Thus, for example, there are several long-established categories of case in which equity recognized that it may be appropriate for such an order to be made.

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.

18    Dawson J stated at [202]:

The cases therefore establish a long-asserted jurisdiction to award costs in appropriate cases against a person who is not a party to the proceedings where that person is the effective litigant standing behind an actual party or where there has been a contempt or abuse of the process of the court.

19    As Thawley J observed in Vanguard 2017 Pty Ltd v Modena Properties Pty Ltd (No 2) [2018] FCA 1461 at [42], Mason CJ and Deane J expressly indicated that they were recognising a “general category of case”. The categories of case which may attract the exercise of the discretion are not closed: Kebaro Pty Ltd v Saunders [2003] FCAFC 5 at [103] (Beaumont, Sundberg and Hely JJ).

20    As to the circumstances in which such an order might be made, “at least some, if not a majority”, of the following criteria were outlined by Basten JA (with whom Beazley and Giles JJA agreed) in FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 at [210]:

(a)     the unsuccessful party to the proceeding was the moving party and not the defendant;

(b)     the source of the funds for the litigation was the non-party or its principal;

(c)     the conduct of the litigation was unreasonable or improper;

(d)     the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest; and

(e)     the unsuccessful party was insolvent or could otherwise be described as a person of straw.

21    In the present case, Sandys Swim is the unsuccessful party who commenced the proceedings to set aside the statutory demand. It cannot be said that there was anything unreasonable or improper about commencing the litigation – the precise point determined on the application, being whether service of a statutory demand by email was effective on a particular date by reason of the operation of s 600G and the definition of “nominated electronic address” in s 9 of the Corporations Act, was novel.

22    As deposed to in the September Aff-MKD, the Australian Securities and Investment Commission Extract for Sandys Swim as at 26 September 2022 revealed that Sandys Swim had a paid up share capital of $3 and was subject to a Notice of Application to wind up the company dated 17 August 2022. There is no evidence of Sandys Swim owning any other assets. Sandys Swim is clearly “a person of straw”. To the extent that funds were spent prosecuting the application, Mr Brown was the source of those funds, albeit he appeared self-represented on behalf of Sandys Swim.

23    As the sole-director and shareholder of Sandys Swim, there is little difficulty connecting Mr Brown’s interests in pursuing the litigation with those of Sandys Swim: Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd (No 10) [2009] FCA 498. Mr Brown is the directing mind and will of the company. That of itself is not sufficient to disengage the ordinary rule that it is the parties to the proceedings who bear the costs. Such conduct is consistent with the director’s duties to the company. As was observed by Lord LJ (Nourse and Ralph Gibson LJJ agreeing) in Taylor v Pace Developments Ltd [1991] BCC 406 at 409F-H:

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

24    What needs to be established in order to warrant the exercise of the discretion to award costs against Mr Brown as a non-party director is whether his management of the litigation was in breach of a duty to the company, or was in some material way improper, or where the director caused the litigation to be conducted in a manner intended to increase irrecoverable costs of the opposing party: Vanguard 2017 at [46].

25    Mr Morgan contended that the following matters tell in favour of the exercise of the discretion to award costs against Mr Brown personally: commencing the litigation outside the statutory time period; forcing the defendant to defend an application that lacked jurisdiction which required six appearances, consideration of 20 affidavits, and various repetitive and irrelevant submissions; seeking adjournments on hearing dates; bringing misconceived applications including for recusal of a judicial officer; failing to obtain legal representation despite being informed by the Court on several occasions of the need to be represented; and continuing to pursue the litigation after rejecting “wholly reasonable offers”.

26    Although Mr Morgan is correct that he was forced to defend an application that lacked jurisdiction, as has already been observed, the precise basis on which that was so had not previously been decided. Mr Brown cannot be criticised for testing the bounds.

27    There is some force in Mr Morgan’s contention that the matter would likely have resolved much earlier had Sandys Swim been legally represented. Nevertheless, Mr Brown was given leave to appear repeatedly: on 9 September 2022 by a Registrar for the purposes of that day’s mention only; on 7 October 2022 by a Registrar for the purpose of the hearing on that day; and on 9 December 2022 by a Judge for the ongoing proceeding. Having been given leave to appear on each occasion prior to the hearing before me, Mr Brown cannot be criticised ex post facto for continuing to conduct the litigation in the manner in which he had chosen to do so, albeit that it was unorthodox and undoubtedly increased irrecoverable costs.

28    As deposed by Ms Dowse in the November Aff-MKD, Mr Morgan made two offers of settlement. The correspondence exhibited to that affidavit evidences the following:

(1)    The first, by letter dated 27 September 2022, offered to resolve the proceedings on the basis that the application be dismissed with no order as to costs. The offer was open for acceptance until 4pm on 4 October 2022: November Aff-MKD, Annexure MKD5. The email by which the letter was presumably was not annexed and therefore there is no time stamp on that offer.

(2)    The second, by email at 10.13am on 7 October 2022, offered to resolve the proceedings on the basis that the application be dismissed and Sandys Swim and Mr Brown pay jointly and severally Mr Morgan’s costs thrown away fixed in the amount of $5,500: November Aff-MKD, Annexure MKD6. The correspondence put Sandys Swim on notice that if appearances were required that morning before the Registrar, both without prejudice offers would be brought to the attention of the court on the question of costs on an indemnity basis against both Sandys Swim and Mr Brown. The email also referred to a case reference that had been sent to the parties by the Registrar.

(3)    By email sent at 10.27am on 7 October 2022, Mr Brown responded, relevantly, that “I did not see Spencer’s [the litigation director at the solicitors for Mr Morgan] Without Prejudice offer until this week, and replied yesterday to agree to that, plus, I would also dismiss my Application of September 30 (attached) …”.

(4)    By email sent at 10.35am on 7 October 2022, Mr Morgan’s solicitor asked again if the terms of the second offer of settlement were acceptable and advising she did not have instructions to adjourn the matter.

(5)    By email sent at 10.36am on 7 October 2022, Mr Brown responded, “As mentioned, I had agreed to Spencer’s proposal and emailed him yesterday, and as a bonus will also agree to withdraw my application of September 30”.

Mr Morgan’s solicitor responded by email sent at 10.43am on 7 October 2022 in the following terms, “That offer was only available for acceptance until 4pm on 4 October 2022 and accordingly, your acceptance on 6 October 2022 is ineffective”.

29    No evidence was tendered by Mr Morgan to contradict Mr Brown’s assertion that he had purported to accept the lapsed offer to walk away bearing his own costs the day prior to the second settlement offer being made. In Annexure ASB-114 to Mr Brown’s affidavit dated 7 December 2022, a screenshot of his Gmail account records, relevantly;

    an incoming email from Ms Dowse on September 27 captioned, “Morgan – ats – Sandys Swim Pty Ltd – ACD42/2022 – Dear Mr Brown, Please se…

    an outbound email on October 6 captioned, “reply to your Settlement Offer – proposing a settlement of these Federal Court proce…”

    an inbound email from Ms Dowse on October 7 captioned, “ACD42/22 - SANDYS SWIM v MORGAN – That offer was only available for acc…”

30    In the absence of any other evidence, I am prepared to accept that it is more probable than not that Mr Brown attempted to accept the first offer on 6 October 2022. Plainly, by that time, the first offer had lapsed. Nevertheless, by the morning of 7 October, Mr Morgan was aware that Mr Brown was prepared to walk away bearing his costs and to discontinue his application of 30 September 2022. At that point, there was perhaps still an opportunity for the matter to have been resolved without either party incurring any additional costs. For that reason, it is not appropriate to characterise Mr Brown’s conduct as being in the nature of failure to accept “wholly reasonable offers”, as submitted by Mr Morgan.

31    For these reasons, it is not appropriate to make a non-party costs order against Mr Brown, the sole director of Sandys Swim.

Should a lump-sum costs order be made?

32    As to the second question, the Court has power to award costs to a party in a specified sum: FCA Act, s 43(3)(d) and Rules, r 40.02(b).

33    The principles applying to the Court’s power to order lump-sum costs, and the quantification of costs where such an order is made were summarised by Markovic J in LFDB v MS S M (No 2) [2018] FCA 2062 at [6]-[8]:

6    The Court’s power to order lump sum costs is discretionary and may be exercised whenever the circumstances warrant it: Su v Australian Fisheries Management Authority (No 3) [2008] FCA 2018 at [1] (Reeves J).

7    A Full Court of this Court (Allsop CJ, Besanko and Middleton JJ) in Paciocco v ANZ (No 2) (2017) 253 FCR 403 at [16]-[17] explained the following in relation to the Court making orders for lump sum costs:

16    On 25 October 2016 the Chief Justice issued the Central Practice Note: National Court Framework and Case Management (CPN-1) (‘Central Practice Note’) and the Costs Practice Note (GPN COSTS) (‘Costs Practice Note’). The Central Practice Note states that the determination of the quantum of costs of a successful party (in a proceeding) should not be delayed and, to this end, the Court will, where appropriate, facilitate the making of lump sum costs orders. The Costs Practice Note provides that the Court’s preference, wherever it is practicable and appropriate to do so, is to make a lump sum costs order so as to finalise costs and avoid potentially expensive and lengthy taxation hearings. It makes clear that the Court should now proceed on the basis that taxation “should be the exception” and confined to matters which are unable to be determined otherwise: Costs Practice Note at [3.3]. The guiding principles are to reduce delay and cost when quantifying costs: Costs Practice Note at [3.1].

17    The Costs Practice Note provides for the Court to make use of sophisticated costs orders and procedures, and to take such steps as it considers necessary to ensure that it has the requisite level of detail to make a costs determination that is fair, logical and reasonable and to avoid orders that lead to potentially expensive and lengthy taxation hearings: Costs Practice Note at [3.3].

8    In Bitek Pty Ltd v IConnect Pty Ltd (2012) 290 ALR 288; [2012] FCA 506 at [18] Kenny J said the following in relation to the determination of the appropriate quantum of a lump sum costs order:

18    The starting point for the fixing of costs is the charges rendered by the applicant’s solicitors: Beach Petroleum at FCR 124; ALR 165 and Hamod v New South Wales [2011] NSWCA 375 at [820] per Beazley JA (with whom Giles and Whealy JJA agreed). The sum of costs fixed should also be proportionate to the nature, including the complexity, of the case: see Canvas Graphics Pty Ltd v Kodak (A’asia) Ptd Ltd [1998] FCA 23. As Beazley JA said in Hamod, at [820], citing, among others, Beach Petroleum at FCR 123; ALR 164:

[820] The approach taken to estimate the costs to be ordered must be logical, fair and reasonable … This may involve an impressionistic discount of the costs actually incurred or estimated, in order to take into account the contingencies that would be relevant in any formal costs assessment … [Citations omitted.]

34    I gratefully adopt her Honour’s summary.

35    In the present case, Sandys Swim did not submit that a lump-sum order was not appropriate in the event that his primary submission, that there should be no order as to costs, was not accepted. In the circumstances already described above where Sandys Swim is a “person of straw”, it would be inappropriate to embark on a taxation hearing if the Court is otherwise able to arrive at a lump-sum.

36    Mr Morgan relies on November Aff-MKD and January Aff-MKD to support his claim for a lump-sum order in the sum of $33,720.90 on a party and party basis, or $42,671.80 on an indemnity basis. The claim includes the reserved costs of the Directions Hearing pursuant to Orders made on 23 November 2022 and the costs of the hearing before the Registrar following the dismissal of the application on 11 November 2022. Ms Dowse’s affidavits accord with the Guide for Preparing a Costs Summary (Supporting a lump-sum order request) which is Annexure A to the Federal Court Costs Practice Note (GPN-Costs). It includes:

(1)    The verification required by Pt A of Annexure A. In that regard Mr Morgan is not entitled to claim input tax credits in respect of any GST relevant to the claims in the Costs Summary (November Aff-MKD [4]; January Aff-MKD [4]).

(2)    The information required by Part B of Annexure A, insofar as it is relevant, as follows:

(a)    The costs summary has not been prepared with the assistance of an expert as to costs (November Aff-MKD [9]; January Aff-MKD [9]);

(b)    That Sandys Swim is liable to pay the costs summary on either a party and party basis or, if the Court so orders, on an indemnity basis (November Aff-MKD [10]; January Aff-MKD [10]);

(c)    The amount of the lump-sum sought (November Aff-MKD [29] – [30] - $23,109.90/$29,946.40; January Aff-MKD [48] – [49] - $10,611.00 /$12,725.40);

(d)    How that amount has been calculated, including any discounts that have been applied (November Aff-MKD [20]-[21], [24]-[25]; January Aff-MKD [40]-[41], [43]-[44]);

(e)    A summary of the categories of work, albeit not including an estimate in percentage terms of the proportion that each category of work constitutes of the total costs claimed. The summary descends to detailing the length of each document reviewed by Ms Dowse (November Aff-MKD [19]; January Aff-MKD [39]);

(f)    In relation to each person who performed the work, a summary of their hourly rate, total hours worked and an estimate, in percentage terms, of the proportion of the total sum claimed attributable to that person (November Aff-MKD [26]-[27]; January Aff-MKD [45]-[46]);

(g)    A summary of the disbursements incurred including fees charged by counsel (November Aff-MKD [29]; January Aff-MKD [41]);

(h)    Formal without prejudice offers were made on 27 September 2022 and 7 October 2022, the first of which lapsed and the second of which was rejected by Sandys Swim (November Aff-MKD [22]).

37    I am satisfied that it is appropriate for the Court to make an order that costs be assessed on a lump-sum basis in this case. The Court has a wide discretion to make an order that costs be quantified on that basis and there is nothing in this case that persuades me that such an order should not be made.

Should costs be awarded on a party and party basis or on an indemnity basis?

38    As to the quantum that should be awarded, for the reasons that I have already expressed in relation to the question of whether a non-party costs order should be made, I decline to order costs calculated on an indemnity basis. Although Sandys Swim allowed the first offer to lapse, it is far from clear from the matters outlined above that this could be described as a rejection of the offer in circumstances that should lead to an order for indemnity costs. No doubt the alacrity with which its claim to have accepted that offer was rebuffed had some impact on Sandys Swim’s attitude to the subsequent offer on the morning of the hearing before the Registrar.

What quantum should be awarded?

39    The lump-sum sought by Mr Morgan, calculated on a party and party basis, is $33,720.90 comprising $10,611.00 in respect of his successful application before the Court on 19 December 2022 and $23,109.90 in respect of his successful application before the Registrar on 7 October 2022. This amount has been calculated by:

(1)    adding together the professional fees charged by Gibbs Wright Litigation Lawyers in respect of each application;

(2)    discounting those amounts by 35% to account for Mr Morgan’s estimated party and party costs;

(3)    adding counsel’s fees.

40    No amount has been claimed in respect of the preparation of the submissions as to costs.

41    Sandys Swim did not make any submission about the appropriateness or otherwise of the costs incurred by Mr Morgan.

Conclusion

42    It is appropriate to order that Sandys Swim pay Mr Morgan’s costs on a lump-sum basis in accordance with these reasons in the amount of $33,720.90.

Associate:

Dated:    17 February 2023