Federal Court of Australia

CIP Group Pty Ltd v So (No 2) [2023] FCA 321

ORDERS

THE COURT ORDERS THAT:

1.    The first and seventeenth respondents pay the applicants’ costs of the application for leave pursuant to ss 236 and 237 of the Corporations Act 2001 (Cth), such costs not to include:

(a)    the costs of drafting any statement of claim; or

(b)    the costs of preparing any affidavits which are used or are reasonably likely to be used in the trial of this proceeding.

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

REASONS FOR JUDGMENT

DERRINGTON J:

Introduction

1    By a decision handed down on 16 December 2022, CIP Group Pty Ltd v So [2022] FCA 1490, the applicants (also referred to in those reasons as the Clancy interests) were granted leave pursuant to ss 236 and 237 of the Corporations Act 2001 (Cth) to bring proceedings in the name of certain companies against the first and seventeenth respondents (referred to as the So interests) for the claims made and the relief claimed in a proposed draft statement of claim. The leave sought was to incorporate the derivative claims into proceedings which had already been commenced against the So interests, or some of them, seeking relief pursuant to ss 232 and 233 of the Corporations Act (the main proceedings).

2    On any view, the application for leave was hard fought and strenuously resisted by the respondents. In the initial reasons, I intimated that the costs of the application should follow the event. However, on the delivery of judgment, the parties sought leave to make further submissions as to costs. That request was acceded to and written submissions were subsequently received. These reasons deal with that issue.

The issue between the parties

3    The applicants, CIP Group Pty Ltd, CIP 1 Pty Ltd and Pyrmont Portfolio Pty Ltd, seek an order that they be paid their costs of the successful application. In doing so, they rely upon a line of authorities in which orders for costs have been made against parties who have opposed a successful application for leave to commence derivative actions. In particular, reliance was placed on the reasons of Brereton J (as his Honour then was) in In the matter of Jimmy’s Recipe Pty Ltd [2018] NSWSC 1331 (Re Jimmy’s Recipe) at [34] – [36], where his Honour observed:

34    I have, on previous occasions, rejected the proposition that costs of applications under s 237 should be left to the Judge determining the derivative proceedings brought pursuant to leave. That is because, in principle, an application under s 237 is a proceeding for final relief, and the proceedings brought with leave are not necessarily brought in the same file or proceedings, the same division or, for that matter, even the same court as the application for leave under s 237. For that reason, it is normally desirable that the costs of the s 237 proceedings be finalised by the judge who hears those proceedings. That is important for a second reason, namely that parties not be encouraged to think that a proceeding under s 237 is an opportunity for those who oppose it to have a “free kick”, for want of a better term, at the plaintiff's case.

35    I am satisfied that the plaintiff, having succeeded on the application over opposition, is entitled to her costs against the defendants who opposed it, although my mind has wandered to some extent between whether that should be contingent on the successful outcome of the ultimate proceedings or not. However, because in substance these proceedings are not an interlocutory application in the derivative proceedings but a separate final proceeding, in my view, a final costs order should be made now.

36    It is not really to the point that the plaintiff would have had to seek leave anyway. Had leave not been opposed, it would have been dealt with as a short matter in the Corporations List one Monday, without requiring a two-day hearing at substantially greater expense. The fact is that when parties elect to oppose applications though they would have had to be made in any event, they thereby elect to expose themselves to the applicant's costs of making the application.

4    There is a not insignificant number of cases in which an order for costs has been made against a party who has opposed an application for leave to bring derivative proceedings: Kidd v Kwek [2022] FCA 1298 (Kidd v Kwek), [18] – [20] per McEvoy J; In the matter of Ulan Stone Pty Ltd [2020] NSWSC 937 (In the matter of Ulan Stone Pty Ltd), [23] – [25] per Black J; In the matter of Karinya Haulage Pty Ltd [2017] NSWSC 888 (In the matter of Karinya Haulage Pty Ltd), [19] – [22] per Brereton J; In the matter of Bakers Extra Pty Ltd [2017] NSWSC 1257 (In the matter of Bakers Extra Pty Ltd), [53] per Brereton J and Hislop v Paltar Petroleum Ltd (No 3) [2017] FCA 1253, [149] per Gleeson J.

5    It can be observed that, in these cases, the justifications for the making of costs orders varied. However, they included the following, which are presently relevant:

(a)    Even though an application for leave needs to be made in any event, the costs of considering the opposition’s material and preparing responsive affidavits would not have had to be incurred had there been no opposition: Kidd v Kwek [19].

(b)    It is no bar to an order for costs that, in the course of the making of an application of this nature, the applicant makes alterations to its position and, in particular, in relation to any offered indemnity in respect of costs, as that is a usual feature of such applications: In the matter of Ulan Stone Pty Ltd [25].

(c)    It is inappropriate to order that the costs be reserved because, once the derivative proceedings are commenced, the parties are often different: In the matter of Karinya Haulage Pty Ltd [20]. Although in this case the parties may be substantially the same, the nature of the claims against them will be different.

(d)    It is usually desirable that the costs of the s 237 proceedings be dealt with in the proceedings by which the application for leave is made and not separately. In particular, “the respondents to s 237 proceedings should not be encouraged to oppose the grant of leave by the view that an immediate costs order will not be made”: In the matter of Bakers Extra Pty Ltd [53].

6    The alternate view is that no order for costs should be made on the application for leave and any such determination should await the outcome of the proceedings. The underlying rationale for this approach was recently articulated by Black J in In the matter of Carbon Copies Composites Pty Ltd [2022] NSWSC 1762 [26]. When dealing with the submission that opposition to the application for leave had increased the costs, he said:

[T]he common practice in respect of costs of an application for leave to bring derivative proceedings, is not to order that the plaintiff has the costs of that application unconditionally, not least because it is not apparent why the plaintiff should have the costs of an application for leave to bring proceedings which ultimately fails. An order is often made that the costs of the application, or some part of them, should be the applicant's costs in the cause of the substantive proceedings: Cassegrain v Gerard Cassegrain and Co Pty Ltd [2008] NSWSC 1159 at [19]; Re Imperium Projects Pty Ltd [2015] NSWSC 123; Redenbach v Legal Practice Management Group Pty Ltd (2018) 125 ACSR 513; [2018] NSWSC 527 at [101]. It does not seem to me to be necessary or desirable to reach an ultimate conclusion as to that matter now, where the parties and the Court will be better informed as to the relevant issues at the conclusion of the proceedings, when they are substantively determined, or, possibly, resolved between the parties. In these circumstances, I will not accede to the Plaintiffs’ application that he have his costs of the application unconditionally, and I will, as Mr Bell accepted could properly be done, reserve the costs of the application.

7    In Cassegrain v Gerard Cassegrain and Co Pty Ltd [2008] NSWSC 1159 [19], Sackville AJA considered it the “appropriate course” on a leave application to make costs orders analogous to those made in interlocutory proceedings, whereby the costs of the party that succeeded on its application were to be designated as that party’s costs in the cause. That party would recover its costs if it was ultimately successful in the action, but otherwise would not. The unsuccessful opponent to the application would not recover its costs, even if it was later to succeed in the derivative action. Similarly, in Re Imperium Projects Pty Ltd [2015] NSWSC 123 [8], Black J followed what he saw as the usual principle, that “[t]he costs for interlocutory proceedings that are inextricably connected to a primary action are usually dealt with by an order for costs in the cause”. He expressed similar views in Redenbach v Legal Practice Management Group Pty Ltd (2018) 125 ACSR 513, 542 [101].

8    The difficulty here, therefore, is that there exist contrary statements from two extremely eminent jurists as to the approach to costs on applications for leave to commence derivative proceedings.

9    In such a context, it is apt to keep steadily in mind that the power to make an order for costs pursuant to s 43 of the Federal Court of Australia Act 1976 (Cth) is to be exercised in the discretion of the Court or the Judge and is not to be fettered by any judicial exegesis. That said, it is necessary, where appropriate, that the power be exercised consistently in substantially similar circumstances. However, as the above discussion indicates, there are inconsistent lines of authority in relation to what might be characterised as the “usual manner” in which the power to award costs is exercised on an application for leave to bring derivative proceedings under s 237 of the Corporations Act.

The circumstances of the present case

10    With respect to the submissions of the So interests to the contrary, it is not determinative one way or the other whether an application for leave under s 237 is final or interlocutory. Even if the decision on that topic in McEvoy v Caplan (2010) 78 ACSR 167 is correct, the interlocutory nature of the application, if it is properly so described, does not necessarily make it more likely that the costs will be reserved. I add that the respondents’ written submissions criticised Brereton J’s decision in Re Jimmy’s Recipe as being founded upon an assumption, contended to be incorrect, that the application for leave was final. It is pellucid that his Honour did not proceed upon any such assumption. Rather, he expressly identified that such an application was “in principle” one for final relief or “in substance” not interlocutory, and these are entirely correct observations.

11    In this context, it is somewhat irrelevant whether the relief under s 237 is sought by the filing of an originating application or, as occurred in this case, the filing of an interlocutory application. The nature of the application remains the same.

12    It is not irrelevant to note that, in most instances, courts make orders finally disposing of the question of the costs of the application and that is so regardless of whether it is ordered that the costs of the successful applicant be paid absolutely or that they be their costs in the cause. Rarely is the costs issue is not dealt with finally.

13    It is, perhaps, not surprising that dispositive cost orders are usually made given that the application is substantial in that, if it is successful, it results in the conferral of rights on the applicant to bring proceedings on behalf of a corporation. Even though there is no determination of the antecedent legal rights and obligations between parties, but instead the creation of new rights, it does not follow that the application lacks import. So much is apparent from the manner in which the orders sought by the Clancy interests in this matter were so energetically opposed.

14    It was submitted for the So interests that the point made in Re Jimmy’s Recipe, that the judge hearing the application for leave may not be the same judge who hears the trial of the derivative proceeding, is inapplicable in the Federal Court where the docket system is in place. Whilst it is true that in the vast majority of cases the docket judge will hear and determine all interlocutory matters and the trial, that is not always so and the possibility exists that the judge who ultimately hears the substantive matter will have no knowledge of the circumstances of a prior interlocutory application. For this reason, this also is not a factor with any decisive effect on the question of costs.

15    The respondents submitted that this Court should follow the principle referred to in Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 where, thirteen years prior to Re Jimmy’s Recipe, Brereton J had said:

[59] The proceedings for leave are final, not interlocutory in nature. Here, the plaintiff/respondent, far from conceding that a grant of leave was almost inevitable, and notwithstanding the (correct) concession that there was a serious question to be tried, firmly opposed the grant of leave. The defendant/applicant has substantially succeeded, the only point on which it has not having occupied practically no time. Yet it may turn out that the proposed derivative action fails. In my opinion, therefore, having regard to the various considerations mentioned by Young J in Devereaux, the costs of the motion should be the Cross-claimants’ costs in the proceedings on HME’s cross-claim.

16    Leaving aside the first sentence, the So interests relied upon the point that, as the applicants may not be successful in the derivative proceedings, no order for costs should be made in their favour. Yet, in that case, an order for costs was made in favour of the applicant for leave. The form of order was that the applicant have its “costs in the proceeding”, such that they were only recoverable if the derivative action was successful.

17    The fact that the applicant for leave may not be successful in the derivative action has certainly swayed the exercise of discretion in a number of cases. The underlying rationale is essentially that, if the derivative action is unsuccessful, then the application for leave should not have been made and the applicant should not recover the costs of it. However, it may be that this nexus between the application for leave and the substantive derivative action should not carry such significant weight. The application for leave is a separate and distinct proceeding to the derivative action itself. The issue to be determined, namely whether the grant of leave is in the best interests of the company, is decidedly different to those that will be litigated if leave is granted. Putting to one side the question of the prospects of success, the central considerations on an application for leave do not go to or concern the merits of the action. Moreover, the parties to the application know that success or failure in it will most likely depend upon those separate and distinct considerations and the application is fought on that basis. It is not infrequently the case that the application turns on the applicant’s ability to satisfy the Court that it is able to provide adequate security for the costs of the action. In these circumstances, the application for leave is readily regarded as being self-contained and the matters relevant to the Court’s exercise of discretion in relation to it are not the subject of controversy in any following proceedings. Those matters will not be elucidated by additional evidence in the hearing of the derivative action.

18    The basis for the proposition that the applicant’s entitlement to the costs of the application for leave should be dependent upon its success in the derivative action has not clearly been stated, other than by the implied suggestion that some form of deity-like prescience should be exercised by the applicant. Whilst the applicant for leave will not succeed without establishing some prospects of success in the proposed action, the application is necessarily made at an early stage when it is usually the case that not all of the evidence is known. It may well be that, on the information known at the time of the application, the prospects of success appear substantial with the result that the application must be considered very reasonably made. However, those prospects may diminish as additional information comes to light in the course of the interlocutory steps in the derivative action and may disappear altogether by the time of trial. Conversely, the prospects may appear only reasonable at the time of the application, but are enhanced as the interlocutory stages of the derivative action occur. There may be many and varied changes in the litigious landscape as the litigation proceeds, some potentially foreseeable and others not. Nevertheless, the question on the application under s 237 is whether, at the time of the application and on the evidence then available, the applicant has prospects of succeeding on the proposed claim. A respondent to the application is aware of that and assesses its prospects of opposing the application accordingly.

19    Further, if the application for leave fails, the unsuccessful applicant will be liable to bear an adverse costs order, and that is so regardless of whether the application failed as a result of a lack of prospects in the derivative action or on some other ground. In those circumstances, the likelihood of success in the derivative proceedings is irrelevant to the question of costs. It might similarly be thought that the success or otherwise of the derivative proceedings should not significantly influence the question of costs should the application for leave be successful. Although there is obviously not precise symmetry between the positions of the applicant and respondent to leave applications under s 237 of the Corporations Act in this respect, neither should there be a greater risk asymmetry between them in relation to the application generally.

20    It would, with respect, place too high a price on the making of an application for leave for it to be usual that, even if the applicant is successful despite strenuous opposition, no effective costs order would be made in its favour. Certainly, there is force in the caution expressed in some authorities that to adopt such a rule would effectively afford a respondent a “free kick”, in that it may contest the application without any expectation that it will be liable to an adverse costs order immediately upon its determination. It would also present an opportunity for the respondent to any such application to generate substantial costs in the course of their failed opposition, and only be called upon to pay the costs, if at all, when the derivative action concludes, which may be years into the future.

21    It was submitted that an award of costs in favour of the applicants in this case would effectively be an award in respect of the work required for the substantive derivative proceedings, because material filed in the main proceedings (which include an oppression claim) was relied upon on the application. This submission appears to have been derived from, or is at least reminiscent of, the observations of McEvoy J in Kidd v Kwek [19], although his Honour plainly approached that matter as a factor which was specific to the circumstances of the case. In the circumstances of the present dispute, the point is also relevant. As was submitted on the respondents’ behalf, the applicants did rely upon a large number of affidavits which had been filed in the main proceedings prior to the making of the application for leave. It was also submitted that the applicants were required to make two attempts at preparing a sustainable statement of claim for the derivative action, and those documents were relied upon in the leave application but will also be used in the main proceeding.

22    There is undoubtedly a risk that, in making an order as to the costs of the application for leave, the applicants will recover some costs related to work that is for, or useful for, the purposes of the main proceeding, which now includes the derivative action. Whilst that may not be a significant factor in many cases, it is in the present case, where a substantial amount of evidence relied upon in the leave application was filed in the main proceedings and will, in all likelihood, be used in those proceedings. However, that is not a reason not to make an order for costs in favour of the successful applicants. Rather, it means that some moulding of the order must occur in order to exclude costs incurred by the applicants which will inure to their benefit in the main proceedings.

23    Similarly, the respondents submitted that, if an order for costs was made, whether it be now or following the determination of the derivative action, some allowance should be made for the applicants’ costs incurred in the preparation of their own material on the leave application. This submission was apparently also sourced from, or addressed in, the decision in Kidd v Kwek, where it was observed at paragraph [18]:

[18] Insofar as the applicant seeks to have his costs of this application on an indemnity basis, I take the view that it was necessary for the applicant, if he wanted to have leave to bring the derivative claims, to make the application that he made. Further, I consider that it was necessary for evidence to be advanced to enable the Court to have the requisite level of satisfaction for the purposes of s 237(2) of the Act. In these circumstances, and having regard in particular to the first Kidd affidavit which was filed on 18 June 2021, the appropriate costs order is that the first, second and third respondents pay the applicant’s costs of this application on and from 15 July 2022, that being the date on which the first tranche of affidavit material in opposition to the application for derivative leave was filed by the respondents.

24    The point made here is that, as the applicants needed to make the application for leave in any event, then even if it had not been opposed they would have incurred a certain amount of costs and, for that reason, no order should be made. However, again, this may be relevant to the structure of the costs order, but it is not relevant to the question of whether it should be made. If the application had not been opposed, there may have been good reason to make the applicants’ costs their costs in the derivative proceedings. However, it was opposed, and strenuously so, with the consequence that a large amount of work was required to be performed to meet a variety of assertions. In this context, it is not irrelevant that, in the course of the antecedent steps to the hearing of the leave application, the respondents filed an application seeking to stay the main proceedings pending the determination of other proceedings between similar parties in the Supreme Court of Queensland. Although they evinced an intention to pursue that application, they subsequently abandoned it, at first in part and then completely. Thereafter, they filed written submissions asserting that the applicants had failed to establish a serious question to be tried and had led insufficient evidence in support of the leave application. Subsequently, additional material was filed to meet those criticisms, although the respondents maintained the submission that the claims in the intended derivative proceedings were unrealistic. Nevertheless, on the morning of the application, they abandoned the assertion that no serious question had been raised. They were right to do so and, in the reasons for the decision on the application, it was observed that the strength of the case sought to be advanced in the derivative action was greater than merely raising a serious question.

25    The manner in which the respondents opposed the application for leave substantially increased the applicants’ costs, such that the costs of an unopposed application would have been minimal against the costs actually incurred. Moreover, it would be difficult, given the respondents’ conduct, to identify what the costs of an unopposed application would have been in the circumstances of this case. Attempting to ascertain those costs and exclude them from any taxation is more than likely to cause delay and even greater costs to be incurred. The decision to avoid such a process is in no way intended to punish the respondents for the manner in which they contested the application, but merely reflects the substantially greater costs that were generated as a result.

Conclusion

26    The So interests vigorously opposed the application for leave under s 237 of the Corporations Act, as they were entitled to do. However, the application having been successful, the applicants are, at least in the first instance, entitled to an order based on the usual principle that costs follow the event. For the reasons which have been expressed above, there is no reason to deny them their costs of the application merely because separate proceedings derivative upon their success in the application are to be pursued and the outcome of those proceedings is uncertain. Here, the opposition to leave was extensive and substantially increased the costs that might otherwise have been incurred. That opposition was brought against a case which, on the available evidence, displayed substantial prospects of success. At a high level of abstraction, it can be observed that the So interests must have known that what was sought to be pursued had, prima facie, at least some merit to it.

27    It can be accepted that the making of an order that the So interests pay the applicants’ costs of the application may have the result that the applicants recover costs for work that is more appropriately understood as having been directed toward the main proceedings and, if those proceedings are successful, they will be entitled to recover again the costs of that same work. To avoid this double recovery, it is desirable that they do not recover the costs of work that is directly connected with the main proceedings. On the other hand, a broad brush approach is required to distinguish the allowable costs from the costs properly to be excluded, lest additional costs be incurred in disputing what ought to fall within or outside of the proposed orders.

28    An order should be made requiring the respondents to pay the applicants’ costs of the application for leave under s 237 of the Corporations Act, but such costs are not to include the cost of preparing affidavits that are likely to be used in the main proceedings or the cost of the preparation of the statement of claim, or drafts thereof, that incorporates the claims that the applicants have been given leave to bring.

Associate:    

Dated:    12 April 2023

SCHEDULE OF PARTIES