Federal Court of Australia

Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Limited (No 3) [2023] FCA 1618

ORDERS

THE COURT ORDERS THAT:

1.    The defendant pay to the second plaintiff interest in the sum of $30,761.90.

2.    The defendant pay the plaintiffs’ costs of the proceedings, including reserved costs and costs of the special case in the Full Court of the Federal Court of Australia and the appeal in the High Court of Australia:

(a)    before 11:00 am on 12 February 2021, on the standard basis;

(b)    otherwise, on an indemnity basis.

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

REASONS FOR JUDGMENT

DERRINGTON J:

Introduction

1    Mr Morton, in his capacity as the liquidator of MJ Woodman Electrical Contractors Pty Ltd (in liquidation) (MJ Woodman), seeks orders as to interest and costs against the defendant, Metal Manufactures Pty Ltd (Metal Manufactures), after successfully pursuing it for payment of $190,000. That sum was recovered pursuant to s 588FF(1)(a) of the Corporations Act 2001 (Cth) (the Corporations Act) on the basis that certain amounts received by Metal Manufactures from MJ Woodman constituted unfair preferences.

2    In the course of the litigation, a question was reserved and a case stated for the consideration of the Full Court pursuant to s 25(6) of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act), albeit against the wishes of Metal Manufactures. That question was whether a statutory set-off, under s 553C(1) of the Corporations Act, was available to Metal Manufactures in answer to the first plaintiff’s claim as liquidator for recovery of an unfair preference under s 588FA. The Full Court answered that question in the negative, and held that no such right of set-off existed: Morton v Metal Manufactures Pty Ltd (2021) 289 FCR 556. Metal Manufactures appealed to the High Court, but the appeal was dismissed: Metal Manufactures Pty Ltd v Morton (2023) 275 CLR 100 (Metal Manufactures (HCA)).

3    The Full Court ordered that the costs of the special case be reserved to the docket judge for determination upon resolution of all outstanding issues between the parties: Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Limited (No 2) [2022] FCAFC 1 [9] (Morton (No 2)). Similarly, orders were made in the High Court that the costs of the appeal be costs in the cause. However, the joint majority also indicated that the question of costs should be determined following resolution of all yet to be determined questions, including whether the litigation should be treated as public interest litigation: Metal Manufactures (HCA) at 123 – 124 [60].

4    Following the delivery of the High Court’s judgment, the matter was set down by orders made on 7 August 2023 for hearing of all remaining issues. However, on 18 September 2023, Metal Manufactures filed a Notice of Withdrawal of Pleading, by which it withdrew all of its remaining defences. On 22 September 2023, orders were made by consent requiring, amongst other things, that Metal Manufactures pay to MJ Woodman the sum of $190,000. As a result, the trial was vacated and the only matters that remained for determination were the issues of interest on the judgment sum and the costs of the proceedings. The parties consented to an order that these issues be determined on the papers, and each side duly filed written submissions in support of its position.

Interest

5    Mr Morton sought interest on the sum of $190,000 pursuant to s 51A of the Federal Court Act. Interest under that section is generally to be calculated in accordance with the Practice Note, Interest on Judgments (GPN-INT), issued on 18 September 2017.

6    In the ordinary course, interest on a claim for relief under s 588FF of the Corporations Act is permitted from the date of the liquidator’s demand: Ferrier and Knight v Civil Aviation Authority (1994) 55 FCR 28, 93; Kazar v Kargarian (2011) 197 FCR 113, 135 [93] (Kazar); Weaver v Harburn (2014) 103 ACSR 416, 434 [133].

7    On 24 June 2020, Mr Morton, in his capacity as liquidator, made a demand of Metal Manufactures for payment of the $190,000 sum that subsequently became the subject of these proceedings. Interest has been calculated in accordance with the Practice Note from the date of that demand. As at 22 September 2023, when the substance of the matter was resolved by consent, it totalled $30,761.90. The plaintiffs are therefore entitled, prima facie, to an order that Metal Manufactures pay interest in that amount.

8    Metal Manufactures has contested this entitlement. It submits that, as a matter of discretion, a lower figure ought to be allowed for interest. More specifically, it has contended that interest should not run during the period between the date on which it was ordered that the question be reserved for the consideration of the Full Court (being 24 March 2021) and the date on which the Full Court delivered its judgment (being 16 December 2021). It advances several grounds in support of that contention.

9    The first is that the special case was referred to the Full Court over its objection, which was made on account of its concern as to costs. The second is that the plaintiffs enjoyed an offer of funding from the Commonwealth (via the Attorney-General’s Department) under the Fair Entitlements Guarantee Recovery Program. In connection with this ground, Metal Manufactures has contended that the funding of the special case was intended to enable these proceedings to “constitute the vehicle by which to challenge the availability of the set-off defence” — such that, in its view, the proceedings amount to public interest litigation. The third is that, prior to the hearing before the Full Court, Metal Manufactures notified the plaintiffs that it intended to obtain an order for costs on the basis that the special case was funded by the Commonwealth. The fourth is that Metal Manufactures has been unable to apply for a costs certificate under s 6 of the Federal Proceedings (Costs) Act 1981 (Cth) in respect of the hearing before the Full Court because the special case was not an appeal.

10    As explained below, the same grounds have been advanced in support of Metal Manufactures’ submissions with respect to the costs of the hearing before the Full Court. Whatever their merits might be in that context, insofar as they have been deployed in connection with the separate issue of interest, with respect, they do little to commend the position that Metal Manufactures has adopted. It is useful to repeat what was said by Foster J (with whom Greenwood and Rares JJ agreed on this point) in a similar context in Kazar at 136 [97], as follows:

Pre-judgment interest should be awarded on money claims “unless good cause is shown to the contrary”. Such “good cause” would rarely be shown. It would be shown only in exceptional circumstances. The section is designed to compensate a successful applicant for the fact that he or she has been kept out of his or her due monetary entitlements (Haines v Bendall (1991) 172 CLR 60 at 66) while his or her claims are made, litigated and determined.

11    The basic fact is that Metal Manufactures has been in possession of the $190,000 sum since the date of Mr Morton’s demand, in the sense that it has not ceded that sum to the plaintiffs. It has had the benefit of the use of those funds, and there is no good reason why the plaintiffs should not be compensated for having been kept out of their monetary entitlement. The grounds upon which Metal Manufactures relies in support of its contrary position, as set out above, effectively suggest that the course adopted by the Court in the interests of expediting the final determination of this matter was liable to (and, in its view, did) prove unfairly disadvantageous to it from a costs perspective in the event that it was unsuccessful. However, that complaint does not engage coherently with the rationale according to which interest is awarded, in the sense of showing some reason why the plaintiffs ought not to be entitled to the interest that they would have earned on the $190,000 sum had it been paid to them immediately in response to Mr Morton’s demand. It follows that there is no “good cause” to depart from the default position that there should be a full award of pre-judgment interest.

12    Metal Manufactures should pay interest to MJ Woodman in the amount of $30,761.90.

Costs of the proceedings

13    The issues arising in relation to the costs of these proceedings can be addressed in two parts. The first concerns the plaintiffs’ entitlement to an order for costs of the hearing of the question reserved for the consideration of the Full Court. The second concerns the basis upon which the costs, generally, should be assessed. Those parts may be considered in turn.

Entitlement to costs of the hearing before the Full Court

14    Metal Manufactures accepts that the plaintiffs have secured judgment for the amount claimed and are entitled to be awarded their costs of the principal proceedings. Further, it accepts that it should pay the plaintiffs’ costs of its unsuccessful appeal to the High Court, which it elected to pursue. However, it contests its liability to pay the costs incurred in connection with the question reserved for the consideration of the Full Court. It advances four grounds in support of its position, which have been summarised above in connection with the issue of interest. The principal ground appears to be that, in its view, the hearing before the Full Court can properly be characterised as “public interest litigation”.

15    As noted above, Metal Manufactures opposed the reservation of a question for the consideration of the Full Court, but its opposition was unsuccessful. The reservation of that question was motivated by the fact that Metal Manufactures had, by its defence, raised an entitlement to set off a debt owed to it by MJ Woodman against the $190,000 sum that Mr Morton claimed as an unfair preference. The question as to whether a set-off could validly be raised in the circumstances that obtained was unsettled, and the determination of the issue by an intermediate court was considered to be an appropriate means by which to bring some certainty to this area of law. It was also thought that reserving the question for the consideration of the Full Court might expedite the resolution of the matter, as the case stated left no facts in dispute between the parties and the question was one of law only.

16    The hearing before the Full Court ultimately involved a substantial effort on the part of both parties, with the Court receiving numerous authorities in support of the various competing contentions. In other words, the resolution of the question reserved was strenuously contested — including by Metal Manufactures, which at no time resiled from its entitlement to raise the set-off defence.

17    The Full Court’s conclusion was that the defence was unavailable to Metal Manufactures. In the usual case, that conclusion would lead the Court, straightforwardly, to exercise its discretion as to costs in favour of the plaintiffs. Along essentially these lines, the Full Court observed that, if Metal Manufactures did not succeed with respect to the other issues that it had raised in the litigation (that is, apart from its set-off defence), then it may be appropriate for it to bear the costs of the special case or a proportion of them, as well as the costs for the remainder of the proceedings: Morton (No 2) [8].

18    Whilst it is appropriate to acknowledge in this way the effect of the usual order that costs follow the event, it ought also to be borne in mind that the Court has a wide discretion to award costs so as to meet the justice of the circumstances of each particular case: Federal Court Act s 43. Accordingly, it is necessary to turn to consider the grounds relied upon by Metal Manufactures in support of its position that there should be no order as to the costs of the special case in the Full Court.

Ground 1 — Metal Manufactures’ objection to the special case

19    Metal Manufactures pointed out that it objected to the referral of a special case to the Full Court on account of its “concern as to the costs of the proceedings (which concerned a comparatively modest sum)”. It noted, apparently by way of contrast, that the plaintiffs “embraced the prospect of referral to the Full Court”. However, it is not immediately apparent why its unsuccessful objection to the referral of the special case, and the plaintiffs’ adoption of a contrary position, should disturb the usual order as to costs. As the plaintiffs have pointed out, its apparent concern as to the costs of the referral is somewhat difficult to accept in circumstances where, upon receiving an unfavourable answer from the Full Court to the question reserved, it unilaterally sought special leave and prosecuted an appeal in the High Court.

20    In any event, there does not seem to be any clear basis upon which to contend that the referral of the special case has, in and of itself, increased costs. It avoided the need for a first instance hearing to be conducted in a matter that seemed, in light of the parties’ attitudes, to have been more likely than most to reach the High Court at some stage. Moreover, as it has transpired, the single issue determined by the Full Court (and, in turn, by the High Court) was the only real issue between the parties: that is, the preliminary determination of the question reserved effectively brought the proceedings as a whole to an end.

21    In these circumstances, Metal Manufactures’ objection to the reservation of a question for the consideration of the Full Court does not afford any good reason to depart from the usual order as to costs.

Ground 2 — Public interest litigation

22    As noted above, perhaps the key issue to which Metal Manufactures drew attention in seeking to influence the Court’s exercise of its discretion as to costs was the potential characterisation of the proceedings as “public interest litigation”. It is necessary to address, at the outset, the authorities that have considered the effect that such a characterisation may have on the question of costs in a particular case.

23    In Racing New South Wales v Fletcher (No 2) [2020] NSWCA 67, the New South Wales Court of Appeal observed at [12]:

The common law has long recognised that the ‘compensatory principle’ underlying the ordinary rule as to costs is subject to a limited public interest qualification … It has been said that the process of characterising proceedings as in the ‘public interest’ is one which proceeds in a principled manner and looks to substance rather than form … A number of factors relevant to that question of characterisation including the nature of the proceedings, the relief sought and the motivations of the party bringing the proceedings. Furthermore the characterisation of proceedings as being in the ‘public interest’ is not by itself a sufficient condition to warrant a departure from the ordinary rule as to costs … To proceed otherwise would bring about absurdity because to the extent that there is a general public interest in the rule of law, every exercise of judicial power involves to some degree a question of public importance …

(Citations omitted).

24    Those observations were cited by Meagher and Brereton JJA in Johnston v The Greens NSW [2020] NSWCA 357 at [24]:

The characterisation of proceedings as in the “public interest” is a question of substance, not form, and depends on a number of factors, “including the nature of the proceedings, the relief sought and the motivations of the party bringing the proceedings”: Racing NSW v Fletcher (No 2) [2020] NSWCA 67 at [12] (Bell P, Meagher and Payne JJA).

25    Elsewhere, it has been observed on multiple occasions that there is great difficulty in identifying the true essence of the concept of “public interest litigation”. The concept has been described as “nebulous” and inherently imprecise: Oshlack v Richmond River Council (1998) 193 CLR 72, 84 [30], 98 [71] (Oshlack); State of Western Australia v Collard [2015] WASCA 86 [28] (Collard). Whilst it is apparent from the reasoning of the members of the High Court in Oshlack that the public interest character of litigation may be relevant to determining the costs order that might be made, that is not to say that a different costs regime applies in the context of such litigation: Oshlack at 122 – 123 [134](6). On the contrary, the fact that the litigation raises issues of public interest will not ordinarily, of itself, be sufficient to establish special circumstances justifying a departure from the usual order that costs be awarded to the successful party: Booth v Bosworth [2001] FCA 1718 [26]; Roe v Director General, Department of Environment and Conservation (WA) [2011] WASCA 57 (S) [12]. In VicForests v Friends of Leadbeater’s Possum Inc (No 2) [2021] FCAFC 92, the Full Court summarised at [7] a number of relevant principles drawn from the earlier decision in Bob Brown Foundation Inc v Commonwealth of Australia (No 2) [2021] FCAFC 20, including the following:

[T]he true issue is not whether the proceedings involved ‘public interest litigation’ but whether, in the exercise of the discretion under s 43 of the FCA Act, any considerations extraneous to any object the legislature could have had in view in enacting s 43 of the FCA Act are relevant …: Oshlack [49], [134] (Bob Brown at [11]–[14]).

[M]erely because an ‘interested person’ has initiated unsuccessful public interest litigation does not mean that there will be a departure from the usual rule as to costs; if there is to be an exception in respect of proceedings brought by ‘interested persons’ from the usual rule as to costs, ‘that exception must be found in the circumstances of a particular case’: Wide Bay Conservation Council Inc v Burnett Water Pty Ltd (No 9) [2011] FCA 661; 194 FCR 250 at [7] (Bob Brown at [15]).

26    To similar effect are the observations of the New South Wales Court of Appeal in People for Plains Inc v Santos NSW (Eastern) Pty Ltd (No 2) [2017] NSWCA 157, where it was observed at [40]:

Even assuming the proceedings were properly to be characterised as amounting to ‘public interest litigation’ (and there is scope for debate about this), as already noted that does not of itself warrant a departure from the general rule. As Bennett J observed (at [45]) in Corcoran v Virgin Blue Airlines Pty Ltd [2008] FCA 864, ‘public interest and an arguable case are not necessarily decisive and not, of themselves, sufficient to prevent the usual costs order being made’. The appellant has not demonstrated that this appeal involved ‘something more’ than the mere fact of the litigation having the character of ‘public interest litigation’.

27    In the present case, Metal Manufactures appears to suggest that there was some peculiarity in the circumstances in which a question came to be reserved for the consideration of the Full Court. However, the more fundamental point, perhaps, is that it is difficult to discern from its conduct any suggestion that it was driven to advance this litigation in the public interest: cf Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd (Subject to a Deed of Company Arrangement) [2014] QCA 24 [9] (Promoseven). The litigation was pursued by Mr Morton, in fulfilment of his duties as liquidator, for recovery of certain amounts that had been paid to Metal Manufactures as a commercial supplier of MJ Woodman. The amounts were alleged to constitute unfair preferences under s 588FA of the Corporations Act. In seeking to resist repayment of the sums claimed, Metal Manufactures raised its purported right to set-off under s 553C as a complete defence to the liquidator’s demand. It also raised other defences, which were subsequently abandoned. In all of this, there is nothing to suggest that Metal Manufactures was defending the matter in the public interest with only a subordinate concern for its private interest. Quite the opposite. The fact is that it stood to obtain an obvious personal benefit in the event that its set-off defence was made out, being the avoidance of a liability, and this benefit was apparently the dominant reason for which it defended the proceedings in the way that it did — including before the Full Court. This weighs against the characterisation of the proceedings as “public interest litigation”: see Collard [46] – [49]; Hastings Point Progress Association Inc v Tweed Shire Council (No 3) [2010] NSWCA 39 [8].

28    There is no doubt that the question reserved for the consideration of the Full Court was one in respect of which there had been much debate over a number of years. Indeed, it was well known to have galvanised opinion, with no satisfactory intermediate appellate court or High Court authority on the point. In this sense, there can be no doubt that resolution of the question conferred a benefit on the public, in that it settled a contentious question of law. However, that does not afford a sufficient reason to depart from the usual order as to costs. In Collard, Buss, Newnes and Murphy JJA observed that the mere fact that a dispute between commercial parties might resolve a question of law to the benefit of the wider community does not make it apt to characterise the proceedings in which the parties are engaged as “public interest litigation”. Their Honours stated as follows at [32]:

We do not, however, understand her Honour to have intended to suggest, and it is not the position, that a departure from the usual order as to costs will be justified whenever a case involves a wider legal importance, or significance, than that which it has to the individual litigants. Often, the decision in a particular case will have application to other similar prospective cases, or will involve the proper construction of a statute of wide significance, or the resolution of a conflicting line of authorities, or will otherwise have wider legal significance or public importance. As the Full Court of the Federal Court pointed out in William Hollier v Australian Maritime Safety Authority (No 2) [1998] FCA 975:

In common law jurisdictions decisions of the courts, in private as well as public law, often clarify the law or lay down new law for the benefit of its citizens, taxpayers, traders, patentees, insurers and insureds, landlords and tenants, etc etc. To that extent, much litigation has a public interest going beyond the interests of the parties. But this feature is inherent in common law litigation and provides no ground for departure from the usual rule as to costs.

29    It follows that the present matter should properly be characterised as, predominantly, a private one between commercial parties — notwithstanding the fact that a question of law of some wider significance surfaced within the arguments that were made. It was a “dispute confined to the commercial interests of those involved, in which [Metal Manufactures] was involved because of its relationship to [MJ Woodman]”: Robson v Commissioner of Taxation (No 2) [2015] QSC 131 [9], quoting Promoseven [10]. Even though the resolution of a particular question born of that relationship was of some importance to the advancement of insolvency law in this country, there was little more in the circumstances to suggest that either side pursued the litigation for any altruistic reason.

30    It is not inappropriate to observe, at this juncture, that a party that truly seeks to advance the public interest by its participation in litigation would be well advised to claim, at an early stage, that it regards the litigation as being of that character and to act accordingly in relation to costs. Of course, mere assertion will not confer upon the litigation a character that it cannot realistically possess. However, an undertaking by one side not to pursue costs against the other on the basis that the issue between them ought to be resolved in the public interest might go some ways to convincing a court that private interests are, in actuality, a subordinate concern in the proceedings.

31    Returning to the circumstances of the present case, it is relevant to note that Metal Manufactures did attribute some significance to the fact that the plaintiffs received funding from the Attorney-General’s Department under the Fair Entitlements Guarantee Recovery Program. That funding related to the specific question reserved for the consideration of the Full Court. Its nature and extent were identified in the following terms by Mr Morton in his report to creditors of 11 May 2021:

In general terms the [Litigation Funding Agreement] provides the following:

*    The funding of legal costs associated with the Claim.

*     The Claim is to be brought by the Liquidator.

*     The funding relates to the specific question of the defence raised pursuant to s 553C(1) of the Act.

*     The AGD will provide an indemnity to the Liquidator in relation to any adverse costs order.

*     The Liquidator’s solicitor will continue to act on his behalf of the liquidator in relation to the Claim.

*     If successful, upon recovery of the funds from the Claim the Funder will have priority for the reimbursement of costs paid ahead of all parties.

*     Any settlement of the Claim by the Liquidator will require prior written approval by the Funder.

32    There can be no doubt that the resolution of the question reserved for the consideration of the Full Court was important to the Commonwealth, which is required to fund and operate the Fair Entitlements Guarantee Recovery Program. Funding through that program is common, given the omission of many corporate entities in Australia to make provision for the rights of workers to receive their full employment entitlements. The existence of a set-off defence for persons who had received unfair preferences was, no doubt, a significant hindrance to the program’s attempts to recover amounts that had been paid. However, the Commonwealth’s interest in the question reserved does not render the proceedings as a whole “public interest litigation”.

33    In the first place, the Commonwealth in the present case was a priority creditor in the liquidation of MJ Woodman, having advanced funds to pay employee entitlements: see Corporations Act ss 556, 560. In that sense, its extension of funding to the plaintiffs was analogous to a creditor in a winding up deciding to fund proceedings commenced by the liquidator and to provide an indemnity for that purpose. Such an arrangement is far from uncommon, and does not ordinarily afford any reason to depart from the usual order as to costs.

34    The fact that the Commonwealth directed specific attention to the set-off defence certainly suggests that the question reserved for the consideration of the Full Court had relevance to persons other than the immediate plaintiffs and defendant, but it does not suffice to cloak the proceedings in any new character. The most that can be said is that the resolution of the question reserved was of interest to a wider class of litigants and practitioners, and that it was of especial interest to the Commonwealth, which has a unique stake in many corporate insolvencies by reason of the Fair Entitlements Guarantee Recovery Program. At the same time, however, many questions of law are resolved by the courts from time to time with important consequences for other litigants and practitioners, and it cannot properly be suggested that the interest of the Commonwealth in a particular question converts the otherwise-private proceedings in which it arises into “public interest litigation”.

Ground 3 — Notice that Metal Manufactures intended to obtain an order for costs

35    Metal Manufactures has submitted that its position that there be no order as to costs of the hearing before the Full Court “acknowledges the ultimate outcome in the proceedings”. It explains this submission, briefly, as follows:

Prior to the hearing of the special case, the plaintiffs were notified that Metal Manufactures intended to obtain an order for costs on the basis that the special case was funded by the Commonwealth.

36    The notice to which this passage refers was a letter dated 12 August 2021 from Metal Manufactures’ solicitors to the solicitors acting for the plaintiffs, in which it was stated (inter alia):

In the circumstances, including that the matter was referred to the Full Bench by your clients effectively as a “test case”, our client proposes to make an application that the plaintiffs pay the defendant’s costs of the proceedings regardless of the outcome of the proceedings.

37    Taking all of this into account, the submission seems to be that:

(a)    Metal Manufactures’ primary position in respect of the special case was that it should have its costs regardless of the outcome;

(b)    it was unsuccessful before the Full Court, such that it now concedes that some less advantageous order as to costs ought to follow;

(c)    it presently seeks that less advantageous order — more specifically, that there be no order as to the costs of the special case; and

(d)    accordingly, the order now sought “acknowledges the ultimate outcome”.

38    The difficulty for Metal Manufactures is that the first link in this chain of reasoning cannot be sustained in light of the conclusion drawn above. Contrary to the assertion made in its solicitors’ correspondence, this was not a “test case”. Accordingly, there was no basis for its initial position that it should have its costs regardless of the outcome. The fact that it was unsuccessful does not, therefore, warrant this Court making no order as to the costs of the special case on the basis that this will represent an incrementally less beneficial outcome for Metal Manufactures. Rather, it warrants an order that the successful parties be entitled to their costs.

Ground 4 — Metal Manufactures’ inability to obtain a costs certificate

39    Finally, Metal Manufactures has claimed that, as the special case was not an appeal, there was no ability for it to apply for a costs certificate under s 6 of the Federal Proceedings (Costs) Act 1981 (Cth), “despite the fact that the proceedings related to the resolution of [a] controversial issue of statutory interpretation”. Consequently, it submits that, “whilst the plaintiffs enjoyed the fruits of Commonwealth support, Metal Manufactures participated in the special case before the Full Court against its wishes and without the ability to apply for a certificate under that statutory scheme”.

40    Whilst it is true that the reservation of a question for the consideration of the Full Court is not an appeal, such that there is in this case no ability for Metal Manufactures to apply for a certificate, that does not alter the rights of the parties inter se. It may well be that the pathway by which the issues in these proceedings came to be determined led ultimately to Metal Manufactures being prejudiced from a costs perspective. However, both sides faced the risk that such prejudice (assuming, for now, that it exists) would be brought home to them in the event that they were unsuccessful before the Full Court. The fact that the plaintiffs escaped this risk by obtaining support from the Commonwealth is irrelevant. They cannot lose their entitlement to costs as against Metal Manufactures merely on account of the fact that they received third-party litigation funding.

41    Metal Manufactures’ inability to obtain a costs certificate accordingly does not afford any reason to depart from the usual order as to costs.

Conclusion on costs of the hearing before the Full Court

42    The plaintiffs succeeded in litigation that arose from a commercial dispute, within which Metal Manufactures raised the set-off defence in an attempt to avoid its liability to repay unfair preferences. The plaintiffs are, prima facie, entitled to their costs. Whilst the proceedings involved an important question of law, the resolution of which by the High Court has undoubtedly been important to the development of insolvency law in this country, it cannot properly be characterised as having been pursued in the public interest. Each party adopted the stance that it did in these proceedings, first and foremost, because that stance aligned with its private commercial interests. In those circumstances, whilst this litigation can be said to have advanced insolvency law to the benefit of those practising and litigating in the area, there is nothing that warrants a departure from the usual order as to costs. Although Mr Morton was able to secure the benefit of the Fair Entitlements Guarantee Recovery Program to support the plaintiffs’ prosecution of this litigation, that did not fundamentally change the nature of the dispute between the parties.

43    The appropriate order is, accordingly, that Metal Manufactures pay the plaintiffs’ costs of the proceedings as a whole — including reserved costs and costs of the special case in the Full Court and the appeal in the High Court.

The basis for assessment

44    The plaintiffs have sought an order that their costs be paid on an indemnity basis from 11:00 am on 12 February 2021, in accordance with r 25.14(3) of the Federal Court Rules 2011 (Cth) (Federal Court Rules). That provision provides as follows:

If an offer is made by an applicant and not accepted by a respondent, and the applicant obtains a judgment that is more favourable than the terms of the offer, the applicant is entitled to an order that the respondent pay the applicant’s costs:

(a)    before 11.00 am 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.

45    The plaintiffs made a formal offer to settle on 10 February 2021, pursuant to r 25.01. The offer was that they would accept the sum of $128,074.23, inclusive of interest and costs, in full and final settlement of the proceedings. Though that offer was open for acceptance for 14 days after its service on Metal Manufactures, it was not accepted during that period, or at all.

46    It is not in dispute that, by the orders made on 22 September 2023, the plaintiffs achieved a result more favourable than the terms of their offer. The judgment entered by consent awarded them the full amount of their claim — being $190,000, exclusive of interest and costs. Prima facie, r 25.14(3) is enlivened in the present case.

47    If a plaintiff achieves a judgment more favourable than their offer of compromise, then there is a rebuttable presumption in favour of indemnity costs: Specsavers Pty Ltd v The Optical Superstore Pty Ltd (No 4) [2012] FCA 652 [10]; Lodestar Anstalt v Campari America LLC (No 2) [2016] FCAFC 118 [23] (Lodestar); Australian Skills Quality Authority v Western Institute of Technology Pty Ltd [2017] FCAFC 183 [23]. It is then for the defendant to persuade the Court that, under r 1.35, some other order should be made: Kassem and Secatore v Commissioner of Taxation (No 2) [2012] FCA 293 [9] – [11]. The power to make an order inconsistent with the Federal Court Rules should be exercised for proper reasons, which will generally only arise in exceptional circumstances: Lodestar [27]; Sydney Equine Coaches Pty Ltd v Gorst [2017] FCAFC 34 [20] – [22]. See also Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) (2004) 212 ALR 281, 284 [17].

48    The text of r 25.14(3) does not suggest that the award of indemnity costs requires a determination as to whether or not the defendant’s refusal to accept the offer was unreasonable. However, as recognised by the Full Court in JMC Pty Ltd v Commissioner of Taxation (Costs) [2023] FCAFC 95 (JMC) at [11]:

In exercising the discretion under r 1.35 to make an order inconsistent with r 25.14, the reasonableness of the rejection of the offer will be relevant. It is most unlikely that an order inconsistent with r 25.14 would be made where the rejection of an offer was not reasonable. On the other hand, merely establishing that the rejection of an offer was reasonable at the time of rejection is not necessarily sufficient.

49    Their Honours went on to describe the reasonableness analysis in the following manner at [13]:

It should also be observed that there are degrees of reasonableness which, amongst other things, must ordinarily be assessed by reference to the extent of the compromise which was offered. It may be reasonable to reject an offer which amounts to something close to capitulation where the case is reasonably and properly arguable. It may be unreasonable to reject a generous offer where the respondent’s prospects are slim.

50    Nevertheless, their Honours acknowledged at [23] that “[t]he intended effect of r 25.14(3) is substantially negated if inconsistent orders are routinely made under r 1.35 on the basis only that the rejection was entirely reasonable”.

51    The offer of settlement in the present case was genuine. It represented approximately two-thirds of the sum claimed in the proceedings. It also included interest on that amount and costs expended to date. The offer was sent under cover of a letter that explained in some detail the plaintiffs’ position, including why the defences raised by Metal Manufactures (with the exception of the set-off defence) could not succeed. It also notified Metal Manufactures that the offer was, to the extent necessary, one made pursuant to the principles in Calderbank v Calderbank [1975] 3 All ER 333. The offer warned Metal Manufactures that it would be relied upon in an application for indemnity costs if it was not accepted.

52    It is not irrelevant to note that, on 12 March 2021, substantive submissions were filed in the proceedings by the plaintiffs. They explained why the set-off defence was unavailable in the circumstances of this case. That explanation, and the authorities relied upon, were substantially accepted by both the Full Court and the High Court. In this way, the plaintiffs were entirely open about the case that they intended to pursue. They conducted the litigation with their cards face up on the table.

53    Metal Manufactures submits that its rejection of the offer was reasonable because the availability of its set-off defence was at that time unresolved by any appellate court. Given the outcome in the proceedings, it is not quite clear that this is so. The position adopted by Metal Manufactures was bad at law. It chose to run a risk by litigating on a contentious issue, in the face of a genuine offer, and it arguably ought to face the consequences of doing so.

54    It further submits that its rejection of the offer was reasonable because the offer was made at an early stage in the litigation, having been made a day after the commencement of the proceedings. As it points out, this was “before the plaintiffs had filed and served evidence in respect of their claim, or disclosed documents … by way of discovery”. However, with respect, the evidence to which Metal Manufactures refers played little part in the proceedings. The central (and, as it happens, the only) issue was the availability of the set-off defence. That raised a question of law, which both parties were capable of considering fully from the outset of the litigation. The plaintiffs were entitled to make their offer at any stage of the proceedings, and it was always open to Metal Manufactures to make a reciprocal offer to avoid the consequences of its initial refusal.

55    Metal Manufactures points out that it made offers of settlement after the plaintiffs put on their evidence in mid-2023. However, those offers were made after the High Court’s decision, which had effectively resolved the central issue in the litigation. They are accordingly of little relevance to the application of r 25.14(3), not least because they were less favourable to the plaintiffs than the ultimate result in the proceedings.

56    Even if it was assumed in Metal Manufactures’ favour that its rejection of the plaintiffs’ initial offer was reasonable, it would not follow that the presumption under r 25.14(3) would be rebutted. As pointed out in JMC at [11], “merely establishing that the rejection of an offer was reasonable at the time of rejection is not necessarily sufficient”. In that case, the Full Court awarded indemnity costs against the Commissioner of Taxation even in circumstances where:

(a)    at the time the relevant offer was made, two pertinent High Court decisions were yet to be handed down, and both parties were proceeding on a different understanding of the law (at [14]);

(b)    accordingly, it was not unreasonable for the Commissioner to reject the offer (at [14]);

(c)    even if the parties had understood that the matter was to be resolved on a different basis, the result was not so clear that the Commissioner could be said to have acted unreasonably in rejecting the offer — as underscored by the fact that he was successful at trial (at [15]); and

(d)    it was not the case that the Commissioner “should … have known [that his] case was likely to fail” (at [16], quoting State Street Global Advisors Trust Company v Maurice Blackburn Pty Ltd (2022) 399 ALR 704, 733 [123]).

57    Arguably, the case for an order to be made under r 1.35 to avert the award of indemnity costs was more compelling in JMC than it is here. That is not to suggest that the power to make an order inconsistent with r 25.14(3) is to be exercised by drawing comparisons between one case and another. It is merely to give an authoritative illustration of the proposition, stated above, that this power should be exercised for proper reasons, which will generally only arise in exceptional circumstances. The fact that an offer might reasonably have been rejected does not invariably, in and of itself, call for an exception to be made to the application of the prima facie position prescribed by r 25.14.

58    Ultimately, there is no feature of the present case that calls for such an exception to be made.

59    Metal Manufactures has failed to demonstrate any basis upon which the Court should deny the plaintiffs their entitlement to indemnity costs on and from the day prescribed by r 25.14(3) of the Federal Court Rules. Orders are to be made accordingly.

Associate:    

Dated:    19 December 2023