Federal Court of Australia

Ballast Holdings Pty Ltd v Leonite Capital (No 2) [2024] FCA 142

ORDERS

THE COURT ORDERS THAT:

1.    The defendant is to pay the plaintiff’s costs of the proceeding:

(a)    assessed on the ordinary basis up to and including 15 December 2022; and

(b)    assessed on the indemnity basis on and from 16 December 2022.

2.    The interlocutory process filed on 10 November 2023 is otherwise dismissed.

3.    Each party is to pay their own costs of the interlocutory process.

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

ORDERS

THE COURT ORDERS THAT:

1.    The defendant is to pay the plaintiff’s costs of the proceeding:

(a)    assessed on the ordinary basis up to and including 15 December 2022; and

(b)    assessed on the indemnity basis on and from 16 December 2022.

2.    The interlocutory process filed on 10 November 2023 is otherwise dismissed.

3.    Each party is to pay their own costs of the interlocutory process.

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

REASONS FOR JUDGMENT

MARKOVIC J:

1    On 20 October 2023 I made orders in each proceeding setting aside the creditor’s statutory demands issued by the defendant, Leonite Capital LLC, against each plaintiff to the proceeding, Ballast Holdings Pty Ltd on the one hand and Nextgen Financial Group Pty Ltd on the other, and in each case for Leonite to pay the respective plaintiff’s costs: see Ballast Holdings Pty Ltd v Leonite Capital [2023] FCA 1245 (Ballast v Leonite).

2    I also made orders permitting each of Ballast Holdings and Nextgen Financial (collectively, plaintiffs) to file any application for payment of their respective costs on an indemnity basis and other orders they seek in relation to their costs, together with supporting evidence and submissions, and for the issue of costs to be determined on the papers.

3    In accordance with those orders, on 10 November 2023 each of Ballast Holdings and Nextgen Financial filed an interlocutory process seeking the following relief:

1.    An order that the Defendant is to pay the Plaintiff’s costs of and incidental to the Originating Process filed 16 December 2022 to set aside the statutory demand dated 1 December 2022 (Statutory Demand) on an ordinary basis up until such time as determined by the Court pursuant to either Order 2 or Order 3 below.

2.    An order that the Defendant is to pay the Plaintiff’s costs of and incidental to the Originating Process on an indemnity basis on and from the date on which the Court determines that it was unreasonable for the Defendant to have maintained its opposition to the Originating Process.

3.    In the alternative to Order 2, the Defendant is to pay the Plaintiff’s costs on a solicitor and client basis on and from the date on which the Court determines that it was unreasonable for the Defendant to have maintained its opposition to the Originating Process.

4.    An order pursuant to s 459N of the [Corporations Act 2001 (Cth)] and s 43(3)(f) of the [Federal Court of Australia Act 1976 (Cth)] that the solicitor for the Defendant, Valorum Law Group Pty Ltd ACN 632 924 835, be jointly and severally liable to pay the costs ordered by the Court pursuant to this Interlocutory Application.

5.    An order that the costs ordered by the Court pursuant to this Interlocutory Application are to be payable forthwith as either agreed or, in the absence of agreement, as assessed.

6.    An order that the Defendant is to pay the Plaintiff’s costs of and incidental to this interlocutory process on any basis the Court deems appropriate, such costs to be payable forthwith as either agreed or, in the absence of agreement, as assessed.

7.    Such other order as the Court deems fit or necessary.

4    In summary, the plaintiffs contend that Leonite should pay indemnity costs from 8 or 16 December 2022 or from the date the Court determines it was unreasonable for Leonite not to have withdrawn the creditor’s statutory demands and that it is just and equitable for Leonite’s solicitor, Valorum Law Group Pty Ltd, to be jointly liable to pay those indemnity costs to them by reason of having served the creditor’s statutory demands on behalf of Leonite, a foreign domiciled company, which it advised and guided in the proceedings.

5    Leonite has filed submissions opposing Ballast Holdings’ and Nextgen Financial’s respective applications in relation to costs. Leonite accepts that the plaintiffs, having succeeded in their applications to set aside Leonite’s creditor’s statutory demands, should have the costs of their applications paid in the ordinary course. Indeed, such an order was made on 20 October 2023 (see [1] above). However, Leonite opposes the orders for indemnity costs and for its solicitors to be jointly liable for costs. Leonite contends that the Court should order Leonite to pay the plaintiffs’ costs to the extent agreed between the parties leading to the dismissal by consent of the plaintiffs’ interlocutory applications for security for costs or, alternatively, that their costs be paid on the ordinary party-party basis.

6    For the reasons that follow I am satisfied that Ballast Holdings’ and Nextgen Financial’s costs in the respective proceeding in which they were a plaintiff should be assessed on an indemnity basis on and from 16 December 2022 until 20 October 2023, the date on which orders were made setting aside the statutory demands served on each of them. However, Ballast Holdings and Nextgen Financial have not satisfied me that there is any basis upon which an order should be made that Valorum be jointly and severally liable for their costs.

7    My reasons for reaching these conclusions follow. Unless otherwise defined, terms used in this judgment have the same meaning as in Ballast v Leonite.

Background

8    On 8 December 2022 the solicitors for the plaintiffs, Assembly Law, sent a letter (8 December 2022 Letter) to Valorum asserting that the Ballast Holdings Demand and the Nextgen Demand were “liable to be set aside” on the basis of defects, including that: the statutory demands only expressed the alleged debt owed in US dollars and did not provide an Australian dollar calculation; the statutory demands failed to adequately identify the basis upon which the alleged debt arose and the accompanying affidavit for the statutory demands only vaguely asserted that a debt was owed by the plaintiffs; and Leonite’s documents did not identify Nextgen Financial by name and failed to adequately identify parties by reference to their Australian Company Number (ACN) and therefore there could be no certainty that the alleged debt related to Nextgen Financial.

9    In the 8 December 2022 Letter the plaintiffs also asserted that there was a genuine dispute as to the existence or amount of the alleged debt owed by the plaintiffs as set out in the statutory demands. Among other things, it provided:

14.    More significantly, there exists a genuine dispute as to the alleged debt owed by our clients as set out in the Statutory Demands.

15.    Prior to the service of the Statutory Demands our clients had no knowledge of the alleged loan agreements, nor had they received the benefit of any funds alleged to have been lent pursuant to those loan agreements.

16.    The agreements provided as supporting documents to the Statutory Demands are purported to have been executed by Russell Cameron as Director of our clients.

17.    It appears to us that, the alleged agreements were entered into in or around 4 February 2021.

18.    We enclose historical company searches for Nextgen and Ballast.

19.    As is clear from the enclosed searches, at no time was Russell Cameron a director of either of our clients.

20.    Your client, properly advised, should have been easily able to identify the appropriate persons who were authorised to execute on behalf of our clients by way of a simple search of a publicly available register.

10    By the 8 December 2022 Letter the plaintiffs demanded that Leonite withdraw its statutory demands by 5.00 pm AEDT on 9 December 2022 and stated that if the plaintiffs were required to bring an application pursuant to s 459G of the Corporations Act 2001 (Cth), they would rely on the correspondence on the question of costs, which they would seek on an indemnity basis “given the clear basis for dispute of the debt as set out in” the letter.

11    Leonite did not respond to the 8 December 2022 Letter.

12    On 15 December 2022 the plaintiffs commenced these proceedings by filing originating processes and the supporting affidavits of Vitorio Vincenzo Turco, a director and secretary of each of Ballast Holdings and Nextgen Financial. By prayer 2 of their respective originating processes, the plaintiffs each sought an order for their costs to be paid on an indemnity basis.

13    On 9 February 2023, 30 March 2023 and 5 May 2023 the Court made timetabling orders in the proceedings, on each occasion reserving on the question of costs.

14    On 18 April 2023 Leonite filed and served its evidence in the proceedings, comprising of two affidavits each with an exhibit of more than 400 pages.

15    On 15 May 2023 Assembly sent a letter (15 May 2023 Letter) to Valorum which, among other things, asserted that the service of Leonite’s evidence was “oppressive and expensive in the context where [Leonite] has had ample opportunity to reflect on the merits of its statutory demand” and the plaintiffs’ assertion that there was no genuine dispute. Assembly foreshadowed the plaintiffs’ intention to file an interlocutory application for security for their costs:

9.    We understand that your client is a limited liability corporation registered in the state of Delaware, in the United States of America. We understand it is a private family office, with no publicly available records as to its financial position.

10.    We are not aware of any assets held by your client in any State or Territory in Australia.

11.    If your client does hold assets in Australia, please provide the relevant particulars and confirm the nature of the assets, their value, if they are encumbered or unencumbered, and if they encumbered, the equity your client asserts it holds within any such assets. If there have been recent independent valuations, please provide them to us.

12.    Given your client is domiciled and ordinarily resident outside of Australia, my clients are concerned that, should they succeed in having the statutory demands issued by your clients set aside, and be awarded their costs, your client will be unwilling to pay their costs. Indeed, my clients are concerned that to enforce any costs award would be expensive and required enforcement against your client in the United States. In light of the foregoing, we consider there is reason to believe that your client will not meet any adverse costs order made against it in each of the above proceedings.

13.    We invite you and your client to dissuade of that view. To do so, please provide evidence of your client’s ability to meet any adverse costs order against it in the above proceedings, including:

13.1    financial statements of your client for the financial years ending 30 June 2021 and 30 June 2022 that particuarlise (sic) income and assets in Australia; and

13.2    income tax returns and Inland Revenue Assessments in respect of your client for the financial years 30 June 2021 and 30 June 2022, if such documents are in existence.

14.    If your client is unwilling or unable to provide the documents requested in paragraph 6, please:

14.1    confirm whether your client is willing to provide security for costs in a form and amount to be agreed or determined by the Court; or

14.2    indicate the basis on which it is contended that your client has no obligation to provide security for our clients’ costs.

15.    In the alternative to providing evidence of its ability to meet a costs order against it, please indicate if your client is willing to provide either:

15.1    an undertaking to the Federal Court of Australia that, through your firm, it willing (sic) to meet an adverse costs order; or

15.2    to deposit into your firm’s trust account sufficient funds to meet any adverse costs order with an undertaking that such funds will be preserved pending the outcome of the proceedings and otherwise made available to meet any adverse costs order.

16.    We are instructed that our clients may seek a direction at the case management hearing on Wednesday for your client to fully respond to this letter. Depending on the adequacy of any response, our clients may consider bringing an interlocutory process for security for costs without further notice.

…

16    The 15 May 2023 Letter stated that Ballast Holdings and Nextgen Financial had incurred, by that time, shared costs of approximately $30,000 (inclusive of GST) and that they expected to incur further costs of approximately $25,000 across both proceedings, with an estimate of $55,000 in total costs. The plaintiffs requested Leonite to indicate its position as to whether Leonite would be willing to provide the undertakings set out above or otherwise pay $38,500, being the estimate of the plaintiffs’ total costs with an applied discount of 30% on the usual party-party basis, as security for their costs.

17    In the 15 May 2023 Letter, Assembly referred to s 459N of the Corporations Act and s 43 of the Federal Court of Australia Act 1976 (Cth) and advised that the plaintiffs may seek to recover their costs from Valorum, stating:

28.    Here, plainly, a genuine dispute as to the debt has been raised, yet your client:

28.1    continue to provide you with instructions to act;

28.2    is domiciled outside of Australia;

28.3    has not responded to our 8 December 2022 letter;

28.4    has issued two statutory demands against separate entities for the same alleged debt;

28.5    has refused to withdraw the statutory demands; and

28.6    has taken steps to escalate the costs of these proceedings.

29.    Many prior cases have warned against creditors persisting with the defence to set aside the statutory demand given the hurdle to be cleared is so low, including the need to consider carefully, against the possibility of an order for indemnity costs, whether there are no valid grounds for their taking up court time and putting the company to expense by doing so.

30.    In the circumstances, depending on your client’s attitude to the matters raised in this letter, our clients put you on notice that they may ultimately seek to recover their costs from Valorum Law Group, the entity which served the statutory demands. If they so elect, they cannot be criticised for not pursuing an application for security for costs.

18    On 15 June 2023 Valorum sent a letter to Assembly refusing to provide the documents and undertakings sought in the 15 May 2023 Letter and noting that, if the plaintiffs brought an application for security for their costs, it would be opposed.

19    On 4 July 2023 Ballast Holdings and Nextgen Financial filed and served applications for security for their costs in their respective proceedings (Security for Costs Applications).

20    On 1 August 2023 I made orders by consent in each proceeding dismissing the Security for Costs Applications with no order as to costs.

21    On 24 August 2023 Valentina O’Regan, solicitor and director of Valorum, wrote to Assembly to confirm that she had received the agreed amount of security for costs for the plaintiffs’ into Valorum’s trust account. The funds remain in Valorum’s trust account pending final orders and determination of costs.

22    On 6 September 2023 Valorum sent a letter to Assembly advising that it was aware that Nextgen Financial was the subject of a winding up application brought by WJ & V Drakoulis Super Pty Ltd atf WJ & V Drakoulis Super Fund in a proceeding commenced in the Victorian Registry of this Court which was listed on 3 October 2023 (Victorian Application). The letter stated:

The basis of the application is that your clients failed to comply with a statutory demand for $270,523.67 within the time period provided by the Corporations Act 2001 (Cth). The effect of this is that the Court must presume that [Nextgen Financial] is insolvent and should be wound up, subject to evidence to the contrary.

In the circumstances, [Nextgen Financial’s] application is now otiose as the company is already presumed to be insolvent. In those circumstances, we propose that your client consent to the application being dismissed without further order as to costs and, if it assists you, we will obtain instructions to withdraw the statutory demand served on [Nextgen Financial].

If [Nextgen Financial’s] application is not withdrawn, we are under instructions to seek an order for costs to be awarded against Assembly Law (pursuant to Federal Court of Australia Act 1976 (Cth) (FCAA) s43(3)(f)) or alternatively to seek costs on an indemnity basis (pursuant to s43(3)(g) of the FCAA)

23    Later that day, Assembly responded to Valorum advising that they were awaiting Nextgen Financial’s instructions in relation to service of the Victorian Application. Assembly stated that if Leonite was of the view that it should withdraw the Nextgen Demand, then it should do so on the basis on that it undertakes to pay Nextgen Financial’s costs. In that letter, among other things, Assembly observed, on behalf of the plaintiffs, that the issue before the Court in this proceeding, whether there is a genuine dispute in relation to the amounts claimed in the statutory demands, was unaffected by the Victorian proceeding and concluded that they could see no basis to withdraw the proceedings.

24    On or around the same day Leonite sent letters to Ballast Holdings and Nextgen Financial enclosing verification statements from the Personal Property Securities Register showing security interests registered in favour of Leonite over Genesis’ shares and property in Ballast Holdings and Nextgen Financial.

Legal principles

25    Section 43 of the Federal Court Act confers a broad discretion on the Court to award costs in a proceeding. That includes a discretion to order a party’s lawyer to bear costs personally pursuant to subs 43(3)(f) and for costs to be awarded against a party on an indemnity basis pursuant to subs 43(3)(g).

Indemnity costs

26    An indemnity costs order may be made where there is “some relevant delinquency on the part of the unsuccessful party”: see Oshlack v Richmond River Council (1998) 193 CLR 72 at [42] (Gaudron and Gummow JJ). As their Honours explained at [44]:

It may be true in a general sense that costs orders are not made to punish an unsuccessful party. However, in the particular circumstance of a case involving some relevant delinquency on the part of the unsuccessful party, an order is made not for party and party costs but for costs on a “solicitor and client” basis or on an indemnity basis. The result is more fully or adequately to compensate the successful party to the disadvantage of what otherwise would have been the position of the unsuccessful party in the absence of such delinquency on its part.

(Footnotes omitted.)

27    In Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 232-234 Sheppard J set out the following principles:

2.    The ordinary rule is that, where the Court orders the costs of one party to litigation to be paid by another party, the order is for payment of those costs on the party and party basis. …

3.    …

4.    In consequence of the settled practice which exists, the Court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the Court in departing from the usual course. That has been the view of all judges dealing with applications for payment of costs on the indemnity or some other basis whether here or in England. The tests have been variously put. The Court of Appeal in Andrews v Barnes (supra) at 141 said the Court had a general and discretionary power to award costs as between solicitor and client “as and when the justice of the case might so require”. Woodward J in Fountain Selected Meats appears to have adopted what was said by Brandon LJ (as he was) in Preston v Preston (supra) at 637; namely, there should be some special or unusual feature in the case to justify the Court in departing from the ordinary practice. Most judges dealing with the problem have resolved the particular case before them by dealing with the circumstances of that case and finding in it the presence or absence of factors which would be capable, if they existed, of warranting a departure from the usual rule. But as French J said (at p 8) in Tetijo, “The categories in which the discretion may be exercised are not closed”. Davies J expressed (at p 6) similar views in Ragata (supra).

5.    Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud (both referred to by Woodward J in Fountain and also by Gummow J in Thors v Weekes (1989) 92 ALR 131 at 152; evidence of particular misconduct that causes loss of time to the Court and to other parties (French J in Tetijo); the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp (supra)); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata); an imprudent refusal of an offer to compromise (eg Messiter v Hutchinson (1987) 10 NSWLR 525; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal); Crisp v Keng (unreported, Court of Appeal, NSW, Kirby P, Priestley JA, Cripps JA, No 40744/1992, 27 September 1993) and an award of costs on an indemnity basis against a contemnor (eg Megarry V-C in EMI Records (supra)). Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis.

6.    It remains to say that the existence of particular facts and circumstances capable of warranting the making of an order for payment of costs, for instance, on the indemnity basis, does not mean that judges are necessarily obliged to exercise their discretion to make such an order. The costs are always in the discretion of the trial judge. Provided that discretion is exercised having regard to the applicable principles and the particular circumstances of the instant case its exercise will not be found to have miscarried unless it appears that the order which has been made involves a manifest error or injustice.

(Emphasis added.)

28    In CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Ltd (2003) 47 ACSR 100; [2003] NSWSC 728 at [19] Barrett J citing Santow J in, among others, Polaroid Australia Pty Ltd v Minicomp Pty Ltd (1997) 16 ACLC 529 stated:

In the s 459 field, Santow J warned in a number of judgments that, with the hurdle to be cleared by companies seeking to have statutory demands set aside being so low, creditors persisting with the defence of such applications need to consider carefully, against the possibility of an order for indemnity costs, whether there are valid grounds for their taking up court time and putting the company to expense by doing so: …

29    At [22] his Honour continued:

I accept that the possibility of an order for indemnity costs should not be allowed to deter a party by whom a statutory demand has been served from putting the company to appropriate proof of the genuine dispute it asserts. But that principle has a limit to it. As Galaxy Resources, Wildtown Holdings and Carinda Homes show, there are cases in which attempts to resist the setting aside of the demand are, even on the interpretation of the facts most favourable to the defendant, so devoid of prospects of success as to be perverse. The opportunity to put the company to proof of the asserted genuine dispute is something to which the defendant should not be regarded as entitled in such obvious cases. A defendant, on having an obvious and irremediable weakness in its position pointed out, ought to withdraw the statutory demand. If, in such circumstances, such a defendant does not do so, it may well be appropriate for the court to award costs to the plaintiff on the indemnity basis.

(Emphasis added.)

30    In CBS Commercial Canberra Pty Ltd v AXIS Commercial (ACT) Pty Ltd; In the matter of CBS Commercial Canberra Pty Ltd (No 2) [2022] FCA 687 at [23] Halley J found that the decision by the defendant to persist in its defence to the plaintiff’s application to set aside the defendant’s statutory demand after it was put on notice of the basis on which it was unlikely to succeed gave rise to a relevant delinquency or alternatively a special or unusual feature sufficient to justify an award of indemnity costs.

Non-party costs

31    Section 459N of the Corporations Act provides that, where the Court sets aside a demand on an application under s 459G of the Corporations Act, it may order the person who served the demand to pay the company’s costs in relation to the application.

32    In Product People (International) Pty Ltd v Box Seat Company Pty Ltd (in liq) (No 2) [2013] FCA 1437 Farrell J considered an application for costs by the plaintiff, The Product People (International) Pty Ltd, which was successful in setting aside a statutory demand served upon it by the defendant. Relevantly, the plaintiff sought orders that Mr Neville Jones, a major creditor of the defendant, pay the plaintiff’s costs on an indemnity basis

33    At [53]-[54] Farrell J set out the principles governing the award of a non-party costs order:

53    The principles governing such awards were usefully summarised by Collier J in Citrus Queensland Pty Ltd v Sunstate Orchids Pty Ltd (No 10) [2009] FCA 498 at [20]-[21]:

[20]    Although as a general rule costs are not awarded against a stranger to litigation, as I have already indicated it is well-settled that the Court has a discretion pursuant to s 43 of the Federal Court Act to order costs against a non-party in appropriate circumstances (Knight (1992) 174 CLR 178, Caboolture Park (1993) 45 FCR 224, Gore v Justice Corp Pty Ltd (2002) 119 FCR 429, Kebaro Pty Ltd v Saunders [2003] FCAFC 5, Life Therapeutics Ltd v Bell IXL Investments Ltd (No 2) (2008) 170 FCR 595). The exercise of such discretion is approached with caution – indeed it has been described as “rare and exceptional” (Vestris v Cashman (1998) 72 SASR 449 at 467, Kebaro [2003] FCAFC 5 at [103]) – and depends on the circumstances of each case as it is a “fact-specific jurisdiction” (Kebaro [2003] FCAFC 5 at [69]). Principles guiding the approach of the Court to the exercise of the (sic) include the following:

•    There must be a real link between the non-party and the proceedings, which is material to the issue of costs (Bischof v Adams [1992] 2 VR 198 at 204-205, Kebaro [2003] FCAFC 5 at [70]).

•    The mere fact that a person may benefit from litigation will not, without more, suffice to justify an award of costs (Bischof v Adams [1992] 2 VR 198 at 204-205, Vestris v Cashman (1998) 72 SASR 449, Kebaro [2003] FCAFC 5 at [70], Probiotec Ltd v The University of Melbourne (2008) 166 FCR 30 at [48]).

•    An order for costs may be appropriate – provided the interests of justice so require – where the party to litigation is an insolvent person or a man of straw, the non-party has played an active part in the conduct of the litigation and the non-party has an interest in the subject of the litigation (Mason CJ and Deane J in Knight (1992) 174 CLR 178 at 192).

•    Regard will be had to whether the non-party had been warned, or the non-party could have been joined as a party or applied to join earlier in the proceedings and thereby obtained the protection of the rules of the court (Vestris v Cashman (1998) 72 SASR 449, Kebaro [2003] FCAFC 5 at [75], Yates v Boland [2000] FCA 1895 at [32]).

•    It can be appropriate to exercise the power against a person who may be characterised as no more than a real party to the litigation in critical and important respects, albeit not the only such party (Kebaro [2003] FCAFC 5 at [111], Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406 at 414, Gore (2002) 119 FCR 429 at 439).

•    An order for costs may be appropriate where a non-party causes a party to bring or defend proceedings for his or her own financial benefit, either to gain the fruits of the litigation or to preserve assets in which the person has an interest (Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757 at 765).

•    Where a non-party has maintained or financed an action, or caused an action, or has some management of the action, a costs order may be appropriate (Symphony Group Plc v Hodgson [1993] 3 WLR 830 at 840). This may be the case where, for example, the nominal plaintiff is mentally incompetent and the non-party has a substantial interest in the outcome (Flinn v Flinn [1999] 3 VR 712).

[21]    Conversely, the courts have declined to order costs against a non-party:

•    Simply because the non-parties were directors of the plaintiff company and had caused the plaintiff to commence and maintain proceedings in circumstances where they ought to have known that, if the proceedings were unsuccessful, it was unlikely that the plaintiff could meet a costs order: Carborundum [1992] 3 NZLR 757.

•    Where the non-party had not been separately represented at the hearing of the primary proceedings.

•    Simply because the non-party is a legal expense insurer (Murphy v Young & Co’s Brewery plc [1997] 1 WLR 1591).

54    The order will be made when, in the circumstances of the particular case, it is just and equitable that a non-party pay the costs of a party to the litigation: Vestris v Cashman (1998) 72 SASR 449 at 469 per Lander J. His Honour also said at 468:

… In exercising the discretion regard would be had to whether the non-party could have been joined as a party earlier in the proceedings and thereby obtained the protection of the rules of court; whether the non-party has had any warning that an application for costs against that party would be made; whether, in those circumstances, the non-party could have applied to be joined in the proceedings and thereby had the capacity to influence the proceedings or the non-party could have protected itself by making an offer in accordance with the rules; whether if a warning had been given the non-party could have terminated the proceedings by discontinuance, negotiation, payment or otherwise; whether the party who would otherwise be usually liable for costs can meet an order for costs and if relevant the reason why that party cannot meet an order for costs; whether it was apparent at any earlier stage in the proceedings, and if so when, that the party could not meet costs; whether the moving party should have sought an order for security for costs; the relationship, if any, between the non-party and the party who would usually be liable for costs; whether the non-party has caused the proceedings; whether the non-party has funded the proceedings; whether the non-party stood to benefit by the litigation and if so how; whether the non-party had a direct or indirect financial interest in the litigation; and whether there has been any improper conduct on the part of the non-party.

None of the matters will necessarily be decisive. Indeed the presence of one or more of those matters does not inexorably lead to the conclusion that an order for costs should be made against a non-party. In Bischof v Adams the mere fact that a person may benefit from the litigation was not enough.

…

Consideration

34    There are two questions to resolve: should an order be made that Leonite pay Ballast Holdings’ and Nextgen Financial’s costs on an indemnity basis; and should an order be made that Valorum, Leonite’s solicitors, be jointly and severally liable to pay the costs ordered by the Court. I address each of those questions in turn.

Should Leonite pay the plaintiffs’ costs assessed on the indemnity basis?

35    The ground on which the plaintiffs succeeded, namely that there was a genuine dispute about the existence of the debt the subject of demands on the basis that Russell Cameron lacked corporate authority to sign the Loan Transaction Documents, was raised with Leonite in the 8 December 2022 Letter.

36    On 16 December 2022, when the plaintiffs filed and served their evidence, Leonite was put on notice of the factual matters underpinning that dispute. It was based upon that evidence that I was satisfied that there was a genuine dispute about the existence of the debt given that the Loan Transaction documents were signed by Mr Cameron who at the time was not a director of Ballast Holdings or Nextgen Financial and, based on the evidence before me, had no authority to sign those documents: see Ballast v Leonite at [63]-[64]. Further, I found that there was no evidence before me which undermined the existence of a genuine dispute about Mr Cameron’s authority: see Ballast v Leonite at [66].

37    On 15 May 2023 the plaintiffs again reiterated the basis upon which they contended there was a genuine dispute about the debt the subject of the statutory demands. It was at that time that the plaintiffs foreshadowed their intention to file applications for security for their costs. As at that date they had incurred approximately $30,000 in costs.

38    The threshold to establish a genuine dispute is not “difficult or demanding” to meet: see for example Kirrak Pty Ltd v Compass Scaffolding & Plant Hire Pty Ltd [2007] NSWSC 1002 at [3]. The claim must have some merit and be genuine and there must be a serious question to be tried: see Ballast v Leonite at [55]. In other words, the hurdle is low.

39    In light of the relatively low threshold that the plaintiffs had to meet and the uncontroverted evidence presented to Leonite about Mr Cameron’s lack of authority to sign the Loan Transaction documents, I am satisfied that in this instance it is appropriate that an order be made that Leonite pay each of Ballast Holdings’ and Nextgen Financial’s costs on an indemnity basis from 16 December 2022, being the date on which they served their evidence.

40    The decision by Leonite to persist in its defence of the plaintiffs’ applications to set aside the statutory demands gave rise to a relevant delinquency or alternatively a special or unusual feature sufficient to justify an award of indemnity costs: see Oshlack at [44] (Gaudron and Gummow JJ); Colgate-Palmolive Company at 233-4 (Sheppard J). It seems to me there was an obvious weakness in Leonite’s defence of those applications in that it could not contradict the evidence that Mr Cameron was not an office holder and otherwise had no authority to sign the relevant documents. This weakness was made plain to Leonite.

41    Leonite submits that, in the alternative to the order sought by the plaintiffs, an order should be made that it pay the plaintiffs’ costs to the extent agreed between the parties leading to the dismissal by consent of the plaintiffs’ interlocutory applications for security for costs. The evidence before me allows me to infer that an arrangement was reached between Leonite and the plaintiffs in relation to the question of security and, I infer, pursuant to that arrangement the applications for security for costs were withdrawn and funds were and are held in Valorum’s trust account. However, there was no evidence of the amount held and whether and how it might satisfy the plaintiffs’ entitlement to their costs on a party–party basis or otherwise or any further explanation given as to why I would make the alternative order sought by Leonite.

Should an order be made that Valorum be jointly and severally liable to pay costs?

42    The plaintiffs submit that Valorum should be jointly liable to pay their costs as ordered by the Court because it served the statutory demands on its letterhead, gave its address for service and assisted Leonite to prepare its voluminous evidence, much of which was withdrawn or inadmissible. The plaintiffs contend that it can be inferred from the correspondence exchanged by the parties that Valorum did not advise Leonite to withdraw the statutory demands, otherwise it ought to have ceased to act for its client.

43    The plaintiffs submit that Valorum was instrumental in issuing and serving the statutory demands, their non-withdrawal and the resistance to the provision of financial information and/or an undertaking as to costs, that Valorum unfairly threatened an adverse costs orders against their solicitors a week from final hearing and that it is just and equitable that it be jointly liable for costs to avoid a worthless award of costs against Leonite if it fails to pay.

44    Leonite seeks the order against Valorum on the basis of s 459N of the Corporations Act or, in the alternative, s 43(3)(f) of the Federal Court Act.

45    As set out above, s 459N of the Corporations Act empowers the Court, where it sets aside a statutory demand, to order the person who served the demand to pay the company’s costs of the application to set it aside. The plaintiffs seem to interpret this section to mean that the person who, for want of a better expression, physically served the demand can be ordered to pay costs. I do not think that is what is intended by s 459N. Rather, the person who served the demand is intended to mean the party who issued, or instructed the issue of, the demand, in this case Leonite. To construe the section otherwise could lead to potentially absurd or unintended results. For example, service can be effected by third parties retained for that purpose or a party’s solicitor, as was the case here. That is not to say that the Court does not have power to order a non-party to pay costs in relation to a proceeding brought under the Corporations Act. It does: see Product People at [47]-[50].

46    That the statutory demands were served under cover of letters from Valorum does not, in my view, make Valorum the party that “served the demand” for the purposes of s 459N of the Corporations Act. That party was Leonite. But even if I am wrong about that, I would not make the order sought by the plaintiffs either pursuant to s 459N of the Corporations Act or s 43(3)(f) of the Federal Court Act.

47    The plaintiffs rely on the principles set out in Product People (see [33] above). In particular, they rely on the proposition that a circumstance in which an order may be made against a third party is where that party “has played an active part in the conduct of the litigation and the non-party has an interest in the subject of the litigation”, including if they have been put on notice and it is just and equitable.

48    The exercise of the discretion to award costs against a non-party to a proceeding is to be approached with caution. Here the facts relied on by the plaintiffs do not lead me to conclude that it is appropriate to make an order that Valorum is liable for any costs payable by Leonite. There is no evidence that Valorum caused Leonite to defend or continue to defend the proceedings at any time or that it influenced Leonite in the way suggested in relation to requests for documents or undertakings in relation to payment of costs.

49    As Leonite submits, there is no reason to believe that Valorum acted other than reasonably and on instructions. In addition, Valorum had no interest in the proceeding in the relevant sense and did not stand to benefit from them (other than for its fees in acting for Leonite). That is in contrast, for example, to Mr Jones, the non-party in Product People, who funded the litigation and provided an indemnity to the party issuing the statutory demand.

50    Finally, there is no evidence to suggest that a costs order against Leonite will be fruitless and will not be met. There is no evidence that Leonite is impecunious. Funds are held in trust by its solicitors, I infer, in substitution for the plaintiffs pressing their applications for security for costs and, it seems, by reason of security held by Leonite over the assets of Genesis in Australia it has assets available in the jurisdiction from which a costs order may be met.

Conclusion

51    The defendant should pay the plaintiffs’ costs assessed on the ordinary basis up to 16 December 2022 and thereafter on an indemnity basis. I am not satisfied that any order should be made as against Valorum for liability for the plaintiffs’ costs.

52    The plaintiffs effectively sought two orders in their respective interlocutory process. They have been partially successful and succeeded in obtaining one such order. In those circumstances each party should pay their own costs of the interlocutory process to which they are party.

53    I will make orders accordingly.

Associate:

Dated:    29 February 2024