Federal Court of Australia

Lucky v Ives (Winding Up Application) [2024] FCA 1501

ORDERS

THE COURT ORDERS THAT:

1.    The originating process be dismissed.

2.    Subject to the orders for costs made to date in the proceedings, the first and third respondents pay the costs of the proceedings on an indemnity basis.

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

REASONS FOR JUDGMENT

Delivered ex tempore, revised from transcript

JACKMAN J:

1    The first applicant and the first respondent, Mr Lucky and Mr Ives, have been the directors of the second respondent, Chief Trade Credit Pty Ltd (Chief), and the controlling minds of its two 50 per cent shareholders, the second applicant and the third respondent. The second applicant, Luta Investments Pty Ltd, seeks in these proceedings an order under s 461(1)(k) of the Corporations Act 2001 (Cth) (the Act) for Chief to be wound up on the just and equitable ground.

2    The evidence in support, which has been served by the applicants, shows that the relationship between Mr Lucky and Mr Ives has broken down irretrievably. Indeed, that was accepted by counsel for Mr Ives at a case management hearing before me on 8 November 2024. Basic steps in the operation and governance of the company have not been taken, including holding board meetings, finalising financial statements and filing tax returns. Until yesterday, it appeared that there was no appropriate means, other than an order winding up the company, to address the deadlock. Late yesterday afternoon, Mr Ives resigned as a director of Chief and communicated that resignation to the applicants. Upon the making of certain representations by Mr Ives’ counsel in court today concerning the future conduct of Chief, the applicants accept that the deadlock has now been resolved, and the application for winding up on the just and equitable ground has become moot.

3    It is agreed between the parties that the originating process should be dismissed. That leaves the question of costs. The applicants seek an order that the first and third respondents pay the costs of the proceedings on the indemnity basis. The principles concerning the award of costs in circumstances such as the present were considered by the Full Court in Chapman v Luminis Pty Ltd [2003] FCAFC 162 at [7] (Beaumont, Sundberg and Hely JJ) in the following terms:

(a)    Where a proceeding terminates before there has been a hearing, the Court should not resolve the issue of costs by engaging in something in the nature of a hypothetical trial: Australian Securities Commission v Aust-Home Investments Limited (1993) 44 FCR 194 at 201 (Hill J).

(b)    This does not mean that a Court can never make an order for costs. Often it will be unable to do so, but in other cases an examination of the reasonableness of the conduct of the parties may provide the basis for an order, or a judge may be confident that one party was almost certain to have succeeded if the matter had been fully tried: Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 625 (McHugh J).

(c)    A distinction is to be drawn between cases in which one party after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the Court’s discretion otherwise than by an award of costs to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs: ONE.TEL Ltd v Deputy Commissioner of Taxation [2000] FCA 270; (2000) 171 ALR 227 at [6] (Burchett J).

4    As to the award of indemnity costs, while the Court’s discretion is broad, there must be some special or unusual feature of the case justifying such an award. One such case is where a party persists in what should have been seen to be a hopeless case: Mead v Watson (as Liquidator for Hypec Electronics) [2005] NSWCA 133; (2005) 23 ACLC 718 at [8] (Sheller, Ipp and Tobias JJA). Put differently, indemnity costs are available where allegations or contentions are made that ought never have been made or the case has been unduly prolonged by groundless contentions: Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 233 (Sheppard J).

5    The present case falls squarely within one of the conventional categories for a just and equitable winding up, namely, where the relationship between the participants in the company has irretrievably broken down, causing a deadlock or an irreparable breakdown between the two members of what is, in substance, a quasi-partnership founded, at least initially, on a relationship of trust and confidence. As I have indicated, it is common ground that the relationship had irretrievably broken down, as counsel for Mr Ives properly conceded at the case management hearing before me on 8 November 2024. At a further case management hearing five days later on 13 November 2024, counsel for Mr Ives accepted that it was “somewhat inevitable, if the matter proceeds to hearing, that in all likelihood your Honour will make an order winding this company up”.

6    Counsel for Mr Ives did foreshadow that an order for winding up may be sought to be resisted on the basis of “unclean hands” or the notion that it was Mr Lucky who was primarily responsible for the breakdown in the relationship. That contention was maintained in correspondence by Mr Ives’ solicitor as recently as two days ago on 16 December 2024. The submission, in my view, was hopeless.

7    In the first place, the state of affairs could not be allowed to continue. The continuing deadlock between Mr Lucky and Mr Ives was relevant not merely to them, but also to the customers, employees and creditors of Chief, as well as its ability to comply with its legal obligations, including with respect to the ATO. Until the resignation by Mr Ives as a director yesterday, there was no sensible alternative to a winding up by which to break that deadlock, and so much was conceded by counsel for Mr Ives on 13 November 2024.

8    Second, although there is authority that a winding up order may be refused where the claimant for the order lacks clean hands or has been the primary contributor to the breakdown in the relationship, that is not decisive (Lamond No 2 [2017] FCA 548 at [25] (Besanko J)) or an “absolute bar” (In the matter of Amazon Pest Control Pty Ltd [2012] NSWSC 1568 at [22] (Black J)), particularly where the partnership is truly deadlocked (Ruut v Head (1996) 20 ACSR 160 at 162 (Santow J)). If it were, the Court would be prohibited from acting where there is no other practical means of breaking a deadlock or where there is fault on both sides, those being matters that support an order for winding up: Ruut v Head at 162 (Santow J); In the matter of Amazon Pest Control Pty Ltd at [22] (Black J). In the present case, where the parties’ deadlock appeared to be insoluble until late yesterday afternoon and there appeared no sensible alternative means of resolving it, the presence or absence of fault on either side could have little relevance.

9    Third, Mr Ives’ contention of unclean hands fails on the evidence. Mr Ives foreshadowed serving evidence on this matter at the case management hearings in the first half of November 2024, although Mr Ives’ evidence had initially been required to be filed and served by late October 2024. I granted Mr Ives further time to serve evidence by 22 November 2024, but, as matters transpired, no evidence was served on his part concerning any question of unclean hands or primary responsibility for the breakdown in the relationship.

10    In the absence of any evidence by Mr Ives, the contention as to unclean hands was hopeless. The proceedings against Chief upon which Mr Ives relied concerned allegedly negligent advice said to have been given by Mr Lucky in the course of conducting Chief’s insurance-broking business. There was no suggestion made in those proceedings of any dishonesty or of any misconduct by Mr Lucky in relation to Chief’s internal affairs. Even if the allegations of professional negligence made against Chief were established, that would not supply a good reason to decline to make a winding-up order on the just and equitable ground.

11    In any case, the evidence is that Mr Lucky and Mr Ives’ relationship was dysfunctional before the claims now made against Chief were first foreshadowed. It may well be that the proceedings brought against Chief and the satellite litigation under s 237 of the Act between Mr Lucky and Mr Ives in which Mr Lucky has largely been successful have added extra strain to their relationship, but it cannot be said, in circumstances where Mr Lucky’s relationship with Mr Ives has been in terminal decline for many years, that Mr Lucky was the primary contributor to the breakdown of the relationship by reason of his conduct in and after 2022.

12    If Mr Ives had resigned as a director at an earlier point of time, then there is no reason to think that that would not have resolved the deadlock, just as yesterday’s resignation has done so. Rather than taking that step at an earlier point in time, Mr Ives waited until 4.47 pm yesterday to communicate his resignation to the applicants. As a result, a great deal of legal costs have been expended in preparing for a case which was almost certain to succeed at every stage of the proceedings.

13    Accordingly, in my view, the present case falls within the category of case where the Court may be confident that one party was almost certain to have succeeded if the matter had been fully tried. That is a sufficient basis for the award of costs.

14    In my view, a further basis is also available for the award of costs in that, in practical terms, Mr Ives has effectively surrendered to Mr Lucky by way of his resignation as a director. Although both will benefit from the continued operation of Chief as a going concern, the deadlock has been broken by the unilateral step taken by Mr Ives to surrender his directorship in favour of Mr Lucky becoming the sole director of the company.

15    It is appropriate that, subject to the costs orders which have been made to date, Mr Ives and his company, Benives Asset Management Pty Ltd, should pay the applicants’ costs of the proceedings.

16    As to whether those costs should be paid on the indemnity basis, in my view there are special circumstances in the present case justifying such an award. Mr Ives has persisted in what should have been seen to be a hopeless case, in that the prospects of the applicants succeeding in obtaining a winding-up order were overwhelming, and no reasonable basis has been demonstrated as to why the applicants would not have succeeded in the application for winding up, save for the events of late yesterday afternoon. The litigation has been unduly prolonged by groundless contentions on the part of Mr Ives to the effect that a winding up order would not be made in the Court’s discretion because of unclean hands or because of attributing more blame to Mr Lucky than to Mr Ives in causing the breakdown in their relationship.

Associate:

Dated:    19 December 2024