Supreme Court New South Wales

• Medium Neutral Citation: Friendly Inn Holdings Pty Ltd v St George Bank [2012] NSWSC 441
• Hearing dates: 17 April 2012
• Decision date: 17 April 2012
• Jurisdiction: Equity Division
• Before: Gzell J

Decision

No order for costs against sole shareholder. Plaintiffs to pay defendants' costs on the indemnity basis from the commencement of the proceedings

• Catchwords: PROCEDURE - Costs - successful defendants - plaintiffs companies of straw - sole shareholder funded proceedings and paid security for costs - whether sole shareholder should pay defendants' costs on the indemnity basis
• Legislation Cited: Civil Procedure Act 2005; Corporations Act 2001 (Cth)
• Cases Cited: Knight v F P Special Assets Limited [1992] HCA 28; (1992) 174 CLR 178; Jeffery & Katauskas Pty Limited v SST Consulting Pty Ltd [2009] HCA 43; (2009) 239 CLR 75; The Beach Retreat Pty Ltd v Mooloolaba Marina Ltd [2009] QSC 84; [2009] 2 Qd R 356; FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340; Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72
• Category: Costs
• Parties: Friendly Inn Holdings Pty Ltd (First Plaintiff); Arcadia Developments Pty Ltd (Second Plaintiff); St George Bank (First Defendant); Atle Crowe-Maxwell and John Frederick Lord Receivers and Managers of Hummingbrooke Pty Ltd (Second Defendant)
• Representation: Counsel: B DeBuse (Plaintiffs); R de Robillard (Defendants); Solicitors: Watson & Watson Solicitors (Plaintiffs); Herbert Geer, Lawyers (Defendants)
• File Number(s): SC 2011/44927

EX TEMPORE JUDGMENT

1 Before the Court is a further amended notice of motion seeking orders that Bryan Anthony Rutter of xxx xxxxxxxxxx xxxx Canterbury NSW 2193 pay the defendants' costs of the proceedings pursuant to s 98 of the Civil Procedure Act 2005 and/or s 1335 of the Corporations Act 2001 (Cth); that the said Bryan Anthony Rutter and the plaintiffs be jointly and severally liable with the plaintiffs for the defendants' costs of the proceedings as agreed or assessed; that such costs be paid on the indemnity basis from 9 February 2011 when the proceedings commenced; that such indemnity costs be fixed as agreed or assessed; that the said Bryan Anthony Rutter pay the defendants' costs of the motion as agreed or assessed on the indemnity basis; and that such further order be made as the court deems fit.

2 The parties filed affidavits in support and in opposition to the motion. I do not propose to allow either party to reopen its case to read those affidavits on the motion. The matter should be argued on the basis of the findings I have made in the preliminary proceedings.

3 There is undoubtedly jurisdiction in the court in its exercise of discretion over costs to visit an order on a non-party. In Knight v F P Special Assets Limited [1992] HCA 28; (1992) 174 CLR 178 at 192-3 Mason CJ and Deane J, with whom Gaudron J agreed, said:

"For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made."

4 But the interaction of the jurisdiction to award costs against a non-party and the role of security for costs is a vexed one. In Knight at 190-1 the fact that security for costs had been ordered was no bar to an order that a non-party pay the costs:

"The appellants contend that the availability of an order for security for costs where the plaintiff is suing on behalf or for the benefit of another is a strong reason for denying the existence of a jurisdiction to order costs against a non-party. Indeed, it has been said that the practice of making such an order for security for costs and of staying the proceedings until it is given is the appropriate remedy (Ram Coomar Coondoo (1876) 2 App Cas at 211). No doubt it is an appropriate remedy in many cases but there are limitations attaching to the availability of security for costs. These limitations are such that security for costs is not a remedy in all cases in which justice calls for an order for the award of costs against a non-party. Security cannot be ordered against a defendant or a plaintiff who is an individual and who resides in the jurisdiction. The amount awarded as security is no more than an estimate of the future costs and it is not reasonable to expect a defendant to make further applications to the court at every stage when it appears that costs are escalating so as to render the amount of security previously awarded insufficient. And the availability of the remedy is scarcely a reason for denying the existence of jurisdiction to make an order for costs against the "real party" at the end of the trial of an action. The availability of an order for security for costs at an earlier stage of the litigation would, in many situations, be a strong argument for refusing to exercise a discretion to order costs against a non-party, but discretion must be distinguished from the jurisdiction."

5 But in Jeffery & Katauskas Pty Limited v SST Consulting Pty Ltd [2009] HCA 43; (2009) 239 CLR 75 at [39] the suggestion was that any unfairness to a successful defendant prosecuted by a plaintiff of straw because security for costs was insufficient was the result of the security for costs principles and did not establish an abuse of process:

"Because security for costs will not always be ordered against an impecunious plaintiff, it cannot be said that a defendant, faced with proceedings from such a plaintiff, can always obtain the protection of security for costs. There are cases where successful defence of an action will come at a considerable cost to the defendant. But the extent to which that possibility exists and the extent to which there is a resultant "unfairness" to a defendant is a product of the provisions and principles that govern security for costs. Neither the existence of the possibility nor its scope suggest that there is some more general rule that to prosecute proceedings without reasonable prospects of being able to meet an adverse costs order is an abuse of process. Whether or to what extent the possibility that a defendant will succeed in defending proceedings only at a cost not recoverable from the plaintiff suggests some need to revisit the provisions or principles governing security for costs is a large question. It was not the subject of argument and is a question about which no view is expressed."

6 In this case security for costs was sought and granted in relation to the preliminary question late in the proceedings, about a month before they commenced, and the amount was accepted as adequate. Mr Rutter caused it to be paid.

7 Reliance was placed on The Beach Retreat Pty Ltd v Mooloolaba Marina Ltd [2009] QSC 84; [2009] 2 Qd R 356, but it was a decision before Jeffery and it was put that a gross injustice would be sustained if an order was not made against a non-party. At [44], Martin J referred to the submission of the defendants thus:

"Because the [p]laintiffs are mere shells, if the Court does not make Mr Noble liable for the defendant's costs they will be unrecoverable. That would be a gross injustice in the circumstances obtaining in this case: where the [p]laintiffs have, at Mr Noble's behest, aggressively pursued a panoply of serious allegations (including of dishonesty) against the [d]efendant companies over more than two years, but then declined to put any evidence before the court to prove even one of those allegations, once the trial actually commenced. The injustice is particularly acute in circumstances where the [d]efendants are not profit-making companies, but rather entities limited by guarantee whose officers are volunteers."

8 In that case Mr Noble was far more involved in advancing the position of the plaintiffs in complicated issues than was Mr Rutter in this case. At [52], Martin J described Mr Noble's depth of involvement:

"I have no doubt that Mr Noble played a central and essential role in the conduct of Beach Retreat and, at various times, MYC. He provided funds for Beach Retreat for it to pay the administrators of the DOCA, and for stock for MYC. He undertook for MYC's unsecured creditors to use part of Beach Retreat's anticipated profits to repay their debts to MYC and at the end of 2005 and early 2006 he was a principal in negotiations between MYC and the defendants concerning a proposed new sublease by SCAC to MYC. He was also involved in many other matters after the proceedings commenced, eg, attempting to persuade SCAC to grant a lease to MYC, attempting to persuade the marina company to transfer three shares in SCAC back to MYC offering to release Brian Baker (then a defendant) from the claims against him in return for Baker providing a comprehensive statement for the plaintiffs and attempting to procure approval from the Queensland Transport to the instrument of sublease of April 2005 between MYC and SCAC."

9 In general terms Mr Rutter acted in this case as the sole director and shareholder of Friendly Inn Holdings and funded its claim. That is insufficient to ground an order for costs against a non-party.

10 In Jeffery at [43] their Honours said this:

"The proposition that those who fund another's litigation must put the party funded in a position to meet any adverse costs order is too broad a proposition to be accepted. As stated, the proposition would apply to shareholders who support a company's claim, relatives who support an individual plaintiff's claim and banks who extend overdraft accommodation to a corporate plaintiff. But not only is the proposition too broad, it has a more fundamental difficulty. It has no doctrinal root. It seeks to take general principles about abuse of process (and in particular the notion of "unfairness"), fasten upon a particular characteristic of the funding arrangement now in question, and describe the consequence of that arrangement as "unfair" to the defendant because provisions and principles about security for costs have been engaged in the case in a particular way and the rules will not permit the ordering of costs against the funder unless the principles of abuse of process are engaged. For the reasons stated earlier, that proposition is circular. And to point to the particular feature of a funding arrangement that the funder is to receive a benefit in the form of a success fee or otherwise, adds nothing to the proposition that would break that circularity of reasoning or otherwise support the conclusion that there is an abuse of process."

11 Basten JA summarised the circumstances in which orders for costs against non-parties had been made in FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 at [210]:

"[T]he requirements of justice should not be allowed to expand an exception to the general rule, so as to undermine the rule itself. What is significant from a survey of the cases in which orders have been made against non-parties is that they tend to satisfy at least some, if not the majority, of the following criteria:

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

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

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

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

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

12 That decision must now be considered in light of the discussion in Jeffery.

13 It is true that both the plaintiff companies were persons of straw. It was submitted that Mr Rutter was the true litigant using the plaintiffs as a defensive wall. But to make good that proposition requires more than that, as sole shareholder, Mr Rutter directed and funded the companies' claims.

14 Statements by solicitors that they were acting for Mr Rutter blurred the distinction between a company and its shareholder as did his statement to the press that he owned the hotel. They are hardly an abuse of process such as to justify a costs order against Mr Rutter.

15 It is true that Mr Rutter wanted to acquire the hotel from the shareholders of Friendly Inn but the Bank took action to protect its security. Mr Rutter used his personal relationship with Westpac to propose a refinance of the St George loan. These are actions that one would expect of a prospective purchaser of a hotel. They do not justify an order for costs.

16 So far as the claim to indemnity costs is concerned, it does not follow that because the plaintiffs' case was largely based on conversations that I did not accept it was without merit and factual foundation and costs should be awarded on the indemnity basis.

17 I found, however, that Mr Rutter and others were at pains to conceal information from the bank so that the plaintiffs could remain in occupation of the hotel for as long as possible.

18 This constitutes sufficient delinquency to justify an order for costs on an indemnity basis: Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at [44]. I do not think that it constitutes a basis for an order for costs against Mr Rutter, however. Delinquent though it was, it was in the interests of the plaintiffs to remain in possession of the hotel for as long as possible.

19 The plaintiffs are to pay the defendants' costs of the proceedings on the ordinary basis until 8 February 2011 and on the indemnity basis from 9 February 2011. The further amended notice of motion is otherwise dismissed with no order as to costs.

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Decision last updated: 03 May 2012