Lewis, in the matter of Damilock Pty Ltd (in Liquidation) ACN 008 083 985 v A.E. Smith & Son Pty Ltd ACN 004 274 793 [2009] FCA 35 (3 February 2009)

Last Updated: 4 February 2009

FEDERAL COURT OF AUSTRALIA

Lewis, in the matter of Damilock Pty Ltd (in Liquidation) ACN 008 083 985 v A.E. Smith & Son Pty Ltd ACN 004 274 793 [2009] FCA 35

IN THE MATTER OF DAMILOCK PTY LTD (IN LIQUIDATION) ACN 008 083 985

MARTIN DAVID LEWIS AND BRUCE JAMES CARTER AS LIQUIDATORS OF DAMILOCK PTY LTD (IN LIQUIDATION) ACN 008 083 985 v A.E. SMITH & SON PTY LTD ACN 004 274 793

SAD 52 of 2008

MANSFIELD J
3 FEBRUARY 2009
ADELAIDE

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SAD 52 of 2008

IN THE MATTER OF DAMILOCK PTY LTD (IN LIQUIDATION) ACN 008 083 985

BETWEEN:	MARTIN DAVID LEWIS AND BRUCE JAMES CARTER AS LIQUIDATORS OF DAMILOCK PTY LTD (IN LIQUIDATION) ACN 008 083 985 Plaintiffs
AND:	A.E. SMITH & SON PTY LTD ACN 004 274 793 Defendant

JUDGE:	MANSFIELD J
DATE OF ORDER:	3 FEBRUARY 2009
WHERE MADE:	ADELAIDE

THE COURT ORDERS THAT:

1. The defendant pay to the plaintiffs their costs of the action, on a party and party basis to 9 May 2008 and thereafter on an indemnity basis.
   

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SAD 52 of 2008

IN THE MATTER OF DAMILOCK PTY LTD (IN LIQUIDATION) ACN 008 083 985

BETWEEN:	MARTIN DAVID LEWIS AND BRUCE JAMES CARTER AS LIQUIDATORS OF DAMILOCK PTY LTD (IN LIQUIDATION) ACN 008 083 985 Plaintiffs
AND:	A.E. SMITH & SON PTY LTD ACN 004 274 793 Defendant

JUDGE:	MANSFIELD J
DATE:	3 FEBRUARY 2009
PLACE:	ADELAIDE

REASONS FOR JUDGMENT

1. On 22 January 2009 I made an order by consent for judgment to be entered in favour of the plaintiffs for $20,071.27 plus interest in the amount of $2,010.98. The parties were not agreed as to the appropriate costs order following that judgment. These reasons deal with that question.

BACKGROUND

2. The plaintiffs are the liquidators of Damilock Pty Ltd (in liquidation) (Damilock). It had previously traded as a retailer of indoor and outdoor furniture for many years until August 2007, shortly before their appointment.
3. For the purposes of ss 9 and 588FE(2) of the Corporations Act 2001 (Cth) (the Act) the relation-back day is 26 June 2007. In the six months prior to that date, that is from 26 December 2006, the defendant had received two payments from Damilock. The first was on 12 January 2007 in the sum of $14,146.00 and the second on 2 May 2007 in the sum of $20,071.27. The latter payment is the same as the judgment sum.
4. On 5 May 2008, the liquidators commenced proceedings against the defendant alleging that each of those payments occurred when Damilock was insolvent within the meaning of s 588FC of the Act, and that by reason of those two payments, the defendant had received more money than it would have received in the winding up of Damilock if those two payments were set aside and the defendant were to prove for its debt. The plaintiffs claimed an order pursuant to s 588F(1) of the Act that the defendant pay to the company the total sum of $34,217.27 (the total of those two payments) as unfair preferential payments plus interest and costs.
5. The defendant did not admit that Damilock was insolvent as at and from 26 December 2006. It also asserted that each of the payments was received by it in good faith and in circumstances where there were no reasonable grounds for suspecting Damilock was or would become insolvent: s 588FG of the Act.
6. At about the same time as those proceedings were commenced, similar proceedings were commenced by the plaintiffs against several other companies also seeking to recover payments as voidable unfair preferential payments under ss 588FE(1) and 588FF of the Act. In some of those proceedings, the defendants did not put in issue that Damilock had been insolvent from 26 December 2006, but in several of them the defendant did put that matter in issue.
7. On 22 July 2008, I ordered that this action, together with the three other actions in which there was a contest about the insolvency of Damilock as at and from 26 December 2006, be heard together only on the question as to Damilock’s insolvency. The trial of that issue was listed for hearing on 23 September 2008. Each party was directed to file and serve a list of witnesses to be called at the trial no less than 14 days before the hearing. The defendant filed a list of its proposed witnesses on 10 September 2008. I accept that its list of witnesses as filed did not in fact relate to the issue of insolvency but to the defence to which I have referred, and that the defendant had misunderstood that the only list of witnesses required was that relating to the issue of insolvency. However, that misunderstanding on its part was not apparent to the plaintiffs from the names of its proposed witnesses.
8. The defendant was represented by counsel at the hearing. However, as indicated by correspondence from the defendant’s solicitors received immediately before the commencement of the hearing, its counsel indicated that the defendant did not intend to participate in the hearing by adducing evidence or otherwise making submissions. It did not then concede the issue of insolvency, but said it would abide the result of that hearing.
9. As it happened, that hearing then proceeded on 23 and 24 September 2008 and 20 October 2008. Judgment was delivered on that issue on 28 November 2008: Lewis, in the matter of Damilock Pty Ltd (in Liquidation) ACN 008 083 985 v VI SA Australia Pty Ltd ACN 002 433 267 [2008] FCA 1801. Damilock was found to have been insolvent as at and from 26 December 2006.
10. In the meantime, it was recognised by the plaintiffs soon after the commencement of the proceedings that the defence relating to the first payment by Damilock to the defendant of $14,146 on 12 January 2007 was likely to be successful. The focus of the plaintiffs thereafter was upon the second payment of $20,071.27 which is the judgment sum. On 9 May 2008, the plaintiffs filed an offer pursuant to O 23 r 2(1) of the Federal Court Rules offering to compromise the whole of their claim against the defendant upon payment by the defendant of $18,000 plus legal costs then specified at $2,000, provided the defendant pay that sum within seven days of acceptance of the offer, which offer was to expire on 23 May 2008.
11. That offer was not accepted. As the evidence now shows, the defendant responded by a counter-offer on 14 May 2008 and subsequently there was an exchange of offers between the plaintiffs and the defendant. In the meantime, the question of insolvency having been resolved, on 20 October 2008 this matter was listed for hearing on 22 January 2009. On 16 January 2009, shortly before the hearing, the defendant made an open offer to pay the judgment sum and interest plus costs to be taxed. The plaintiffs indicated that they required costs to be paid on a solicitor and client basis from 9 May 2008.
12. That is largely the present area of dispute as to the appropriate order for costs. In addition, the defendant through counsel has put, notwithstanding its open offer of 16 January 2009, the proposition that there should be no order for costs of the proceeding at all. The plaintiffs additionally seek an order that the defendant should pay one third of the plaintiffs’ costs “of the insolvency trial”.

THE CONTENTIONS

13. The plaintiffs’ contention as to the basis upon which it should recover costs of the action is twofold. First, they say that they are entitled to costs on an indemnity basis in accordance with O 23 rr 11(3) and (4) of the Federal Court Rules, the offer of 9 May 2008 not having been accepted, and the plaintiffs having succeeded in the claim by the consent judgment referred to in excess of the amount of that offer. Secondly, they contend that, by reason of the extensive exchange of offers (which were without prejudice at all material times), they made a number of offers to the defendant to compromise the claim, all of which the defendant refused by making lesser counter-offers, all of which were less than the amount which the plaintiffs have ultimately recovered by judgment. Hence, in the general exercise of its discretion the Court should make an order for indemnity costs of the proceedings from 9 May 2008 and on a party and party basis up to that time.
14. The defendant’s oral submission was first that there should be no order for costs of the proceeding at all because there has been no hearing on the merits. It is, the defendant says, simply a case where a commercial resolution of the dispute between the parties has been arrived at and so the Court should not make any order for costs. Alternatively, they contend that the costs order should be simply on a party and party basis.
15. One contention identified on the defendant’s behalf, that O 23 r 11(4) was not activated because less than the 14 days notice required by O 23 r 5(3) had been given, was not pursued. The contention is plainly wrong, and properly not pursued. The offer was made on 9 May 2008. The 14 day period specified by O 23 r 5(3) expired on 23 May 2008, and that is the date specified in the notice.
16. The defendant fell back on the proposition that the Court, in the exercise of its discretion, should not make an order for indemnity costs because proper reasons existed for it not to do so. Those reasons were in essence that the Court should encourage negotiated settlement of claims, and to impose an order for indemnity costs in circumstances where there had been a prolonged period of negotiation between the initial offer and the ultimate resolution would not be in accordance with that policy. It would not give effect to the objective of encouraging parties to reach a commercial resolution of their dispute. It was also put that the defendant had throughout adopted a reasonable attitude to the claim against it. It had promptly filed a defence, and had taken a “neutral attitude” on insolvency simply by not admitting that issue in its defence, and it had for an extensive period of time engaged in negotiations with the plaintiffs in an endeavour to resolve the dispute informally. It had up to a certain point no clear foundation for understanding why the plaintiffs alleged that Damilock was insolvent from 26 December 2006, and until the statement of claim no clear basis for identifying why the plaintiffs contended that the defendant’s “good faith” defence was not available to the defendant. Hence, it was said, the defendant acted not unreasonably given the commercial assessment of risk, to have put the matters in issue as it did in its defence, and then to dispute the amount of the costs which the plaintiffs now seek.
17. Finally, the defendant contended that there should be no order for costs against it in respect of “the insolvency trial” because of the attitude which it adopted in relation to that proceeding, and alternatively that it should be ordered to pay only 25 per cent of those costs and only up to the date of the commencement of the hearing, that being the date from which it indicated simply that it would abide the result of that hearing.

CONSIDERATION

18. The contention of the defendant that there should be no order for costs should be rejected. The cases relied on by the defendant do not enhance its position in the present circumstances.
19. L & A Maglio Pty Ltd v Commissioner of Taxation [2007] FCA 1365 concerned taxation appeals by several taxpayers against appellable objection decisions. The appeals were compromised and were discontinued by consent, but the respondent sought costs of the appeals. Those costs were ordered in the respondent’s favour, having regard to the appellants’ conduct of the appeal over a lengthy period: see at [32]. The other decision referred to by counsel for the defendant is equally evidently inapplicable. Cirillo v Consolidated Press Property Pty Ltd (No 2) [2007] FCA 179 concerned the award of costs after the applicant’s claim had been summarily dismissed. Costs were awarded on a solicitor and client basis against the applicant, having regard to the way the proceedings were conducted. In neither case was there the overlap of the application of O 23 of the Federal Court Rules.
20. The relevant principles about the discretion to award costs under s 43 of the Federal Court of Australia Act 1976 (Cth) where a matter has not proceeded to determination on the substantive issue were discussed by Goldberg J in Yates Property Corporation Pty Ltd v Boland [2000] FCA 1106; (2000) 179 ALR 664 at [4]- [5]. However, this case does not concern those circumstances. Here the plaintiff’s claim has not been compromised. It has been acknowledged. The full amount of the claim is the amount of the judgment. It was acknowledged only just prior to the commencement of the hearing. Had there been no offer under O 23 of the Federal Court Rules, the plaintiffs in the normal course would have been entitled to their costs of the action on the normal basis. That, in substance, is what the defendant’s offer of 16 January 2009 recognised. It was no doubt aware of the potential implications of the offer made under O 23 of the Federal Court Rules. It sought to confine the costs to party and party costs. But its proposal was not accepted. The parties could not agree as to an order for costs. The defendant nevertheless consented to judgment for the amount of the claim.
21. In my view, there is no proper reason to depart from the normal application of O 23 r 11(4). The offer of 9 May 2008 was in compliance with O 23. It specified a period of time within which a response could be made in accordance with O 23 r 5(3). At that time, the plaintiffs’ claim was for a considerably larger sum, and in any event the offer was to accept a significantly lesser sum than the claim for the disputed payment of $20,071.27. Ultimately, the plaintiffs have succeeded in recovering by the consent judgment an amount in excess of that offer.
22. In Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) (2004) 212 ALR 281 Hely J said at 284 [17]-[18]:

Once an offer is made, and a judgment no less favourable obtained, a rebuttable presumption in favour of indemnity costs is created. It then becomes incumbent on the defendant to show reason why the presumption should not crystallise.
...
Even if an unsuccessful litigant acted reasonably in rejecting an offer of compromise based on its asserted defences, the authorities establish this of itself is not a sufficient reason to displace the presumptive or prima face operation of the Rules.

23. There is no real reason why, in the present circumstances, O 23 r 11(4) should not be applied. That rule is intended to encourage prompt and realistic resolution of disputes by adding the sanction of indemnity costs where one party is prepared to compromise its claim on terms which ultimately are less favourable than the eventual outcome, but the other party is not. The defendant in this matter elected to try and secure a lesser settlement than the amount of the offer. It was entitled to do so, but at the risk ultimately of O 23 r 11(4) being enlivened. The subsequent negotiations were all in the shadow of that risk. Its attempt to negotiate a lesser settlement proved fruitless. Indeed, although the plaintiffs later made a settlement offer at a lesser sum than the filed offer, that too was rejected. And whenever, thereafter, the plaintiffs put a further settlement offer (the amount increased as the costs were incurred), the defendant responded by a counter-offer somewhat less than the plaintiffs’ offer. Whilst the Court encourages the settlement of claims, there is nothing to indicate the plaintiffs’ offers were unreasonable. After all, the defendant at any time – as it ultimately did – could have admitted the claim and submitted to taxation of indemnity costs from the date of the offer if it thought the plaintiffs’ offers with costs included were excessive. Instead, it simply responded to every offer by a lesser counter-offer. The “commercial assessment” of risk, the phrase used by the defendant’s counsel to describe its approach, is not sought to be justified beyond that approach. Then it simply tried to negotiate to secure a costs order which averted the application of O 23 r 11(4). Such a course of negotiations provides no proper reason to depart from the application of O 23 r 11(4). There were two main elements to the plaintiffs’ claim: whether Damilock was insolvent at material times, and (because the subject payment by Damilock to the defendant was not really in issue) whether the defendant could make out the “good faith” defence. There may be cases where, in the particular circumstances, a defendant may have such limited access to information that there is thereby proper reason to defer the operation of the indemnity costs order under O 23 r 11(4) until the defendant has had a fair opportunity to consider the claim. I do not need to determine if such cases may occur. This is not such a claim. The plaintiffs by letter of 30 January 2008 gave the defendant notice in general terms of the basis upon which they said that Damilock was insolvent from December 2006. As it happened, at the trial to determine the date when Damilock became insolvent during the six months prior to the relation-back day, it was not contended that Damilock was solvent beyond about mid March 2007. That is the date before the subject payment in any event. The plaintiffs in that letter also pointed out the circumstances in which, they claimed, the defendant’s receipt of $20,071.27 on 27 April 2007 was not received in circumstances which might enliven the defence in s 588FG of the Act. The defendant, in any event, was best placed to assess that issue.
24. I am satisfied that it is appropriate to apply the presumption as to costs which O 23 r 11(4) indicates. I accordingly order that the defendant pay the plaintiffs’ costs of the proceeding up to 9 May 2007 on a party and party basis, and thereafter on an indemnity basis. The plaintiffs accept that their costs can only be allowed from the point where they decided to make the claim against the defendant upon which they have succeeded, and as are incidental to its pursuance.
25. The costs of the “insolvency trial” present a practical issue for the taxing officer. The costs of that trial have not yet been awarded against any of the defendants who participated. The present defendant, by its defence of 2 July 2008, put insolvency in issue. It was served with an extensive notice to admit facts by the plaintiffs addressing that issue. At a directions hearing on 22 July 2008, it was given until 8 August 2008 to acknowledge that Damilock was insolvent at 27 April 2007 (when it received the payment in issue), and otherwise was directed to prepare and file its evidence on the issue. It did not then admit insolvency as at that date. The trial of that issue (involving the defendant and three other companies against whom like claims had been made and who had put in issue the question of Damilock’s insolvency) was listed for hearing to commence on 23 September 2008. As noted above, only shortly before that date, the defendant indicated it would not participate in the hearing of that issue and would abide by its result. It did not then admit insolvency.
26. The plaintiffs accept that they should ultimately recover only one set of costs against those companies who put insolvency in issue. In the circumstances outlined, the defendant apparently participated in the trial of that issue up to, in effect, the commencement of the hearing. I think that would therefore include all the plaintiffs’ proper preparatory work and the fee of brief of counsel. As the plaintiffs are prepared, apparently, to seek several orders for costs in relation to that trial, I indicate to the taxing officer that, in my view, the costs order I propose to make against the defendant should include 25% of the plaintiffs’ costs on that issue up to that point. Thereafter, as I have not had the opportunity of hearing the other companies who participated in that hearing, I do not propose to give an indication of how the costs of that hearing should be separately allocated between those companies (assuming for the present time there is a costs order made against each of them). Their respective participation in the hearing of that issue was difficult. The fact that the defendant was, from 23 September 2008, prepared to abide the event does not necessarily mean that the plaintiffs did not incur further costs in this action after that date. That is a matter for the taxing officer to determine.

ORDER

27. The defendant should pay to the plaintiffs their costs of the action, on a party and party basis to 9 May 2008 and thereafter on an indemnity basis.
    

I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

Associate:

Dated: 3 February 2009

Counsel for the Plaintiff:	Mr S Doyle and Mr B Renfrey
Solicitor for the Plaintiff:	Finlaysons
Counsel for the Defendant:	Mr GA Stevens and Mr J Graham
Solicitor for the Defendant:	Madgwicks

Date of Hearing:	22 January 2009
Date of Judgment:	3 February 2009