FEDERAL COURT OF AUSTRALIA - GENERAL DIVISION

SMITH v DEPUTY COMMISSIONER OF TAXATION and OTHERS

Mansfield J

26 August, 16 September 1997 - Adelaide

Mansfield J On 9 May 1997 I gave judgment in this matter (Smith v DCT (1997) 36 ATR 142 ; 97 ATC 4471 ), the material parts of which included orders that the respondent Deputy Commissioner of Taxation (the Commissioner) pay to the applicant as liquidator of Australian Company Number 007 764 249 Pty Ltd (the company) $235,000 plus interest calculated at the rate of 12% per annum on part of that sum from 4 April 1995. The judgment was in respect of a claim that payments of $194,000 and $41,000 made by the company to the Commissioner of 3 November 1994 and 6 February 1995 respectively were each unfair preferences, insolvent transactions, and voidable transactions under s 588FA, 588FC and 588FE of the Corporations Law (NSL) (the Law). I also gave judgment in favour of the Commissioner on his cross-claim against the directors of the company in terms specifically set out in the judgment.

At the time of giving judgment, I ordered the Commissioner to pay to the applicant his costs of the action to be taxed and reserved to the applicant liberty to apply for an order for indemnity costs within a specified period. The applicant has applied for such an order, and this judgment deals with that issue.

I shall not repeat the matters referred to in detail in the judgment of 9 May 1997, but it is necessary to have regard to it to fully understand the matters addressed in these reasons.

The applicant presents the claim for indemnity costs in two ways:

(a) for indemnity costs of the action from 5 June 1996 under O 23 r 11(4) of the Federal Court Rules (the Rules) on the basis that the amount of the judgment was more than offers made by the applicant to the Commissioner on 4 June 1996 and later on 11 December 1996; and

(b) for indemnity costs of the proceedings with respect to the three issues dealt with in the judgment, namely, that the company was at material times insolvent, that the payments made had the effect of preferring the Commissioner over the position of other creditors: s 588FA(1), and thirdly that the payments were not part of a " running account " : s 588FA(2). The submissions, and material referred to, on those three topics was the same and it was not suggested that I should deal with one or other of them separately, even though the last of those three matters of course involves a defence specifically raised by the Commissioner whereas the first two of those matters involve issues required to be proved by the applicant in any event. In those circumstances, I will treat the three issues together.

Order 23 Rule 11

Section 43 of the Federal Court of Australia Act 1976 (Cth), and perhaps also s 23 of that Act, provides the court with power to award costs, including where appropriate costs on an indemnity basis. It is a discretionary power which must be exercised judicially. Order 62 of the Rules makes it clear that, in the absence of an order having a different effect, the normal rule will be that costs are payable on a " party and party " basis. See generally the discussion of Sheppard J in Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 ; John S Hayes & Associates Pty Ltd v Kimberley-Clark Australia Pty Ltd (1994) 52 FCR 201 .

Order 23 rule 11 was inserted by statutory rule number 332 of 1994, effected from 6 October 1994. Indeed, in its terms, it may have been prompted by observations in such cases. Rule 11(4) provides:

If:
(a) an offer is made by an applicant and not accepted by the respondent; and

(b) the applicant obtains judgment on the claim to which the offer relates not less favourable than the terms of the offer;

then, unless the court otherwise orders, the applicant is entitled to an order against the respondent for costs incurred in respect of the claim:
(c) up to an including the day the offer was made - taxed on a party and party basis; and

(d) after that day - taxed on an indemnity basis.

On 4 June 1996, the applicant pursuant to O 23 of the Rules made an offer in the following terms:

The Applicant will accept the sum of $177,300 together with interest of $20,696.55 (calculated from 5 April 1995 to 4 June 1996 at the rate of 10% per annum) plus costs at $4500 in satisfaction of its claim against the Deputy Commissioner of Taxation.

On 11 December 1996, a substituted offer was filed again pursuant to O 23 that the applicant would accept the same sum, but with interest adjusted at the same rate to 5 December 1996 and without specifying an amount for costs. That offer was to remain open for 14 days from its receipt: see r 5(3). It was not suggested in submissions that the fact that the offer was for a limited time only had any significance.

Neither offer was accepted by the Commissioner.

It is apparent that the judgment obtained by the applicant on his claim was " not less favourable than the terms of " each offer. The Commissioner accepted that. Thus, by operation of O 23 r 11(4), the applicant is entitled to an order for costs taxed on an indemnity basis from 5 June 1996 unless the court otherwise orders.

In Wills v Big Mac Pty Ltd (unreported, Federal Court, Heerey J, 949/94, 9 December 1994, p 13 ), his Honour said:

… an important element in facilitating proper consideration of a payment in is certainty as to the costs consequences. It would in my opinion require compelling and exceptional circumstances before a Court " otherwise orders " . Were this not so, applicants might be inhibited in accepting otherwise reasonable offers because of uncertainty as to the costs consequences. The effectiveness of Order 23 in promoting settlement of litigation would be diminished.

That case involved consideration of the costs consequences of the acceptance of an offer of compromise made by a respondent under O 23 r 11(1), and in somewhat different circumstances from those presently applicable. However, I think his Honour ' s observations were directed generally to the operation of O 23, and in my view appropriately so. Of course, the expression " compelling and exceptional circumstances " is not used as a term of art but simply to indicate that the appropriate starting point is to apply the rule, and that there is an onus upon the party seeking to assert that the rule should not apply on its terms to make out such matters, whether of fact or of mixed fact and law or of law, as to justify the court, in the proper exercise of a judicial discretion, ordering otherwise than as the rule provides.

It was submitted that the decision of Lindgren J in MGICA (1992) Ltd v Kenny & Good Pty Ltd [No 4] (1996) 140 ALR 707 was to a different effect. I do not think that is so. In that case, Lindgren J was considering the general exercise of the discretion as to costs in the context of a " Calderbank letter " , but where the regime provided by O 23 had not been used by the applicant making the offer of settlement. Lindgren J noted that point, and after referring to O 23 r 11(4) observed (at ALR 709):

If MGICA had made its offer in conformity with O 23 it would have enjoyed a presumptive entitlement to indemnity costs.

and later observed (at ALR 711) that the mere writing of a " Calderbank letter " does not generate the same presumptive entitlement to indemnity costs as is provided for in O 23. His Honour went on to explain why the structure of O 23 includes elements which are more protective of an offeree ' s position than the unregulated offer made in a " Calderbank letter " .

I turn to consider the Commissioner ' s reasons why the court should order other than in accordance with the operation of O 23 r 11(4).

Firstly, it was put that the applicant as the liquidator of the company was in a different position from the normal litigant as he could have recourse to the assets of the company collected in the course of the winding up to protect him for indemnity costs in any event. The submission was based upon one of the guidelines distilled from the authorities by Sheppard J in Colgate-Palmolive at FCR 232, when discussing a claim for costs on an indemnity basis, in the following terms:

The problem arises in adversary litigation, ie. litigation as between parties at arm ' s length. Different considerations apply where parties may be found to be entitled to the payment of their costs out of a fund or assets being administered by or under the control of a trustee, liquidator, receiver or person in a like position eg a Government agency or statutory authority.

The principles so identified by Sheppard J have been applied by other judges of this court from time to time, for example in John S Hayes. Colgate-Palmolive did not involve specifically consideration of the terms of O 23, which in its current form was introduced into the Rules only subsequent to that decision. There is nothing in O 23 r 11(4) which suggests that it should not apply in its terms simply because the offeror in question is a liquidator, or otherwise has recourse to a fund to recover costs. Whilst it is true that, in the present circumstances, the applicant will have recourse to the company ' s funds in respect of his full proper costs in any event, I do not think that that consideration of itself, or indeed with the other matters raised by the Commissioner, provides a reason or a sufficient reason to not give effect to the presumptive intent of O 23 r 11. The proceedings are brought by the liquidator for the benefit of the creditors and members of the company. To the extent to which the funds of the company are used in the conduct of successful litigation, and are not otherwise recoverable, there is proportionately a lesser fund available to satisfy the demands of the creditors and of the members. If an order for indemnity costs were made, in accordance with the rule, to the extent to which those costs exceed the party and party costs of the applicant, an equal amount will then be available to be distributed pro rata amongst all unsecured creditors of the company including the Commissioner, and in the event of surplus, to the members. In any event, I do not take Sheppard J to say that in any case in which a liquidator brings proceedings on behalf of a company, necessarily different considerations will apply. His Honour ' s proposition noted firstly that the problem arises in adversary litigation, ie litigation as between parties at arm ' s length. This is such litigation. There may be many circumstances in which the different considerations to which Sheppard J referred may apply. I do not think the mere fact that the applicant on the claim is a liquidator, on behalf of the company in liquidation, and is bringing a proceeding at arm ' s length against another person which in this particular circumstance happens to be the Commissioner, provides a sound reason not to apply the apparent intent of the rule. It might very well have been some other creditor or creditors of the company, rather than the Commissioner, against whom the claim or a like claim was pursued.

Next it was put that the proceeding was complex. There may be cases in which the nature of the issues, or the circumstances giving rise to the issue being litigated as and when it was litigated, do merit special consideration. I do not see in the nature of this claim that there are any such special considerations. No particular feature of the nature of the issues, or their relevance as a matter of general principle, or in any other way was identified by the Commissioner.

It was next contended that the Commissioner had not acted irresponsibly in the conduct of the defence of the claim, and that any costs on an indemnity basis under the rule ought only to be ordered if his conduct is properly so characterised. In that way, it was contended, the rule would only apply where it was appropriate to penalise the conduct of one party to the litigation. I accept, for present purposes, that the Commissioner did not act irresponsibly in the conduct of the proceeding. In my view, however, the contention put is simply not supported by the words of the rule. The proposition put is more appropriately applicable to a claim for costs on an indemnity basis absent the applicant having followed the procedure prescribed by O 23. As Lindgren J in MGICA pointed out, such matters may well then be of significance. In my view the rule, on its proper construction, does not provide that its presumptive effect should be imposed only where the offeree is shown to have acted unreasonably.

Finally, it was contended that the Commissioner was in a difficult position by reason of his cross-claim against the directors of the company. There may be circumstances in which, by reason of a cross-claim, or by reason of the interrelationship of the issues in the principal claim and in the cross-claim, other reasons will be established which make the operation of rule as contemplated by O 23 r 11(4) not appropriate. However, the mere fact of the cross-claim is not, in my view, a sufficient reason to alter that starting point. There is no explanation offered by the Commissioner as to why the offer was accepted. There is no evidence that the Commissioner, upon receipt of the offer, raised either formally or informally the implications of the offer in relation to the cross-claim. Indeed, on the material before me, on the eve of trial the Commissioner ' s attitude was that the offer made was rejected because he was confident of success in his defence. There is no evidence, nor any suggestion put in submission, that the cross respondents were approached by the Commissioner in any attempt to liaise or correspond with them or to discuss with them the implications of the offer. The material before me simply indicates that the Commissioner rejected the offer.

There are some additional considerations which, in my view, are worthy of note. The offer itself did represent a real element of compromise by the applicant. It was not a formulated offer equal to the amount of the claim, simply with a view to getting an order for indemnity costs when and if the claim succeeded in its entirety. The applicant ' s offer did indicate a willingness to accept a lower amount than both the claim as formulated and the ultimate judgment. It was not an offer which amounted to no more than a request for surrender. No other conduct of the applicant was identified as bearing adversely on his entitlement otherwise to the operation of the Rule.

There may be circumstances which may satisfactorily explain the failure of a respondent to accept an applicant ' s offer, or which provide other reasons why the court should " otherwise order " , so as not to impose costs on an indemnity basis as the starting point for the operation of O 23 r 11(4) provides. In the present case I do not find the circumstances identified, either separately or taken together, of sufficient moment to warrant reversing that prescription. It would discourage proper use of O 23 to do so.

Accordingly, in my judgment it is appropriate that the applicant should have the costs of the action on and after 5 June 1996 on an indemnity basis, so that such costs are to include all costs except in so far as they are of an unreasonable amount or have been unreasonably incurred.

Indemnity costs on issues

In the light of the above ruling, as the proceedings were instituted on 19 January 1996, the effect of this part of the application in practical terms is for indemnity costs of the three identified issues with respect to the proceedings up to and including 4 June 1996.

The Commissioner filed a defence on 21 February 1996, although it was later amended, and a cross-claim on the same day. The applicant filed affidavits in support of his claim on 20 and 21 June 1996 (to which were exhibited reports of himself dated 11 April 1996 and of Mr Anthony Sims, another accountant, dated 18 March 1996 dealing with the issues of insolvency and the preferential effect of the two payments), and further affidavits on 12 and 13 August 1996.

There is no evidence of correspondence with respect to the three identified issues prior to 4 June 1996, although communications inviting the Commissioner to acknowledge or admit insolvency and preferential effect of the two payments were subsequently given from 7 November 1996. It is not necessary to consider those communications in detail, although they may have had significance had I not otherwise ordered costs on an indemnity basis from 5 June 1996.

The applicant contends that the issues identified were raised or put in issue by the Commissioner on the pleadings, that the production of experts ' reports of himself and Mr Anthony Sims were provided pursuant to Court orders, and that at no time did the Commissioner adduce any inconsistent evidence either of an expert or other nature concerning insolvency or the preferential effect of the two payments. The later communications from 7 November 1996 did serve to invite the Commissioner ' s attention to acknowledging those issues and sought particulars of the grounds of any dispute with respect to them, as well as giving notice of an intention to seek indemnity costs with respect to them. Far from having the desired effect, the Commissioner in fact immediately prior to the hearing maintained his dispute with respect to those issues, and required both the liquidator and Mr Sims to be presented for cross-examination. It was only at the hearing, and after the trial had commenced, that it became apparent that the Commissioner did not propose to adduce any evidence inconsistent with those matters, although he did not in fact concede them. Such matters might well be significant to a claim for indemnity costs from a particular point in time, but on no view can that point in time go back earlier than 5 June 1997. Accordingly, for present purposes, they are not of great moment.

It was nevertheless contended that the Commissioner ' s general attitude with respect to those issues was such as to warrant an indemnity costs order in any event in respect of the entire proceedings. While there is no dispute as to the court ' s entitlement to make such an order in appropriate circumstances, the Commissioner contended that such an order was not appropriate in the present circumstances. Again, for practical reasons, it is necessary only to address the point of time up to 4 June 1996.

The relevant principles have been discussed in Colgate-Palmolive and were pithily expressed by Lindgren J in MGICA at FCR 711 in the following terms:

Clearly, the circumstances must take a case out of the " ordinary " or " usual " category if an order for indemnity costs is to be made, since, as noted earlier, the rules evince an intention that in that category of cases, an order for costs signifies an order for costs on a " party and party " basis. Perhaps the various " tests " which have been suggested are classifiable as " abuse of process " , " ulterior or extraneous purpose " and " unreasonableness " tests.

Amongst the cases to which his Honour referred leading up to that conclusion was the decision of Woodward J in Fountain Selected Meat (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401, in which his Honour said:

… in order to establish a convenient principle in such cases it is necessary to be a little more prosaic. I believe that it is appropriate to consider awarding " solicitor and client " or " indemnity " costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts for the clearly established law. Such cases are, fortunately, rare. But when they occur, Court will need to consider how it should exercise its unfettered discretion.

Having regard to those principles, I have reached the view that it is not appropriate to order indemnity costs in respect of the three issues effectively for the period up to 4 June 1996. As I have said, the " running account " defence was but an incidental aspect of the submissions. The three grounds were treated, for present purposes, as a package.

I do not find that the material before me discloses that the Commissioner, properly advised, should have known that he had no chance of success either generally or in respect of the particular issues up to or by 4 June 1996. I am not therefore of the view that his conduct in relation to the defence of the proceedings, in relation to those issues, was such as to indicate some ulterior motive, or a wilful disregard of relevant facts or law, on his part. Knowledge of solvency or insolvency, and of the preferential effect of the two payments, was in the first instance primarily available to the applicant. The applicant had to prove those matters in any event in the proceedings. The applicant therefore had to prepare some evidence to support those conclusions at some point in the proceedings, unless the applicant had prior to the proceedings presented such information to the Commissioner as to persuade him that those issues should be conceded. There is no material before me that that was done. Once the proceedings were issued, in my view, the Commissioner was entitled to be given access to the relevant material in a cogent way before any question could arise as to the Commissioner acting unreasonably in relation to responding to that material. At best he could have received that material in about April 1996, although it is not clear now on the material before me whether he received that material when the reports were prepared, or only when the affidavits containing the reports were filed in June 1996. I do not think that it was unreasonable for the Commissioner not to have conceded issues of solvency or insolvency, and as to the preferential effect of the two payments prior to 4 June 1996. I do not conclude that the Commissioner, up to that time, was deliberately prolonging the claim, or otherwise engaging in some form of misconduct with respect to it, in relation to his response on those issues.

For the reasons given, I do not think that the applicant has made out a sufficient basis for exercising my discretion to award costs on an indemnity basis in respect of the three identified issues prior to and up to 4 June 1996. Up to that time, costs should be awarded on the usual basis.