22
Oct 2018

Costs orders against third party directors: the consequences of being obstructive in winding up proceedings

In the recent decision of Vanguard 2017 Pty Limited, in the matter of Modena Properties Pty Limited v Modena Properties Pty Limited (No 2) [2018] FCA 1461 the Federal Court of Australia found a director of a company liable to pay costs as a result of their conduct during the course of a proceeding to have a company wound up on the grounds of a failure to comply with a statutory demand.

Background

On 27 September 2017, Vanguard 2017 Pty Limited (Vanguard) served a statutory demand on Modena Properties Pty Limited (Modena ) seeking payment of $138,000 by way of refund of a “commitment fee” in accordance with two agreements entered into by the parties on 13 January 2017. Those agreements provided for a refund of the commitment fee if the agreements did not go ahead. Both agreements were subsequently terminated following which Vanguard served Modena with a creditor’s statutory demand for payment of debt for a sum equal to the commitment fee.

Modena unsuccessfully applied to the Supreme Court of Queensland to set the statutory demand aside pursuant to section 459G of the Corporations Act 2001 (Cth)(Corporations Act) . The application was dismissed by consent and Modena was ordered to pay Vanguard’s costs. Modena ultimately failed to comply with the statutory demand.

On 17 January 2018, Vanguard commenced proceedings in the Federal Court of Australia to wind up Modena on the grounds of insolvency.  Modena filed and served a Notice of Appearance opposing the winding up application on the following grounds:

  1. The Applicant failed to comply with 470(1)(a) of the Corporations Act; and
  2. The Application was an abuse of process because it was issued for an unlawful purpose in circumstances in which the Applicant was at all material times aware that a bona fide dispute existed as to the date upon which the debt was payable.

Although not stated in the grounds of opposition, Modena sought to establish that it was in fact solvent.

In support of the grounds of opposition, Modena relied on an affidavit sworn by Mr Schimana, a Certified Practising Accountant engaged by Modena to prepare financial reports, as well as an affidavit of its sole director, Mr Carr. Mr Schimana deposed to being aware that Modena had approximately $300,000 in cleared funds in a bank account maintained by Modena with Westpac (Westpac Account) and provision had been made to pay the sum of $138,00 to Vanguard. Curiously, Mr Schimana’s affidavit failed to annex / exhibit a single financial record or document of Modena.

Vanguard subsequently issued a subpoena to Westpac (which Modena unsuccessfully sought to have set aside), which produced bank statements indicating that the Westpac Account in fact had only $1,203.54 in funds at the time Mr Schimana swore his affidavit. Throughout the course of the proceedings Modena maintained the argument that it was at all material times was, and remained, solvent.

Non-Party Costs Orders

Section 43 of the Federal Court of Australia Act 1976 (Cth) provides, amongst other things, the following:

  1. The Court or a Judge has jurisdiction to award costs in all proceedings before the Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which this or any other Act provides that costs must not be awarded. This is subject to:

……..

2. Except as provided by any other Act, the award of costs is in the discretion of the Court or Judge.

3. Without limiting the discretion of the Court or a Judge in relation to costs, the Court or Judge may do any of the following:

  1. make an award of costs at any stage in a proceeding, whether before, during or after any hearing or trial;
  2. make different awards of costs in relation to different parts of the proceeding;
  3. order the parties to bear costs in specified proportions;
  4. award a party costs in a specified sum;
  5. award costs in favour of or against a party whether or not the party is successful in the proceeding;
  6. order a party’s lawyer to bear costs personally;
  7. order that costs awarded against a party are to be assessed on an indemnity basis or otherwise;
  8. do any of the following in proceedings in relation to discovery:
    1. order the party requesting discovery to pay in advance for some or all of the estimated costs of discovery;
    2. order the party requesting discovery to give security for the payment of the cost of discovery.
  9.  make an order specifying the maximum cost that may be recovered for giving discovery or taking inspection.

Although section 43(3) does not expressly allow for the Court to make an order for costs against a non-party, such a power was found to exist by reason of the Court’s discretionary power to award costs (see for example Knight v FP Special Assets Ltd (1992) 174 CLR 178 at paragraphs 192-193).

The Courts decision

The Court found that Mr Carr  played an active role in the conduct of the litigation, including causing Modena to maintain the issue of solvency in circumstances where there was no reasonable basis to do so. Further, the Court found that Mr Carr would have been aware that the statements in Mr Mr Schimana’s affidavit were false and misleading and by allowing Modena to continue to assert it was insolvent he had caused Vanguard to incur unnecessary costs.

In light of the above, the Court ordered Mr Carr to pay Vanguard’s costs on the indemnity basis.

Take away

The decision in Modena Properties is a timely reminder as to the scope of the Court’s discretion to award costs. It is also an indication as to the Court’s attitude to recalcitrant directors involved in winding up proceedings and the relief available to a petitioning creditor faced with an obstructive director.