Hurford Hardwood Kempsey Pty Ltd v Kempsey Timbers (Sawmilling) Pty Ltd (No 5)

1. [1]

   I gave judgment in this matter on 22 August 2019: Hurford Hardwood Kempsey Pty Ltd v Kempsey Timbers (Sawmilling) Pty Ltd [2019] NSWSC 1069. These reasons assume familiarity with that judgment. I will use the same abbreviations.

2. [2]

   It followed from my reasons that Hurford was entitled to judgment against Kempsey Timbers in the sum of $234,740 together with interest.

3. [3]

   I entered judgment and made an order for interest on 17 September 2019.

4. [4]

   That judgment was satisfied from funds that, on 20 September 2019, I ordered be paid out of Court to Hurford from the fund referred to at [7] of my August judgment.

5. [5]

   It also followed from my reasons that Hurford was entitled to the bulk of its costs.

6. [6]

   On 19 September 2019, I ordered that Kempsey Timbers pay Hurford’s costs, other than in relation to the long service leave issue, on the ordinary basis until 22 October 2018 and on an indemnity basis thereafter: Hurford Hardwood Kempsey Pty Ltd v Kempsey Timbers (Sawmilling) Pty Ltd (No 2) [2019] NSWSC 1248.

7. [7]

   Hurford contends its costs are in the order of $500,000.00. They have not been assessed.

8. [8]

   On 26 September 2019, I dismissed an application by Hurford for a freezing order restraining Kempsey Timbers from disposing of, dealing with, or diminishing the value of its only remaining asset, a property at Wauchope, below an unencumbered value of $650,000 pending satisfaction of the costs order: Hurford Hardwood Kempsey Pty Ltd v Kempsey Timbers (Sawmilling) Pty Ltd (No 3) [2019] NSWSC 1285.

9. [9]

   Now, by notice of motion filed on 17 February 2020, Hurford seeks orders that:

Decision

1. [10]

   I am not satisfied that I should make the orders sought.

2. [11]

   Hurford’s notice of motion of 17 February 2020 should be dismissed.

Non-party costs orders only made in exceptional circumstances

1. [12]

   Usually, costs orders are made only against the losing party or parties.

2. [13]

   An order that a non-party pay costs will be made only in exceptional cases and only where the interests of justice require the order: Knight v FP Special Assets Ltd (1992) [1992] HCA 28; 174 CLR 178 at [193] (Mason CJ and Deane J, with whom Gaudron J agreed); Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [80] (Gleeson JA, with whom Macfarlan and Leeming JJA agreed).

3. [14]

   Exceptional means “no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense… [t]he ultimate question [being] whether in all the circumstances it is just to make the order”: Lord Brown for the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807; [2004] UKPC 39 at [25] (adopted by McColl JA in Yu v Cao [2015] NSWCA 276 at [138]-[139]).

4. [15]

   In FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 Basten JA (Beazley and Giles JJA agreeing) said at [210] that orders have been made against non-parties where some, if not a majority, of these criteria were established:

5. [16]

   I will discuss such of these criteria as arise in this case in the course of considering how the case was put for Hurford.

Stated basis for the costs order sought

1. [17]

   Mr McCall, who appeared for Hurford, submitted that a costs order should be made against Dr Head, Oakley and Beebo because Dr Head personally, and “by” Oakley and Beebo, has caused the costs order I made on 19 September 2019 to be “frustrated”.

2. [18]

   This is said to be because:

The relationship between Dr Head, Oakley Investments, Beebo and Kempsey Timbers

1. [19]

   None of Dr Head, Oakley Investments and Beebo was a party to the proceedings.

2. [20]

   The relationship between Kempsey Timbers, Dr Head, Oakley Investments, and Beebo is depicted in the following chart:

3. [21]

   Thus, Dr Head is:

4. [22]

   Dr Head was witness of fact in the proceedings. Apart from a complaint about evidence Dr Head gave in the proceedings about Kempsey Timbers’ creditors, to which I will return, there is no suggestion that Kempsey Timbers’ conduct of the litigation, under Dr Head’s directorship, was unreasonable or improper. Nor is it suggested that Dr Head, acting reasonably, should have understood that Kempsey Timbers’ defence and cross claim in the proceedings had no prospects of success.

5. [23]

   The mere fact that Dr Head is the sole director and ultimate shareholder of Kempsey Timbers is not itself a reason to make an order that he pay the costs of the proceedings. Something more must generally be found: FPM Construction at [206] per Basten JA.

6. [24]

   Oakley Investments played no role in the proceedings. It is owned and controlled by members of the Head family but is otherwise unrelated to Kempsey Timbers. It is a secured creditor of Kempsey Timbers.

7. [25]

   Some $170,000 of a much larger sum Oakley Investments advanced to Kempsey Timbers was used by Kempsey Timbers to pay some of its legal costs of the proceedings. But there is no suggestion that Oakley Investments otherwise had any interest in the outcome of the proceedings. Oakley Investments’ role was akin to a bank lending money to a litigant. That is not sufficient to warrant a costs order against it: eg Jeffrey & Katauskas Pty Limited v SST Consulting Pty Limited (2009) 239 CLR 75; [2009] HCA 43 at [43] (French CJ, Gummow, Hayne and Crennan JJ).

8. [26]

   In about April 2019, Kempsey Timbers granted Oakley Investments a mortgage (“the Mortgage”) over the Wauchope property. I will return to this below.

9. [27]

   Beebo is, in effect, the parent company of Kempsey Timbers and a major unsecured creditor. It played no role in the proceedings. I see no basis at all for an order that it pay Hurford’s costs.

10. [28]

    I now turn to the bases advanced by Mr McCall.

The “materially false” affidavits

1. [29]

   As I stated at [4] of my 22 August 2019 judgment, the purchase price paid by Kempsey Timbers for Hurford’s sawmill business was payable in four instalments the last of which, $500,000, was payable by 1 August 2018 (the “August Payment”).

2. [30]

   A dispute arose as to whether Hurford was obliged to make the August Payment on that day.

3. [31]

   In that regard, Mr Andrew Hurford swore an affidavit of 21 August 2018 in which he stated:

4. [32]

   As I set out at [7] of my 22 August 2019 judgment, the dispute about the August Payment was resolved upon the basis that Hurford pay Kempsey Timbers $242,000 of the $500,000 and that the balance of $258,000 remain in Court.

5. [33]

   In response to Mr Hurford’s affidavit, Dr Head swore an affidavit on 8 October 2018 in which he said:

6. [34]

   Dr Head’s statement that Kempsey Timbers “currently has no debts other than minor credit card obligations” was not true. It was on that date indebted to Beebo in a sum of something in the order of $3.5 million and to Oakley Investments in the sum of some $834,000.

7. [35]

   In cross-examination on this application, Dr Head did not have an adequate explanation in relation to this.

8. [36]

   He gave this evidence:

9. [37]

   It is not satisfactory that, in his affidavit of 8 October 2018, Dr Head gave evidence which, had he thought about it for a moment, he must have known to be incorrect.

10. [38]

    But Mr McCall did not point to any steps that Hurford took in the proceedings by reason of the falsity of this evidence or point to any evidence that the costs incurred by Hurford were thereby increased. As Mr Scruby SC, who appeared with Ms Ernst for Kempsey Timbers, submitted, there is no evidence that Hurford placed any reliance on Dr Head’s affidavit at any point.

11. [39]

    Mr McCall also referred to an affidavit sworn by Mr Dowsett on 18 September 2018 and 18 September 2019.

12. [40]

    I referred to Mr Dowsett’s 18 September 2018 affidavit at [20]-[22] of my 26 September 2019 judgment.

13. [41]

    As I recorded at [21], Mr Dowsett said in that affidavit that “the companies [Kempsey Timbers] have nil external debt”.

14. [42]

    At [22] of that judgment, I said:

15. [43]

    On this application, Mr McCall called Mr Dowsett as a witness. I gave Mr McCall leave to cross-examine Mr Dowsett pursuant to s 38 of the Evidence Act 1995 (NSW).

16. [44]

    Mr Dowsett said he prepared the affidavit at the request of Kempsey Timbers’ solicitor who “wanted to get an indication of the current [financial] state of affairs of the company”. Mr Dowsett said he did not regard the amounts owing by Kempsey Timbers to Oakley Investments and Beebo as being “external” debt because those companies were related to Kempsey Timbers.

17. [45]

    On the application for the freezing order, Mr McCall did not seek to cross-examine Mr Dowsett about this. On this application, there is no evidence that Mr Dowsett gave his somewhat incomplete account of Kempsey Timbers’ financial position because of any suggestion or instruction from Dr Head. Mr McCall did not ask Dr Head anything about this.

18. [46]

    It is true, as Mr McCall submitted, that the unchallenged evidence of the solicitor then acting for Hurford, Mr Clint Braid, was that Hurford relied on Mr Dowsett’s evidence in deciding to agree to the resolution of the dispute about the August Payment as set out at [32] above and to not seek security for costs.

19. [47]

    Thus, Mr Braid said:

20. [48]

    It is also true that, as Mr McCall pointed out, that in his 8 October 2018 affidavit, immediately following the statement I have set out at [33], Dr Head said:

21. [49]

    Thus, in effect, Dr Head adopted Mr Dowsett’s affidavit as an accurate statement of Kemspey Timbers’ financial position. Arguably, he also adopted Mr Dowsett’s affidavit as a complete statement of that financial position; which it was not, as Dr Head must have known, as it did not refer to the amounts owing to Oakley Investments and Beebo.

22. [50]

    Had Mr Dowsett revealed the full position, it may well be that Mr Braid, and thus Hurford, would have given further consideration to seeking to restrain Kempsey Timbers from calling for payment of the August Payment and to seeking security for costs.

23. [51]

    But what would then have happened? Would Hurford have achieved a better position concerning the August Payment? Would Hurford have obtained an order for security for costs and, if so, in what amount? Mr McCall did not develop any submission about these matters.

24. [52]

    To determine an amount of costs for which Dr Head should be liable by reason of his adoption of Mr Dowsett’s affidavit, I would have to come to a conclusion about these matters. That would involve a hypothetical assessment of the evidence likely to be adduced on either side and of the Court’s likely determination of the issues involved in the light of that evidence. That exercise would involve a high degree of speculation on my part. I do not see how I could reach any conclusion about this. It would involve me taking a stab in the dark. As has been said in a different, but corresponding context, “justice does not dictate that in such a case, a figure be plucked out of the air” (Troulis v Vamvoukakis [1998] NSWCA 237 at [29] (Gleeson CJ). I do not propose to do so.

25. [53]

    I referred to Mr Dowsett’s affidavit of 18 September 2019 at [23]-[38] of my judgment of 26 September 2019.

26. [54]

    In that affidavit, Mr Dowsett gave an account of the manner in which Kempsey Timbers’ drawings on each loan account with Oakley Investments were used. Again, Mr McCall did not seek to cross-examine Mr Dowsett about this on the freezing order application and did not ask Dr Head any question about it on this application relevant to the question of whether Dr Head should pay the costs of the proceedings. No order is sought against Mr Dowsett.

27. [55]

    In these circumstances, I do not see how the “materially false” affidavits provide a reason to order Dr Head to pay the costs of the proceedings.

The Mortgage

1. [56]

   I referred to the Mortgage in my judgment of 26 September 2019 at [18] and [19].

2. [57]

   There is more evidence before me on this application as to the circumstances that led to the granting of the Mortgage.

3. [58]

   Thus, Dr Head gave this evidence:

4. [59]

   On 8 November 2018, Dr Head, as chairman and director of Kempsey Timbers, resolved that Kempsey Timbers enter the Mortgage. The Minutes read:

5. [60]

   I see no reason not to accept this evidence, nor the accuracy and bona fides of the explanation recorded in the minutes.

6. [61]

   By the Mortgage, Kempsey Timbers acknowledged that Oakley Investments had advanced $1.5 million and agreed to repay that sum in four years.

7. [62]

   In fact, in April 2019, when the Mortgage was executed, the amount owing by Kempsey Timbers to Oakley Investments was in the order of $534,000. Between then and 31 October 2019 a further sum in the order of $615,000 was advanced.

8. [63]

   In his affidavit of 18 September 2019, read on the freezing order application, and to which I have referred, Mr Dowsett explained how those advances were utilised: see [23] to [38] of my 26 September 2019 judgment. As I have said at [25] above, some $170,000 was used to pay costs in these proceedings.

9. [64]

   Oakley Investments was a substantial creditor of Kempsey Timbers. Kempsey Timbers, by Dr Head, sought further financial assistance from Oakley Investments for its working capital, and to help fund the litigation. Dr Head, on behalf of Kempsey Timbers, offered Oakley Investments the Mortgage as security for that further assistance.

10. [65]

    That did cause Kempsey Timber’s equity in Wauchope to be made subject to the Mortgage. But that was in exchange to Oakley Investments’ agreement to provide further funding to Kempsey Timbers.

11. [66]

    I do not see the granting by Kempsey Timbers to Oakley Investments of the Mortgage as a reason to visit a costs liability on either Dr Head or Oakley Investments.

The “defeating” of the freezing order application

1. [67]

   Mr McCall submitted that:

2. [68]

   The evidence upon which Kempsey Timbers relied to “convince” me that it was proceeding with a subdivision of the Wauchope property was that of Kempsey Timbers’ then solicitor, Mr Worthington that I set out at [45] of my 26 September 2019 judgment.

3. [69]

   To repeat, that evidence was:

4. [70]

   As I recorded in the 26 September 2019 judgment, Mr McCall did not challenge this evidence.

5. [71]

   Nor did Mr McCall challenge the affidavit evidence given by Dr Head on this application that “I agree that [what Mr Worthington deposed to be Dr Head’s intention] was my intention as at” the date of Mr Worthington’s 2019 affidavit.

6. [72]

   I see no reason to doubt that evidence.

7. [73]

   Accordingly, I cannot see how this circumstance provides a basis for the costs orders sought.

8. [74]

   In any event, even if, by reason of the nature of evidence adduced before me on the freezing order application, Hurford lost an opportunity otherwise available to it to get a freezing order, that has had no causative consequences so far as concerns the voluntary administration.

9. [75]

   That is because the making of a freezing order would not have prevented Dr Head from appointing an administrator or propounding a Deed of Company Arrangement, and causing it to be voted on.

10. [76]

    Further, as Mr Scruby explained, Hurford’s position would not be significantly different had a freezing order been made. Kempsey Timbers’ indebtedness to Oakley Investments would have been $100,000 less, this being the amount advanced by Oakley Investments after the dismissal of the application for the freezing order. That would have made only a marginal difference to the return for unsecured creditors

11. [77]

    In his affidavit on this application, Dr Head went on to explain what then happened. I now turn to this.

The voluntary administration

1. [78]

   Mr McCall submitted:

2. [79]

   Dr Head explained the circumstances that lead to Kempsey Timbers being placed into voluntary administration in his affidavit of 5 March 2020.

3. [80]

   Mr McCall cross-examined Dr Head for some time in this application but did not, in substance, challenge Dr Head’s account.

4. [81]

   Dr Head said that following delivery of my judgment on 22 August 2019 he retained an alternative solicitor, Mr Stuart Hetherington of Colin Biggers & Paisley.

5. [82]

   Dr Head instructed Mr Hetherington to brief senior counsel to advise on Kempsey Timbers’ prospects of successfully appealing my decision of 22 August 2019. Dr Head also asked Mr Hetherington for advice as the amount that Hurford was likely to recover for its costs of the proceedings and to negotiate a settlement of the costs question.

6. [83]

   Dr Head deposed:

7. [84]

   Mr McCall submitted:

8. [85]

   Dr Head’s evidence shows that the position is more nuanced than this.

9. [86]

   That evidence shows that Dr Head consulted his fellow Oakley Investments director, as well as the majority shareholders in Oakley Investments as to whether Oakley Investments should continue to fund Kempsey Timbers. Those parties decided that Oakley Investments should not do so. Oakley Investments had no obligation to continue funding. As directors of Oakley Investments, Dr Head and Mr David Head had an obligation to act in that company’s best interests. As Mr Scruby submitted, Dr Head did not owe any duty to Hurford to seek to have Oakley Investments conduct its affairs in any particular way.

10. [87]

    Dr Head continued:

11. [88]

    Dr Head continued:

12. [89]

    Mr Hetherington then introduced Dr Head to Mr Alan Hayes of Hayes Advisory. Mr Hayes ultimately became the administrator of Kempsey Timbers.

13. [90]

    Dr Head continued:

14. [91]

    Thereafter, on 19 November 2019 Dr Head, as sole director of Kempsey Timbers, resolved that a voluntary administrator, Mr Hayes, be appointed to Kempsey Timbers pursuant to s 436A of the Corporations Act 2001 (Cth).

15. [92]

    On 19 November 2019, Dr Head lodged a proof of debt for Beebo in the administration in the sum of $3,576,852. On 27 November 2019, Mr David Head lodged a proof of debt for Oakley Investments in the administration in the sum of $1,150,000. On 4 December 2019, Hurford lodged a proof of debt in the administration in the sum of $519,295.54.

16. [93]

    On 21 February 2020, the administrator circulated a Supplementary Report to Creditors in which he recommended that Kempsey Timbers execute a Deed of Company Arrangement providing that:

17. [94]

    On 2 March 2020, the creditors of Kempsey Timbers, including Beebo and Oakley Investments, resolved to approve the Deed of Company Arrangement. Only Hurford voted against that approval.

18. [95]

    Mr McCall submitted that “the voluntary administration was just a means to avoid payment of the Costs Order before [Kempsey Timbers] continue with the subdivision application”.

19. [96]

    As Mr Scruby pointed out, this submission appears to involve propositions that:

20. [97]

    If there were substance in the propositions, that might provide a basis for Hurford to make an application under Part 5.3A of the Corporations Act, for example, to seek to terminate or set aside the Deed of Company Arrangement pursuant to ss 445E or 447A of that Act.

21. [98]

    But I do not see how they could lead to the conclusion that Dr Head should pay Hurford’s costs of the proceedings.

22. [99]

    In any event, the administrator said in his Second Report to Creditors that Kempsey Timbers only became insolvent on the making of my costs order. Mr McCall did not seek to challenge that conclusion.

23. [100]

    In that circumstance, I cannot see how Dr Head could be criticised for voting in favour of the Deed of Company Arrangement. As Kempsey Timbers was then insolvent, the alternative was for Kempsey Timbers to be placed into liquidation. Further, in so voting, Dr Head gave up his own claims against Kempsey Timbers and caused Beebo to give up all of its claims.

24. [101]

    Mr McCall submitted that the Deed of Company Arrangement “is the final step in a course of conduct in these proceedings by Dr Head and his companies to avoid paying the costs of the plaintiff”.

25. [102]

    Mr McCall did not put that proposition to Dr Head in cross-examination and, indeed, as I have said, did not in substance challenge Dr Head’s account of the events leading up to the Deed of Company Arrangement.

26. [103]

    I am not, in those circumstances, prepared to accept that there was some kind of grand plan by Dr Head to cause the costs order to be frustrated.

27. [104]

    Nor do I see anything in the circumstances leading to the administration of Kempsey Timbers as providing a reason to make a costs order against Dr Head; let alone against Oakley Investments or Beebo.

28. [105]

    I do not see that it adds anything to point to the fact that Kempsey Timbers may now be in a position to proceed with the Wauchope development. That may be a consequence of the Deed of Company Arrangement. But the alternative was for Kempsey Timbers to go into liquidation. Had that occurred, according to the Administrator’s report, Hurford would have received even less than in the administration.

UCPR 36.16(3A)

1. [106]

   There is a further difficulty.

2. [107]

   Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”) r 36.16(3A)-(4) provide:

3. [108]

   The effect of these provisions is that a final costs order, once entered, cannot be varied unless a notice of motion is filed within 14 days after the order is entered: e.g., Boateng v Dharamdas [2019] NSWCA 233 at [24] (Macfarlan JA, with whom Gleeson JA agreed) and [57] (White JA).

4. [109]

   That was not done.

5. [110]

   Mr McCall submitted that UCPR r 36.16(3A) did not apply because the present application does not seek to “set aside or vary” an order but rather seeks orders that are “supplemental or additional” to the costs order that I made.

6. [111]

   Mr McCall relied on the decision of the Full Court of the Federal Court in Caboolture Park Shopping Centre Pty Ltd (in liq) v White Industries (Qld) Pty Ltd (1993) 45 FCR 224 at 264-265 that a non-party costs order did not vary or alter the original costs order but was “supplemental” to it.

7. [112]

   However, unlike UCPR 36.16, the Federal Court Rule in question in Caboolture, Order 35 Rule 7, states, in terms, that the power to “vary or set aside” an order does “not affect the power of the Court to terminate the operation of an order by a supplementary order”.

8. [113]

   Further, Payne JA (Meagher and Gleeson JJA agreeing) expressed a different view in Rodi v Gelonesi [2016] NSWCA 348 at [37] where his Honour said, speaking of UCPR 36.16(3A):

9. [114]

   Payne JA did not need to express a final view about this because he was not persuaded that he should make the non-party costs order sought. His Honour’s views are thus obiter. However, I agree with them and propose to follow them.

10. [115]

    In my opinion, in form and in substance the orders now sought would vary my orders of 19 September 2019.

11. [116]

    The first order sought by Hurford, set out at [9(a)] above, is that “a different person” pay the costs that I ordered Kempsey Timbers to pay; namely Dr Head, Oakleigh Investments and Beebo liable for Hurford’s costs. The second order sought, set out at [9(b)] above, is that once one or more of those parties pays those costs, Kempsey Timbers’ “liability” to do so is “extinguished”.

12. [117]

    That would, in my opinion, constitute a variation of the orders I made.

13. [118]

    Mr McCall submitted that, alternatively, I should use the powers contained in s 14 of the Civil Procedure Act 2005 (NSW) (“CPA”) to extend the time limit in r 36.16(3A).

14. [119]

    Section 14 provides:

15. [120]

    Mr McCall did not cite any authority for the proposition that the power given to the Court under s 14 of the CPA to dispense with a “requirement” of the rules could be used to extend the time limit imposed by UCPR 36.16(3A) and thus in effect dispense with the prohibition in UCPR 36.16(3C).

16. [121]

    UCPR r 36.16(3C) provides that despite UCPR 1.2, which provides generally for the extension and abridgment of time fixed by the rules, the Court may not extend the time limit by r 36.16(3A).

17. [122]

    It would be very odd if, nonetheless, an extension of time could be made available under s 14 of the Act. Any such circumstances would subvert the intent evinced in UCPR r 36.16(3A) and (3C) that the 14 day time limit not be extended.

18. [123]

    It may be that, had Hurford given notice within the 14 day period prescribed by UCPR 36.16(3A) of its intention to seek a non-party costs order but had not actually filed a notice of motion seeking such an order within that 14 day period, s 14 of the CPA could be relied on to dispense with the requirement of UCPR 36.16(3A) to actually file a notice of motion within 14 days. But, absent such notification within the 14 day period, the better view appears to be that s 14 of the CPA is not so available: see Aukuso v Tahan (No 2) [2018] NSWCA 302 at [4] (Meagher JA) and [43]-[49] (Simpson AJA; Macfarlan JA agreeing).

19. [124]

    Had it been necessary for me to deal with this question, I would have concluded that in the absence of any indication having been given by Hurford within the 14 period of its intention to seek a non-party costs order, s 14 of the CPA was not available to override the prohibition in UCPR 36.16(3C).

Conclusion

1. [125]

   The plaintiff’s notice of motion of 17 February 2020 should be dismissed.

2. [126]

   I will hear the parties as to costs.