Raffy Nominees Pty Ltd v nib Holdings Ltd (No 2)

By three notices of motion filed in this proceeding, the first and second defendants and the third defendant seek gross sum costs orders against the plaintiff, Raffy Nominees Pty Ltd, and against relevantly, the first respondent, Mr Matthew Donnellan. To the extent necessary, the defendants also seek leave to proceed against Raffy Nominees under s 440D(1)(b) of the Corporations Act 2001 (Cth). Finally, the defendants sought costs orders against the second respondent, Raffy Holdings Pty Ltd. The claim for that relief, however, has been resolved.

On 28 June 2023, I delivered judgment in this matter and a related matter, nib Holdings Ltd v Raffy Nominees Pty Ltd as trustee of the Whitecoat Holding Trust (the nib Proceeding): see nib Holdings Ltd v Raffy Nominees Pty Ltd as trustee of the Whitecoat Holding Trust; Raffy Nominees Pty Ltd v nib Holdings Ltd [2023] NSWSC 715. This judgment assumes familiarity with that judgment.

As I explained in my earlier judgment, on the first day of the hearing of the two proceedings, Raffy Nominees sought leave to discontinue this proceeding. That leave was granted. A timetable was made for the third defendant to make an application for indemnity costs. The third defendant was then excused from the hearing. On the second day of the hearing, the first and second defendants indicated that they had instructions to make an application for indemnity costs and for an order that a condition of the discontinuance be that Raffy not be entitled to commence fresh proceedings arising out of the same set of facts. Those orders were opposed, with the result that the applications were stood over for argument to a date after the conclusion of the hearing of the nib Proceeding.

The foreshadowed applications were heard on 19 May 2023, at which time I indicated that I would hand down my judgment in relation to them at the time I handed down judgment in the nib Proceeding. During the course of the hearing, I raised the question whether I should assess costs on a gross sum basis and asked counsel for the defendants whether they intended to make an application for an order of that type. As is apparent from the transcript of the hearing, I considered that it may be appropriate to make a gross sum costs order having regard to the conduct of Raffy Nominees in the proceeding. Counsel for the nib parties and counsel for the third defendant both indicated that they anticipated that would obtain instructions to make such an application. I then reserved my decision.

I delivered judgment in both proceedings on 28 June 2023. At that time, I made the following order in this proceeding:

On 6 July 2023, the Court made the following directions by consent in relation to the first and second defendants’ application:

On 24 July 2023, the Court made the following directions by consent in relation to the third defendant’s application:

On 8 August 2023, the first and second defendants filed a notice of motion seeking relevantly the following orders:

On 11 August 2023, the first and second defendants filed a notice of motion seeking the following order:

On 26 July 2023, the third defendant filed a notice of motion seeking an order that her costs be specified in a gross sum in the amount of $233,000.00. The third defendant served but did not file an amended motion on 10 August 2023. On 17 August 2023, the third defendant filed in Court a further amended notice of motion seeking the following orders:

It is the motions filed on 8, 11 and 17 August 2023 that are before the Court.

Section 98 of the Civil Procedure Act 2005 (NSW) (CPA) provides:

Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 36.16 relevantly provides:

Section 14 of the CPA provides:

The three motions raise a preliminary question whether the order made on 28 June 2023 determined claims for relief (within the meaning of UCPR r 36.16(3)) which are now sought to be varied by the defendants’ notices of motion. If and to the extent that it did, UCPR r 36.16 operates as a bar to a variation of that order because none of the notices of motion were filed within 14 days after the order was entered so as to fall within UCPR r 36.16(3A) and no extension to the 14-day period is possible under UCPR r 1.12: see UCPR r 36.16(3C). In addition, the power to dispense with the rules in particular cases appears to be of no assistance to the defendants because the rule from which dispensation might be sought (UCPR r 36.16) expands rather than limits the circumstances in which the Court may vary a final judgment or order: see, for example, Bailey v Marinoff (1971) 125 CLR 529 at 530 per Barwick CJ.

It has been suggested that the Court has power to dispense with the requirement to file a notice of motion, leaving the balance of UCPR r 36.16(3A) to operate according to its terms. But that would still require the applicant to give notice (other than by way of notice of motion) of the application within the 14-day period specified in that rule: see Eliezer v The Council of St Andrew’s Cathedral School (No 2) [2021] NSWCA 227 at [19]; compare Oikos Constructions Pty Ltd t/as Lars Fischer Construction v Ostin & Anor (No 2) [2021] NSWCA 98 at [38] per White JA (with whom Basten JA agreed). No such notice was given in this case. The most that could be said is that within the 14-day period (indeed, before the final order was entered), the defendants indicated that they anticipated obtaining instructions to make an application for gross sum costs orders.

Although the position is not beyond doubt, the current state of the law is that a costs order in relation to a final hearing is the determination of a claim for relief within the meaning of UCPR r 36.16(3). That was the conclusion of Giles JA (with whom Spigelman CJ and Handley JA agreed) in Roads and Traffic Authority of New South Wales, Council of the Shire of Evans & Pioneer Road Services Pty Ltd v Palmer (No 2) [2005] NSWCA 140 at [20]-[21] in relation to Pt 40 r 9(4) of the Supreme Court Rules, which was relevantly in substantially the same terms as UCPR r 36.16(3). Commenting on that decision, the Court of Appeal in Habib v Nationwide News Pty Ltd (No 2) [2010] NSWCA 291 at [39] said:

There is a question whether an application for a gross sum costs order against a party against whom a costs order has already been made is an application to vary that costs order. Different views have been expressed on that question. In Livers v Legal Services Commissioner (No 2) [2021] NSWCA 164 at [5]-[8], White JA, following his Honour’s earlier decision in Short v Crawley (No 45) [2013] NSWSC 1541 at [27], held that it was a variation but not to a claim for relief. It was only a variation to the mode for quantifying the claim for relief.

The decision of White JA is to be compared with the decision of Leeming JA in Riva NSW Pty Ltd v Mark A Fraser and Christopher P Clancey t/as Fraser Clancey Lawyers (No 4) [2018] NSWCA 327 at [59]-[61], where his Honour held that a claim for a gross sum costs order was a claim to set aside or vary an existing costs order because it “supplants the assessment regime, and permits a person to proceed to execution directly”. The issue remains unresolved: see Ahern v Aon Risk Services Australia Ltd (No 2) [2022] NSWCA 39 at [19]-[21].

Ultimately, in my opinion, the question must turn on the correct construction of the relevant order understood in the context in which it was made. In the present case, it is apparent that the order made on 28 June 2023 was only intended relevantly to resolve the question whether costs should be awarded on the ordinary basis or the indemnity basis. That was the only issue before the Court at the time the matter was argued, and it is apparent from the transcript that I specifically intended to reserve to another day the question whether a gross sum costs order should be made. The order itself does not state that costs were to be assessed. In context, it must be interpreted as leaving that question open. Section 98(4) of the CPA gives the Court power to make a gross sum costs order at any time before costs are referred to assessment.

A similar issue arises in relation to the question whether a costs order should be made personally against Mr Donnellan. There is conflicting authority on whether an application for a costs order against a third party is an application to vary a costs order already made. In Caboolture Park Shopping Centre Pty Ltd (in liquidation) v White Industries (Qld) Pty Ltd (1993) 45 FCR 224, the Full Court of the Federal Court held that it was not. In that case, the applicant, Caboolture, had commenced proceedings against the respondent, White Industries, claiming damages for misleading and deceptive conduct and fraudulent misrepresentation. White Industries filed a cross-claim seeking to recover amounts due to it under a contract. Judgment was ordered for White Industries against Caboolture on the claim and that judgment was entered on 18 August 1989. On 6 April 1990, the Court gave judgment on the cross-claim in these terms:

Subsequently, Caboolture went into liquidation. After judgment had been entered on the cross-claim, it emerged that its solicitors had commenced and continued the claim knowing that it had no worthwhile prospects of success in order to vex White Industries. After discovering those facts, White Industries filed a notice of motion seeking an order that the solicitors pay its costs of the proceedings (other than the cross-claim) personally. The question whether the court had power to make such an order came before the Full Court on a case stated. The answer to the question turned on whether the application was an application to vary the judgment entered on 6 April 1990. The Full Court held that it was not. In reaching that conclusion the Court said (at 235):

In Xabregas v The Owners – Strata Plan No. 79205; Moallem v Consumer, Trader and Tenancy Tribunal & Ors (No 2) [2014] NSWSC 1027, White J, following his Honour’s earlier decision in Short v Crawley (No 45) [2013] NSWSC 1541 at [33] cited Caboolture for the broader proposition that “… it has been held that in accordance with the power to make such supplemental orders, an order for costs may be made against a non-party notwithstanding the entry of the final judgment in the proceeding”.

Although not expressing a final view, a different conclusion was reached by the Court of Appeal in Rodi v Gelonesi [2016] NSWCA 348. In that case, Payne JA (with whom Meagher and Gleeson JJA agreed) said (at [37]):

In my opinion, the issue again ultimately depends on the correct construction of the relevant order. In my view, the order made on 28 June 2023 must be understood as resolving the question by whom costs are to be paid. The order specifically says that “the plaintiff pay the defendants costs …” (emphasis added). That order was made following a contested hearing on costs in which the question whether someone else should pay the defendants’ costs was never raised. Indeed, that issue was only raised by the notices of motion filed on 11 and 17 August 2023.

The defendants submit that the order made on 28 June 2023 only addressed whether and on what basis the plaintiff should pay costs. It did not address the question whether some other party – specifically, Mr Donnellan – should also pay costs.

I do not accept that submission. There had been a contested hearing in relation to the costs of the discontinuance. An essential feature of a costs order is by whom the costs should be paid. There was no suggestion during the contested hearing that anyone other than the plaintiff should pay the defendants’ costs. In that context, an order that the plaintiff pay the defendants’ costs (assessed on an indemnity basis) must carry with it an implication that no other person is liable to pay those costs. Accepting that, an application that some other person also pay those costs is an application to vary that order.

The decision in Caboolture is distinguishable. As the Full Court pointed out, the order in that case was made not simply to compensate the successful party for the costs that it has incurred but as a means by which the Court regulates the conduct of legal practitioners appearing before it. The general words of a costs order against a party should not be interpreted as excluding the possibility of a costs order of that type. Consequently, such an order, if made, is properly seen as supplemental and not contrary to the original costs order.

It follows that the Court has power to make a gross sum costs order against the plaintiff, but it does not have power now to make a costs order of any type against Mr Donellan.

Having regard to the conclusions I have reached, this question does not arise. However, I should say something about it in the event that I am wrong about the question of power.

The Court will only make a costs order against a third party in exceptional circumstances. The circumstances in which it will do so are not closed and it is necessary for the Court to have regard to the particular facts of the case in deciding whether to make such an order. The relevant principles were summarised in the following frequently cited passage from the judgment of Basten JA (with whom Beazley and Giles JJA agreed) in FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 at [210]:

Applying these criteria, the mere fact that a person is the sole director and shareholder of an unsuccessful plaintiff is not sufficient to justify a personal costs order against that person: PM Works at [36]; [46]-[47].

Also relevant is the availability of an application for security for costs. As Mason CJ and Deane J said in Knight v F. P. Special Assets Ltd (1992) 174 CLR 178 at 191:

On balance, I would not have made a third-party costs order against Mr Donnellan. A number of the features identified by Basten JA are present in this case. Mr Donnellan was the sole director of Raffy Nominees and was clearly its directing mind. On the findings I have made, the conduct of the litigation was unreasonable because it was evident that the claim had no reasonable prospects of success. The evidence strongly suggests that, at the time the proceedings were brought, Raffy Nominees was insolvent.

There are, however, two features of this case that make it inappropriate to make a costs order against Mr Donnellan. First, I do not think it could be said that Mr Donnellan was the person behind the litigation or that he was the principal beneficiary of it. Second, it was open to the defendants to make an application for security for costs and the third defendant in fact did so.

As to the first of these points, it is important to bear in mind that nib sued Raffy Nominees to recover a loan owed to it. Raffy Nominees defended that proceeding and, shortly before that proceeding was due to be heard, took an assignment of causes of action that another company, Digital Health Ventures Pty Ltd (DHV), had against nib and the other defendants. DHV was a joint venture company established by nib Holdings and another company controlled by Mr Donnellan, TouchToBuy Pty Ltd (TTB). It sold its business to a company owned by Raffy Nominees, nib and two other investors as part of a series of transactions by which nib and Raffy Nominees (in place of TTB) retained an interest in the business previously owned by DHV but introduced two new investors into that business. DHV was subsequently placed into liquidation. nib or the second defendant, nib Health, had provided services to DHV. The third defendant was an employee of nib (or one of its subsidiaries) and a director of DHV. The proceedings were funded by a commercial loan Raffy Nominees obtained from Raffy Holdings Pty Ltd, a company controlled by Mr Donnellan’s wife. Raffy Holdings was the trustee of a discretionary family trust of which Mr Donnellan and members of his family were beneficiaries.

It is apparent from this brief description of the facts that this proceeding was part of a flawed strategy by which Raffy Nominees sought to avoid having to pay the amount claimed by nib in the nib Proceeding. It appears that the strategy was developed by Mr Donnellan in consultation with Raffy Nominee’s lawyers. However, it could not be said that the proceeding was funded by Mr Donnellan directly or that he necessarily personally stood to benefit from them. The proceeding was brought for the benefit of Raffy Nominees and in conjunction with the claim against it. Raffy Nominees, not Mr Donnellan, was the beneficiary of the claim in its capacity apparently as a trustee of the Whitecoat Holding Trust. For those reasons, I do not think this is an appropriate case in which to make a personal costs order against Mr Donnellan.

In their submissions, the defendants attach some significance to the fact that, shortly before Raffy Nominees went into external administration, Mr Donnellan caused it to transfer the causes of action the subject of this proceeding (which were preserved by the discontinuance) to another company controlled by him. However, I do not think that is a reason for ordering Mr Donnellan to pay costs personally. His liability for costs should depend on the conduct of this litigation, not what might happen in the future. If a new proceeding is commenced relying on the same causes of action, the history of this matter may be relevant to the costs orders that should be made in those proceedings, but the possibility of those proceedings is not relevant to the costs orders that should be made in this proceeding.

As to security, little weight should be attached to the fact that nib Holdings did not make an application for security. It was reasonable for it not to have done so in circumstances where the proceeding was brought on very quickly. However, the third defendant did make an application for security. That application was settled on the basis of the following consent orders:

The undertaking referred to in order 2 was to be given in these terms by Mr Donnellan:

So far as the third defendant is concerned, in my opinion, these orders provide a strong discretionary reason for not making a personal costs order against Mr Donnellan in favour of the third defendant. The relevant parties settled the question of security by agreeing that Mr Donnellan would be personally responsible for costs up to a maximum of $100,000. It is apparent from the form of undertaking that the parties contemplated the possibility that the third defendant might seek additional security. It is true that the orders do not prevent an application by the third defendant for an order that Mr Donnellan pay the whole of her costs personally. But they do provide a framework governing Mr Donnellan’s liability to pay costs personally. The third defendant should not be permitted to depart from that framework without good reason. No sufficiently good reason is advanced in this case. The third defendant knew the relationship between Raffy Nominees and Mr Donnellan and knew that there was at least reason to believe that Raffy Nominees would not be able to pay any costs order against it. The third defendant correctly believed that the claim against her was weak. In that context it was open to her to put Mr Donnellan on notice that if Raffy Nominee’s claim against her failed, she would be seeking an order that he pay costs personally. Instead, she chose to make an application for security and to agree to the orders that were made. Having agreed to those orders, she should not be permitted after the event to contend that Mr Donnellan should be liable for all her costs.

Having regard to the conclusions I have reached it is unnecessary to consider whether affidavit evidence given by the solicitor for Raffy Nominees in which it is alleged that the solicitor made an admission concerning Mr Donnellan’s control of Raffy Nominees was admissible on this application.

On 31 August 2023, I ordered Raffy Nominees, which was then as it is now in external administration, to pay nib Holdings’ costs of the nib Proceeding on a gross sum basis and gave reasons for that order: see nib Holdings Ltd v Raffy Nominees Pty Ltd as trustee of the Whitecoat Holding Trust (No 2) [2023] NSWSC 1036 (the nib Holdings Costs Judgment).

There is a question in this case whether nib Holdings and nib Health Funds Ltd (together, the nib Parties) (and the third defendant) need leave to proceed against Raffy Nominees under s 440D(1)(b) of the Corporations Act, since they are the defendants in this proceeding. But it is not necessary to consider that question further. Even if leave is required, I would give it for the same reasons as I gave leave to nib Holdings to make an application for a gross sum costs order in the nib Holdings Costs Judgment. And for similar reasons, I would make a gross sum costs order in this case. Leave was not opposed by the administrators and a gross sum costs order appears to be the most efficient and costs-effective way of determining the question of costs in circumstances where the defendants are unlikely to recover their costs and where at some stage their costs will have to be dealt with by the administrators as part of the proof of debt process.

The evidence relied on by the nib Parties in support of their quantification of their costs in this proceeding is the same as the evidence nib Holdings relied on in the nib Holdings Costs Judgment. That evidence involved apportioning the nib Parties’ costs across the two proceedings. With one minor adjustment to take account of the fact that nib Holdings would not incur the costs of an assessment, I accepted that evidence in the nib Holdings Costs Judgment. I should adopt the same approach in this proceeding. Adopting that approach, the nib Parties submit that their costs should be calculated by taking their total costs referable to this proceeding, which is $319,989.30, and making the following adjustments:

In my opinion, those adjustments are appropriate. The first and third adjustment should be made before applying the discount of 15 percent and should be rounded, reflecting the fact that the calculation is not a precise one. The $16,359 should then be deducted from that amount. Adopting that approach, I have concluded that the nib Parties should be entitled to recover $268,000 less $16,359 – that is, $251,941.00.

The third defendant’s application for a gross sum costs order is supported by two affidavits from her solicitor, Mr Crispian Lynch, a partner of Gilbert + Tobin. Mr Lynch exhibits to his first affidavit the accounts rendered to the third defendant. Those accounts (which are partially redacted) set out details of the work done, by whom it was done, the person’s charge out rate and the amount charged for each item of work. Mr Lynch explains that some items of work do not relate to this proceeding and have been excluded, leaving a total amount for solicitors fees of $204,708 (excluding GST). The total amount for senior counsel fees is $32,150, the total amount for junior counsel fees is $21,375 and the total amount for other disbursements is $5,927.63, making a total of $264,160.63. These amounts do not appear to be excessive having regard to the nature of the case and the work that was done.

The third defendant adjusts that amount by:

On that basis, the third defendant claims $245,000.

For the reasons given in the nib Holdings Costs Judgment, I think that the general approach adopted by the third defendant is appropriate. Moreover, I accept that a 15 percent discount on the third defendant’s total costs is a reasonable discount to apply bearing in mind that, although the third defendant is entitled to recover her costs on an indemnity basis, not all those costs are likely to be recovered on assessment.

However, in my opinion, three further adjustments are required. First, it is not appropriate to include Mr Lynch’s estimate for the total costs of the motion, since part of the motion related to a gross sum costs order against Mr Donnellan, which failed. In my opinion, it would be more appropriate to allow $12,000 for the costs of the application for a gross sum costs order. Second, a deduction should be made to take account of the fact that the third defendant will avoid the costs of an assessment. In my opinion, an appropriate deduction is $15,000. Third, the third defendant has recovered $13,650 in costs from Raffy Holdings. That figure needs to be deducted. Again, the 15 percent discount should be applied after the first two adjustments and the result should be rounded, before deducting the $13,650.

On that basis, the third defendant should recover $222,000 less $13,650 – that is, $208,350.

The orders of the Court are: