In the matter of Central West Civil Pty Ltd

This is a costs application in respect of the discontinuance of an application by XJS World Pty Ltd (“XJS”) to be joined as a substituted creditor in a winding up application in respect of the Defendant, Central West Civil Pty Ltd (“CWC”).

It is necessary first to set out the history of the proceedings. By Originating Process filed on 26 June 2023, the Plaintiff, High Quality Asphalts Pty Ltd (“HQA”) brought an application for the winding up of Central West Civil Pty Ltd (“CWC”) on the ground of insolvency. Multiple third parties then filed notices indicating their intent to appear to support the winding up application. CWC then indicated that it would oppose the winding up application on the basis that, prior to the expiry of the 21 day period available to respond to the creditor’s statutory demand on which HQA relied, it had entered into a payment agreement in relation to the debt, through a third party, and sought to have the Court exercise a discretion to dismiss the winding up application, and alternatively contended that it was solvent. On 26 July 2023, HQA was granted leave to withdraw its application.

By Interlocutory Process dated 16 August 2023, XJS applied for an order that it be substituted as the Plaintiff in the proceedings. It appears that XJS is a proprietary company operated by a husband and wife, Mr and Mrs Vance, with Mrs Vance as its director, and its substitution application relied on an unpaid debt under a lease of commercial premises previously rented by CWC. CWC opposed XJS’s substitution application, relying on evidence of its director asserting the existence of oral agreements reached with Mr Vance before XJS and CWC entered the commercial lease on which XJS relied. At about the same time as CWC took that course, Mr Vance was admitted to hospital with an apparently serious health condition, which I am comfortably satisfied severely limited or excluded his ability to give, and his solicitor’s ability to obtain, instructions in respect of the matter.

By a notice of discontinuance, filed with leave granted on 11 September 2023, XJS discontinued its application for substitution and, where no other creditor of CWC sought to be substituted to continue the winding up proceedings, I dismissed those proceedings. I reserved the question of costs, where CWC indicated its intent to pursue a claim for costs against XJS.

Mr Justin Young, who made written submissions for CWC in respect of its claim for costs, recognised that the Supreme Court (Corporations) Rules 1999 do not expressly provide for discontinuance of an interlocutory process, as distinct from the discontinuance of winding up proceedings under r 5.8, and that r 12.1 of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”) deals with the discontinuance of proceedings, in respect of claims for relief brought in the proceedings, rather than with the discontinuance of an interlocutory process. Mr Young nonetheless submits that the costs principles applicable to the discontinuance of claims under UCPR r 42.19 should apply to the discontinuance of an interlocutory process. That submission has the potential difficulty that UCPR r 42.19(2) applies, in its terms, to the costs relating to each claim in respect of which the proceedings have been discontinued, and Mr Young’s submission requires that concept to be given an extended application in respect of an interlocutory process. Nonetheless, Mr Horobin, who made submissions for XJS, assumes that the principles relating to a discontinuance of proceedings under UCPR r 42.19 applies and refers to my summary of those principles in Re Cabramatta King Tea Pty Ltd [2022] NSWSC 462 (“Cabramatta King Tea”) at [5]-[10].

It is not necessary to decide whether UCPR r 42.19 applies, given the conclusion that I reach below. That rule provides that:

I summarised the case law dealing with the application of this rule in Cabramatta King Tea at [7]ff as follows:

I also recently followed the decision of McNamara v San [2010] NSWSC 809 (“McNamara v San”) in Re Harmony Homes Pty Ltd [2023] NSWSC 300 at [5]ff.

Mr Horobin accepts that, although UCPR r 42.19 (if it applies) does not create a rebuttable presumption that the discontinuing party must pay the other party’s costs, “some proper justification, sound positive ground or good reason for departing from the usual position would need to be shown” in order to displace an order that XJS pay CWC’s costs. He submits that the justification, sound positive ground or good reason in this case relates to the serious health issues that now affect Mr Vance, which arose about one week after XJS filed its Interlocutory Process for substitution, and the fact that XJS’s solicitors had advised CWC’s solicitors of those matters promptly after Mr Vance’s hospitalisation.

I am comfortably satisfied that the matters to which Mr Horobin refers constitute a proper justification, sound positive ground or good reason for departing from the usual position. I accept that the occurrence of the supervening event of Mr Vance’s serious illness and its adverse impact on XJS’s ability to respond to the evidence led by CWC, irrespective of the truth or falsity of that evidence, has led to the discontinuance of the proceedings and there had been no unreasonable conduct on the part of XJS in that regard. I am also comfortably satisfied that, adopting the language of McNamara v San at [12], the order that would be “just in the particular circumstances of th[is] case” is that there be no order as to the costs of the Interlocutory Process, so that each party bears its own costs in that regard. I would make that order, even if UCPR r 42.19 applies to the discontinuance of an interlocutory process.

I would reach the same result if UCPR r 42.19 does not apply in respect of an interlocutory process. Possibly in the alternative, CWC submits that XJS has not discontinued the interlocutory process as a result of a compromise or settlement, and the discontinuance amounts to a capitulation by XJS. I do not accept that submission, where, as I noted above, the evidence supports the inference that the application for substitution has not been pursued by reason of the serious health difficulties affecting Mr Vance and their adverse impact on XJS’s ability to pursue the substitution application, irrespective of its merit. That circumstance provides no reason to think that the substitution application would not have succeeded, and indeed that a winding up application would not have succeeded, had it been pursued.

CWC also contends that the evidence supports no more than a short adjournment to assess Mr Vance’s medical condition. I also do not accept that submission, where the nature of the health issues identified in respect of Mr Vance are such that there is no reason to think that an adjournment, still less a short adjournment, would avoid the difficulties which result from those issues. In the further alternative, CWC invites the Court to infer that XJS perceived its application to be hopeless, and seeks to have the Court reach a conclusion whether the alleged debts are bona fide disputed. The former inference is not properly drawn, where Mr Vance’s medical condition provides a more likely explanation for the discontinuance of the proceedings. I do not propose to determine the latter question, where that would amount to determining, on the merits, the application for substitution which has now been discontinued, contrary to the principle recognised in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622. There has been no determination of the merits of the substitution application and there is no basis for any order for costs on the basis that costs follow the event.

For these reasons, I would also make an order there be no order as to the costs of the Interlocutory Process, so that each party bears its own costs in that regard, if UCPR r 42.19 does not apply to the discontinuance of an interlocutory process.

At the directions hearing where CWC indicated its intent to press this costs application, I noted the possibility that, having regard to the nature of the evidence as to Mr Vance’s health difficulties, I would potentially order indemnity costs against CWC in respect of this costs application, if the application failed. XJS now seeks an order for its costs of this costs application on that basis.

The Court has power to award costs on an indemnity basis under s 98(1)(c) of the Civil Procedure Act 2005 (NSW) and, in order to establish a claim to indemnity costs, a party must ordinarily show conduct of the other party that is unreasonable or delinquent: Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 7) (2008) 65 ACSR 324; [2008] NSWSC 199. An indemnity costs order does not punish an unsuccessful party for bringing a case that failed, but compensates the successful party for incurring costs arising from the other party’s unreasonable conduct: Hamod v New South Wales (2002) 188 ALR 659; [2002] FCA 424 at [20].

I am comfortably satisfied that CWC unreasonably pressed its application for its costs of the Interlocutory Process, having regard to the available evidence of Mr Vance’s medical condition and the fact that there had been no determination of the substitution application on its merits. This is a proper case in which to order that CWC pay XJS’s costs of and incidental to this costs application on an indemnity basis.

Accordingly, I order that: