By and -

Key decisions

  • Loo, in the matter of Halifax Investment Services Pty Ltd (in liquidation) v Quinlan (Liquidator) [2021] FCAFC 186
  • Hardingham v RP Data Pty Ltd (No 2) [2021] FCAFC 175

CORPORATIONS

Corporation holding Australian Financial Services Licence went into administration and liquidation – liquidators applied to Court for directions and judicial advice – commingling between accounts – deficiency in funds held to meet client entitlements – whether primary judge erred in holding date for valuation of client entitlements should be the date of administration

Loo, in the matter of Halifax Investment Services Pty Ltd (in liquidation) v Quinlan (Liquidator) [2021] FCAFC 186 (26 October 2021) (Middleton, Beach and Moshinsky JJ)

Background: Halifax Investment Services Pty Ltd (in liquidation) (‘Halifax AU’) held 70% of the issued shares in Halifax New Zealand Limited (in liquidation) (‘Halifax NZ’). Halifax AU held an Australian Financial Services Licence (‘AFSL’). It was not a licensed broker but facilitated the acquisition of shares by clients through an online broker and made a range of financial products available to clients. Halifax NZ held a Financial Service Provider’s Licence granted by the Financial Markets Authority (New Zealand). Halifax NZ also acted as a broker for its clients in respect of various exchange-traded products including shares and warrants.

Prior to the administration and subsequent liquidation of both companies and in breach of applicable statutory requirements, there was commingling between Halifax AU accounts, between Halifax NZ accounts, and between accounts of Halifax AU and Halifax NZ and there was a deficiency in the funds held by Halifax AU and Halifax NZ to meet client entitlements. The moneys paid to Halifax AU and Halifax NZ by clients were held on trust for the clients’ benefit. As at the date of administration of the companies there was, relevantly, a single deficient mixed fund.

The issue: The primary issue in the proceedings was whether the primary judge erred in holding that the date for valuation of the proportionate entitlements of clients (or investors) in respect of a single deficient mixed fund was the date of administration of the relevant companies. The applicant on behalf of a certain category of investors contended that the primary judge erred and that her Honour should have adopted a date as close as possible to the date for final distribution.

The date of valuation issue arose in circumstances where the administrators/liquidators had taken the unusual step of permitting investors to maintain open positions after their appointment. Some investors had maintained open positions and the value of some of those positions had increased.

A further interesting aspect of the proceedings is that the issue was, at the request of the parties, heard jointly by the Court of Appeal of New Zealand and the Full Court of the Federal Court of Australia sitting in joint session with the two Courts deliberating jointly but each Court issuing its own decision.

Decision: In dismissing the appeal, the Court:

  1. noted the primary judge’s decision with respect to the date of valuation issue was discretionary and that appellate intervention requires satisfaction of the well-established grounds of appeal identified in House v The King (1936) 55 CLR 499;
  2. stated that the fact that the liquidators permitted investors to maintain open positions and that investors had a choice whether or not to do so, does not support the appellants’ contention as to the adoption of a date as close as possible to the date for final distribution (rather than the date of administration) as the date for valuation of clients’ proportionate entitlements because:
  • having regard to the statutory framework and the nature of the trust, the date of administration provides a logical starting point for the purposes of valuing the proportionate entitlements of clients. To the extent that the trust arose by force of reg 7.8.03, the date of administration triggered the operation of that regulation in the circumstances of this case. To the extent that the trust arose pursuant to s 981H of the Corporations Act, while the trust already existed before the date of administration, the Administrators became the trustees of the trust upon their appointment as administrators;
  • the deficiency in the mixed fund existed at the date of administration and the fund was first constituted for the purposes of pari passu distribution on that date. In those circumstances, there is a logic in valuing the proportionate entitlements of investors as at the date of administration; and
  • the adoption of the date of administration in this case is consistent with authorities that have adopted, in the context of the pari passu distribution of a deficient trust or other fund in shortfall, the date when the fund was first constituted for the purposes of pari passu distribution (see, e.g. Re MF Global Australia Ltd (in liq) (2012) 267 FLR 27 and Re Lehman Brothers International (Europe) (in administration) [2009] EWHC 3228 (Ch)).

The Court of Appeal of New Zealand delivered its own judgment (Loo v Quinlan and Kelly (in their capacity as liquidators) [2021] NZCA 561 (Kós P, Cooper and Goddard JJ)), on the same date, and to the same effect, as that of the Full Federal Court. The NZCA judgment can be found at: https://www.courtsofnz.govt.nz/assets/cases/2021/2021-NZCA-561.pdf

OFFERS OF COMPROMISE, INDEMNITY COSTS ORDERS

Common law (Calderbank) offer of compromise – Calderbank not cited in offer – indemnity costs not cited in offer – merits of proceedings and reasonableness of offer not traversed in offer – whether rejection of offer imprudent or unreasonable

Hardingham v RP Data Pty Ltd (No 2) [2021] FCAFC 175 (1 October 2021) (Greenwood, Rares and Jackson JJ)

The Full Court of the Federal Court of Australia considered the question of what content was required to constitute an effective offer of compromise under the principles in Calderbank v Calderbank [1976] Fam 93 (‘Calderbank’), and, where the offer was rejected and the offeree failed to better the offer in judgment, whether rejection of the offer by the offeree qualified as ‘imprudent or unreasonable’ such as to give rise to an indemnity costs order in favour of the offeror.

Background: At trial, the primary judge held that copyright in certain photographs and plans held by Hardingham and exclusively licensed to Real Estate Marketing Australia Pty Ltd (‘REMA’) was not infringed by RP Data Pty Ltd (‘RPD’). (The role played by another party, Realestate.com.au Pty Ltd, in the trial and appeal is not considered in this case note and is excised for the sake of clarity.) The basis for the decision was that the contract between REMA and RPD was to be construed such as to contain a term allowing for use of the photographs and plans by RPD, which term was either to be inferred from their course of dealing or implied in order to give business efficacy to their agreement. Costs of the trial were ordered to be borne by Hardingham and REMA.

Hardingham and REMA appealed to the Full Federal Court. In the course of correspondence after institution of the appeal, Hardingham and REMA informed RPD that, although they had litigation funding for the costs of the trial, it did not cover an adverse costs order at trial nor did it cover the appeal proceedings (which were being conducted by Hardingham and REMA’s lawyers on a speculative basis).

The Offer: After the filing of the notice of appeal by Hardingham and REMA, but before the parties had filed their outlines of argument on the appeal, the solicitors for Hardingham and REMA sent a letter to the solicitors for RPD proposing terms of compromise of the appeal (‘the Offer’). The Offer proposed the appeal be dismissed save that the costs order of the primary judge be varied such that each party bear their own costs of the trial, and further that each party bear their own costs of the appeal. The Offer was described as being a ‘walk away’ offer, on the basis of the impecuniosity of the appellants and the impact of COVID-19 on the appellants’ business.

Importantly, the Offer did not constitute an offer of compromise under Pt 25 of the Federal Court Rules 2011 (Cth), as it was not open for a minimum of 14 days as required by r 25.05(3) and was not in accordance with the form required by r 25.01(1). Thus, if the Offer were to be effective as an offer of compromise with consequences for the making of costs orders, it could only be so under the common law principles enunciated in Calderbank.

The heading of the Offer contained the words ‘without prejudice save as to costs’. The Offer did not express itself as being made pursuant to the principles in Calderbank, nor otherwise refer to Calderbank. The Offer did not refer to the potential of being relied upon in support of an argument for indemnity costs. The Offer did not engage with the merits of the parties’ cases on appeal, nor explain why the Offer was a reasonable one.

The Offer was rejected by RPD. The appeal proceeded and judgment was ultimately delivered in favour of Hardingham and REMA, with the question of costs reserved.

The question of costs fell to be decided by reference to the Offer. RPD accepted they should pay Hardingham and REMA’s costs of the appeal on a party-and-party basis, but opposed that they should pay Hardingham and REMA’s costs on an indemnity basis from the date of the expiry of the Offer.

Decision: In contradistinction to an offeror’s entitlement to certain costs orders where an offer was made under Federal Court Rules Pt 25 (and analogues such as Uniform Civil Procedure Rules 2005 (NSW) Pt 20 Div 4, Pt 42 Div 3, and Pt 51 Div 8 Subdiv 1), where an offer was made under common law principles, the making of any costs orders remains in the discretion of the Court. Case law has established that a rejected Calderbank offer may result in an indemnity costs order where the rejection was ‘imprudent or unreasonable’, although there is no presumption in favour of such an order merely because the offeree has failed to better the offer in judgment.

Form of the Offer: There is no rule that the offeror must provide a reasoned explanation of the weaknesses in the offeree’s case and the reasonableness of the offer (at [22]). Further, the requirement that parties comply with the overarching purpose of facilitating a just resolution of disputes as quickly, inexpensively and efficiently as possible is taken into account when the Court exercises its discretion as to costs, and this in effect requires the offeree to consider the reasonableness of the offer whether or not the offeror has explained its supposed reasonableness (at [23]).

The Court flatly rejected the submission that the Offer did not qualify as a Calderbank offer merely because it did not explicitly cite Calderbank or because it did not explicitly refer to the seeking of indemnity costs. Given the inclusion of the words ‘without prejudice save as to costs’ in the Offer, RPD could not have been in any doubt as to the basis on which the Offer was made and the indemnity costs consequences thereof: regardless of the Offer, success on the appeal would ordinarily have led to a party-and-party costs order in favour of Hardingham and REMA anyway, so the only consequence of the Offer can have been in respect of indemnity costs (at [24]-[25]). Given the quantum of legal costs in commercial litigation, it was recalled that an offer to ‘walk away’ at a certain point in litigation did represent a genuine compromise, as the offeror was thereby foregoing the possibility of recovering its legal costs incurred to date.

Reasonableness of rejection of the Offer: The reasonableness of an offer falls to be determined from the perspective of the offeree at the time of the offer, but this question does not involve considering what other offers might hypothetically have been made or what other outcomes might hypothetically have been negotiated (at [30]). The Court held the rejection of the Offer was imprudent and unreasonable due to several factors. First, RPD was aware that Hardingham and REMA were impecunious and that their litigation funding did not cover the adverse costs order below, so there was no real prospect of RPD recovering those costs anyway. Secondly, RPD was aware that Hardingham and REMA’s litigation funding did not extend to the appeal, such that even if the appeal were ultimately dismissed, any legal costs of the appeal incurred by RPD would likely end up being irrecoverable as well. Thirdly, RPD was aware that Hardingham and REMA’s impecuniosity had been aggravated by the then-current COVID-19 lockdown. Fourthly, RPD was indeed able to assess the reasonableness of the Offer because it was aware of the strengths and weaknesses of the parties’ respective cases: the notice of appeal had already set out the legal issues to be argued by the appellants and RPD was already familiar with the factual issues, which were the same as in the trial below (at [28]).

Accordingly, the Court ordered that RPD pay Hardingham and REMA’s costs of the appeal on a party-and-party basis up to the time of the expiry of the Offer, and thereafter on an indemnity basis.


Anthony Lo Surdo SC is a barrister, arbitrator and mediator in 12 Wentworth Chambers, Sydney; Lonsdale Chambers, Melbourne; William Forster Chambers, Darwin and Outer Temple Chambers, London, Abu Dhabi and Dubai.
Dr David J Townsend is a barrister in Third Floor Wentworth Chambers.