Fairfield Services Pty Ltd (in liquidation) v Leggett [2020] QSC 183 (2020) 5 QR 50

SUPREME COURT OF QUEENSLAND CITATION: Fairfield Services Pty Ltd (in liquidation) v Leggett [2020] QSC 183 PARTIES: FAIRFIELD SERVICES PTY LTD (IN LIQUIDATION) ACN 118 874 203 (first plaintiff) NIGEL ROBERT MARKEY AND ANN FORDYCE IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF FAIRFIELD SERVICES PTY LTD (IN LIQUIDATION) (second plaintiff) v GREGORY CLYDE LEGGETT (first defendant) CATHERINE LEIGH LEGGETT (second defendant) FILE NO/S: BS 11458 of 2017 DIVISION: Trial Division PROCEEDING: Application filed 28 April 2020 DELIVERED ON: 18 June 2020 DELIVERED AT: Brisbane HEARING DATE: 22 May 2020 JUDGE: Bond J ORDER: The plaintiffs must pay the defendants’ costs of the proceeding, including their costs of the application filed 28 April 2020, to be assessed on the standard basis. CATCHWORDS: PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – COSTS – DISCONTINUANCE OF OR WITHDRAWAL FROM PROCEEDING – where the plaintiffs commenced proceeding in 2017 – where shortly before the trial in 2020 the plaintiffs formed the view that there was no prospect of effecting a settlement with the defendants, and the costs of proceeding to trial had come to outweigh the likely recovery from the defendants – where the plaintiffs applied for leave to discontinue with no order as to costs – whether a costs order should be made when there has been no hearing on the merits – whether the plaintiffs should be regarded as effectively surrendering to defendants and required to pay their costs Uniform Civil Procedure Rules 1999 (Qld), r 304, 307, r 685 Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; [1993] FCA 801, cited Johnson v Clancy [2010] NSWSC 1301, applied Jones v Jones [2012] QSC 342, cited -- 1 of 22 -- 2 ONE.TEL Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548; [2000] FCA 270, applied Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11, cited Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622; [1997] HCA 6, considered Zhao v Suzhou Haishun Investment Management Co Ltd [2020] VSCA 34, cited COUNSEL: D K Atkinson QC, with N Derrington, for the plaintiffs M D Martin QC, with L Copley, for the defendants SOLICITORS: Hopgood Ganim for the plaintiffs Shand Taylor for the defendants Introduction [1] The plaintiffs commenced this proceeding by claim filed on 2 November 2017. The defence was filed on 18 December 2017 and the reply filed on 24 January 2018. The proceeding has been managed by me on the commercial list since 30 July 2018. [2] On 28 April 2020, just under three weeks before the scheduled 18 May 2020 commencement of the 10-day trial of this proceeding, the plaintiffs listed for mention before me an application for leave to discontinue the proceeding. [3] The plaintiffs frankly acknowledged that they decided to take that course because they had formed the view that there was no prospect of effecting a settlement with the defendants and the costs of pursuing the proceeding to a conclusion at trial had come to outweigh the benefits likely to be obtained from the trial. [4] The defendants did not oppose the grant of leave to discontinue, but contended that the plaintiffs should pay their costs. For their part, the plaintiffs sought an order that there be no order as to the costs of the proceeding. [5] It was not convenient on 28 April 2020 to determine the entirety of the plaintiffs’ application. The parties agreed that the costs question involved a substantial argument which should be set down for hearing at some later time. Accordingly, I vacated the trial dates, granted the plaintiffs leave to discontinue, but otherwise adjourned their application until 22 May 2020. I also made directions for the delivery of evidence and written submissions in advance of that hearing. [6] On 22 May 2020, I heard the adjourned application. The position of the parties remained that which had been communicated to me, save that the defendants also sought an order that their costs be assessed on the indemnity basis.1 [7] The plaintiffs’ argument was that I should have regard to the reasonableness of the parties’ respective conduct in prosecuting and defending the case, up until the time it was discontinued. The plaintiffs contended that, in principle, if their case was arguable, and both 1 At the hearing, although the defendants had not filed an application seeking such relief, the defendants initially sought to pursue an application for an order that the liquidators not be indemnified for their costs out of the assets of Fairfield, because their conduct in prosecuting the case was so unreasonable as to warrant that denial. For reasons which are not necessary to record, they did not press that application, although they reserved their right to make such an application at some future time. -- 2 of 22 -- 3 parties acted reasonably, then the usual order would be that each party bear its own costs. The essence of the defendants’ contrary argument was that there was no sufficient reason put forward to depart from the ordinary position that a plaintiff who discontinues should be ordered to pay costs. [8] For reasons which follow, I do not accept that the plaintiffs have correctly identified applicable principle. By their decision to discontinue, the plaintiffs effectively surrendered to the defendants. Contrary to the plaintiffs’ contention, that will usually provide a strong reason to award costs against the party who has surrendered. The plaintiffs have not established anything which outweighs that reason in the discretionary balance. The just order in the particular circumstances of this case is that the plaintiffs must pay the defendants’ costs of the proceeding, but on the standard rather than the indemnity basis. The principles which govern the exercise of the present costs discretion The costs discretion under r 307(2) [9] The plaintiffs’ argument relied on rr 304 and 307 of the Uniform Civil Procedure Rules 1999 (Qld), which provide as follows: 304 Discontinuance by plaintiff or applicant (1) A plaintiff or applicant may discontinue a proceeding or withdraw part of it before being served with— (a) for a proceeding started by claim—the first defence of any defendant; or (b) for a proceeding started by application—the first affidavit in reply from a respondent. (2) However, after being served with the first defence or first affidavit in reply, a plaintiff or applicant may discontinue a proceeding or withdraw part of it only with the court’s leave or the consent of the other parties. (3) Also, if there is more than 1 plaintiff or applicant, or a counterclaim against a plaintiff, a plaintiff or applicant may only discontinue with the court’s leave or the consent of the other parties. (4) A plaintiff may discontinue against one or more defendants without discontinuing against other defendants. (5) An applicant may discontinue against one or more respondents without discontinuing against other respondents. 307 Costs (1) A party who discontinues or withdraws is liable to pay— (a) the costs of the party to whom the discontinuance or withdrawal relates up to the discontinuance or withdrawal; and (b) the costs of another party or parties caused by the discontinuance or withdrawal. (2) If a party discontinues or withdraws with the court’s leave, the court may make the order for costs it considers appropriate. [10] Because the first defence in this proceeding had been served long ago and the defendants were not consenting to the discontinuance, the plaintiffs had correctly sought leave to discontinue. The discretion referred to at r 307(2) was enlivened. The plaintiffs contended the discretion was the same as that provided for by r 685, which is in these terms: 685 Costs if further proceedings become unnecessary (1) If, for any reason, it becomes unnecessary to continue a proceeding other than for deciding who is to pay the costs of the proceeding, any party to the proceeding may apply to the court for an order for the costs. -- 3 of 22 -- 4 (2) The court may make the order the court considers just. [11] The plaintiffs then argued that both the r 307(2) and r 685(2) discretions had to be exercised in accordance with the principles articulated by McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624-625: Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order. … If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases. [12] The problem with the plaintiffs’ argument is that it ignores the important distinction drawn by Burchett J in ONE.TEL Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548 at [6] (emphasis added): In my opinion, it is important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the Court’s discretion otherwise than by an award of costs to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs. [13] As Burchett J demonstrated, Lai Qin was an example of the latter type of case. His Honour observed: In Ex parte Lai Qin, McHugh J was careful to state (at 624) that the principles with which he was concerned were those that “govern an application for costs when a party elects not to pursue an action because he or she has achieved the relief sought in the action either by settlement or by extra-curial means”. As his Honour recounted the facts, the instant case was one where the applicant had challenged a decision of the Refugee Review Tribunal denying her status as a refugee but, during the pendency of her action in the High Court, the Minister had exercised his special discretion in her favour under s 417 of the Migration Act 1958 (Cth). The question whether the Tribunal had or had not erred in law thus became moot. [14] The significance of the distinction drawn by Burchett J has been recognised in many subsequent cases.2 Recently, in Zhao v Suzhou Haishun Investment Management Co Ltd [2020] VSCA 34 (Tate, McLeish and Hargrave JJA), the Victorian Court of Appeal put it this way (at [10] and [12], emphasis added): 10 In Nichols v NFS Agribusiness Pty Ltd, the New South Wales Court of Appeal applied the principles stated in Lai Qin, as explained in later cases, and allowed an appeal against a trial judge’s decision to award costs. In the course of reviewing the authorities following Lai Qin, Payne JA (Basten and Meagher JJA agreeing) accepted that, absent any consideration of the merits of the proceeding, costs may be ordered where there is a capitulation by one party — in the sense that it ‘effectively surrenders to the other’. In his Honour’s view, this approach is consistent with the judgment of McHugh J in Lai Qin. Payne JA referred to the dissenting judgment of Sackville AJA in Muhibbah Engineering (M) BHD v Trust Co Ltd, and to the reference by Sackville AJA in that decision to the following statement by Burchett J in ONE.TEL Ltd v Deputy Commissioner of Taxation: [Their Honours then quoted the passage from ONE.TEL Ltd quoted at [12] above.] 2 At the time of writing these reasons, the Jade citator identified 84 cases in which the significance of the distinction identified by Burchett J had been acknowledged. -- 4 of 22 -- 5 … 12 … However, the principles stated by McHugh J in Lai Qin were, in his words, intended to ‘govern an application for costs when a party elects not to pursue an action because he or she has achieved the relief sought in the action either by settlement or by extra-curial means’. We accept as a general principle that where a party litigates for some time and then acts so as to effectively surrender or capitulate to the other, that will usually be a strong ground to award costs against the party who has surrendered or capitulated. But each case will depend on its own facts. [15] The plaintiffs relied on Petavrakis v Hirst & Co [2001] QSC 224 at [34] (White J); Rathie v ING Life Ltd [2003] QSC 429 at [44] (Mullins J); Kennedy v Griffiths [2014] QSC 43 at [66] (Boddice J); and Rushbrook v Chalmers [2015] QSC 145 at [19] (Boddice J) in support of the proposition that the general principles in Lai Qin apply universally in circumstances where a costs discretion arises when there has been no hearing on the merits and without regard to the distinction I have drawn. That proposition cannot be made good. First, as the Victorian Court of Appeal confirmed in Zhao v Suzhou Haishun Investment Management Co Ltd, the principles stated by McHugh J in Lai Qin were, in his words, intended to “govern an application for costs when a party elects not to pursue an action because he or she has achieved the relief sought in the action either by settlement or by extra-curial means”. They were not intended as a universal proposition and are not inconsistent with the distinction identified by Burchett J in ONE.TEL Ltd. Second, there is no indication in any of those decisions that the distinction identified by Burchett J in ONE.TEL Ltd (let alone the line of authority supporting its significance) was ever drawn to the attention of their Honours. Third, to the extent that the cases support the proposition that the proper exercise of the discretion may require consideration of the reasonableness of the conduct of the relevant parties, they may be accepted. Fourth, in any event, the exercise of the discretion in each case will turn on its own particular facts. [16] Of course, it would be wrong to say that the principles guiding the exercise of my discretion pursuant to r 307(2) (or r 685(2)) simply require a classification of the case into one of the two categories adverted to in ONE.TEL Ltd and then an application of the particular general rule which flows from that classification. The considerations which may influence the proper exercise of the costs discretion are not so narrowly confined. [17] In Johnson v Clancy [2010] NSWSC 1301 at [21], Hallen AsJ expressed a helpful and comprehensive summary of the principles which may be regarded as relevant in determining who is to bear the burden of costs in a case where the proceedings are discontinued before a final hearing, by reference to the applicable New South Wales procedural rules. McMeekin J cited that summary with approval in Jones v Jones [2012] QSC 342 at [44] to [45], whilst acknowledging the Queensland rules are different in terms. [18] I endeavour below to adapt and to consolidate Hallen AsJ’s summary so as to identify in the Queensland context the considerations which, in my view, should influence the exercise of the discretion in a case where a plaintiff withdraws from the continued prosecution of a proceeding by discontinuing without any hearing on the merits. [19] First, costs discretions are truly discretionary and there are no absolute rules. In each case the discretion must be exercised judicially, so that the Court arrives at the order it thinks just in the particular circumstances of the case: Johnson v Clancy at [21](a) and (m). [20] Second, under r 681, the general rule is that costs follow the event unless the Court orders otherwise. In Oshlack v Richmond River Council (1998) 193 CLR 72, McHugh J explained the principle and policy underlying that general rule: -- 5 of 22 -- 6 The principle is grounded in reasons of fairness and policy and operates whether the successful party is the plaintiff or the defendant. Costs are not awarded to punish an unsuccessful party. The primary purpose of an award of costs is to indemnify the successful party. If the litigation had not been brought, or defended, by the unsuccessful party the successful party would not have incurred the expense which it did. As between the parties, fairness dictates that the unsuccessful party typically bears the liability for the costs of the unsuccessful litigation. As a matter of policy, one beneficial by-product of this compensatory purpose may well be to instil in a party contemplating commencing, or defending, litigation a sober realisation of the potential financial expense involved. Large scale disregard of the principle of the usual order as to costs would inevitably lead to an increase in litigation with an increased, and often unnecessary, burden on the scarce resources of the publicly funded system of justice. [21] Third, where the proceedings are discontinued prior to any hearing on the merits, the r 681 general rule cannot be applied in terms. As McHugh J observed in Lai Qin, a Court is necessarily deprived of the factor that usually determines whether or how it will make a costs order. The Court cannot try a hypothetical action between the parties to determine the question of costs: Johnson v Clancy at [21](f); see also Petavrakis v Hirst & Co at [9]; Kennedy v Griffiths at [66]; Rushbrook v Chalmers at [19]. At the time of discontinuance, usually it will be impracticable to assess the eventual prospects of success in the action: Johnson v Clancy at [21](f). [22] Fourth, it may nevertheless be appropriate to make an order that costs are borne by one side. Each case will depend on its own facts, but it may be relevant to consider the following: (a) (in a particular case) the conduct of the defendant prior to the commencement of the proceeding, where such conduct may have precipitated the litigation (Johnson v Clancy at [21](h)); (b) the whole of the proceeding, including whether the plaintiff has acted reasonably in commencing and continuing to prosecute the proceeding and whether the defendant has acted reasonably in defending it (Johnson v Clancy at [21](g) and Ralph Lauren 57 Pty Ltd v Byron Shire Council [2014] NSWCA 107 at [33] per Preston CJ of LEC (with whom Beazley P and Ward JA agreed)), but bearing in mind that the question of reasonableness may not be one capable of determination absent a full hearing on the merits (see Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32 at [43], [57] per Hodgson JA (with whom Tobias and Basten JJA agreed)); and (c) the reasons for discontinuance (Johnson v Clancy at [21](g)), but bearing in mind that the subjective considerations of one party not put before the other party will generally be immaterial so that the discretion will be exercised on the basis of the objective circumstances established on the evidence (see Bitannia Pty Ltd v Parkline Constructions Pty Ltd per Basten JA at [81]; Ralph Lauren 57 Pty Ltd v Byron Shire Council at [34] per Preston CJ of LEC (with whom Beazley P and Ward JA agreed)). [23] Fifth, when evaluating the relevant considerations, there is an important distinction between (1) cases in which one party, after litigating for some time, effectively surrenders to the other, and (2) cases where some supervening event, or settlement, so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs: ONE.TEL Ltd v Deputy Commissioner of Taxation at [6]. As to this: (a) In the former type of case, the surrender or capitulation will usually provide a strong reason to award costs against the party who has surrendered or capitulated: Zhao v Suzhou Haishun Investment Management Co Ltd. It seems to me that this must be a -- 6 of 22 -- 7 partial reflection of the principles and policies which underlie the r 681 general rule, as identified by McHugh J in Oshlack v Richmond River Council. A classic illustration of the type of case where one party has effectively surrendered to the other is a case where proceedings are dismissed or discontinued because the applicant chooses not to proceed with them: Kiama Council v Grant [2006] NSWLEC 96 at [57] per Preston CJ. (b) In the latter type of case, there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs, and that might provide good reason to decide that each party should bear its own costs. Lai Qin is one example of a case falling into this category, but other examples include Commonwealth Bank of Australia v Daleport Pty Ltd (in rec) (No 6) [2019] NSWSC 958, where the proceeding was assessed to have become futile in light of the fact that sequestration orders had been entered against defendants, and True Conservation Association Inc v Minister Administering the Threatened Species Conservation Act 1995 [2008] NSWLEC 221, where the passage of legislation rendered the proceeding futile. [24] Sixth, the Queensland rules are silent as to onus. Care must be taken in the application of authorities from other jurisdictions where the rules are different. But as McMeekin J observed in Jones v Jones at [45], “obviously r 307(1) does provide some guide”. The principle and policy underlying the r 681 general rule as explained by McHugh J in Oshlack v Richmond River Council support the outcome dictated by r 307(1). It seems to me to follow that if the only information before the Court is that the proceeding was discontinued but at a date after the first defence had been filed, there would be no reason not to exercise the r 307(2) discretion in the same way as suggested by r 307(1). In such a case, it would be difficult to see why plaintiffs who discontinue before the first defence must pay their opponent’s costs, but plaintiffs who wait to discontinue for months or years after the first defence should not. Without more, those facts would normally be regarded as demonstrating a strong ground to award costs against the discontinuing plaintiffs: cf Zhao v Suzhou Haishun Investment Management Co Ltd. But there might well be some particular reason why the discontinuing plaintiffs should not pay an opponent’s costs, or indeed, why the opponent should pay the costs of the discontinuing plaintiffs. Ordinarily, the law expects that “he who asserts must prove”: Cook’s Construction Pty Ltd v SFS 007.298.633 Pty Ltd (formerly t/as Stork Food Systems Australasia Pty Ltd) (2009) 254 ALR 661 at [43] per Keane JA. At least on that basis, the party seeking a particular exercise of the costs discretion must demonstrate why it is appropriate. The discretion to order that costs be assessed on an indemnity basis [25] There was no controversy concerning the principles governing this exercise of discretion. [26] The defendants relied on Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 to submit that the following circumstances may warrant the award of indemnity costs: (a) the making of allegations of fraud known to be false, or making irrelevant allegations of fraud; (b) the making of allegations which ought never to have been made; and (c) the undue prolongation of a case by groundless contentions. [27] There is no doubt that such circumstances can justify the exercise of discretion to award indemnity costs: see Emanuel Management Pty Ltd (in liq) v Foster’s Brewing Group Ltd [2003] QSC 299 per Chesterman J and Palmer v Parbery [2018] QCA 268 at [8] per Morrison JA. -- 7 of 22 -- 8 The nature of the plaintiffs’ case [28] The first plaintiff (Fairfield) was placed into liquidation on 18 November 2014. However, the plaintiffs alleged Fairfield was insolvent at all times between December 2013 and 18 November 2014 (the insolvency period). [29] Prior to its liquidation, Fairfield carried on a business of supplying to its customers specialised commercial plumbing and fire protection services. Its directors were Mr Ross Sadler and Mr David Bence, neither of whom was a party to the proceeding and both of whom were ultimately bankrupted. [30] The defendants, Mr and Mrs Leggett, were chartered accountants. They operated an accounting practice in partnership and, over a period of around eight years prior to Fairfield being wound up, their partnership provided extensive accounting services for Fairfield and rendered invoices and were paid fees for so doing. [31] The second plaintiffs (the liquidators) had conducted investigations and public examinations of various parties in relation to the affairs of Fairfield, including Mr and Mrs Leggett. [32] Fairfield and the liquidators contended that Mr Leggett’s involvement in the affairs of Fairfield throughout the insolvency period was so extensive, and of such a nature, that Mr Leggett was a de facto director of Fairfield during that time and thereby owed Fairfield each of the various duties which a director owes to a company, including fiduciary duties at law and statutory duties pursuant to ss 180, 181 and 182 of the Corporations Act 2001 (Cth) (the Act). Alternatively, if Mr Leggett was not a de facto director, he and Mrs Leggett owed fiduciary duties to Fairfield during the insolvency period by reason of the factual nature of their relationship with Fairfield in the circumstances. [33] Against that background, Fairfield and the liquidators advanced these four claims against Mr and Mrs Leggett: (a) an insolvent trading claim seeking recovery of $9,719,984.68; (b) a claim for recovery of professional fees in the amount of $1,039,983; (c) a claim for equitable compensation against Mr Leggett on the basis of his accessory liability in respect of Mr Sadler’s breach of fiduciary duty, seeking recovery of $722,538; and (d) a claim to recover preference payments made by Fairfield to Mr and Mrs Leggett in repayment of a loan which they had advanced to Fairfield, seeking recovery of $975,000. The issues which would need to be determined to assess the merits of the plaintiffs’ case [34] The insolvent trading claim was founded on the contention that Fairfield had incurred some $9,719,984.68 of debts to third party creditors during the insolvency period, that Mr Leggett had the same responsibilities in relation to insolvent trading that the de jure directors had, and that he had failed to prevent Fairfield trading whilst it was insolvent. Amongst other things, the Court would be required to determine: (a) whether Fairfield was insolvent throughout the insolvency period within the meaning of s 95A of the Act; (b) whether, throughout the insolvency period, Mr Leggett was a de facto director of Fairfield for the purposes of s 9 of the Act and, if so and to what extent, he thereby -- 8 of 22 -- 9 owed Fairfield fiduciary and statutory duties (including the duty pursuant to s 588G of the Act to prevent Fairfield from incurring debts whilst insolvent); (c) whether, in the circumstances of the case, Mr Leggett contravened his duties by permitting Fairfield to incur debts whilst insolvent (including, necessarily, whether he had reasonable grounds for suspecting and did suspect that Fairfield was insolvent) and, if so, the loss and damage Fairfield thereby sustained; (d) whether Mr Leggett could make out any of the statutory defences contained in s 588H of the Act; (e) whether Mr Leggett’s breach of his duty owed to Fairfield under s 588G of the Act was a wrongful act or omission which occurred in the course of him acting as a partner of his partnership with Mrs Leggett; and (f) whether Mrs Leggett was herself liable for Mr Leggett’s breach of his s 588G duty pursuant to ss 13 and 14 of the Partnership Act 1891 (Qld). [35] The claim to recover professional fees was founded on the contention that, during the insolvency period, Mr and Mrs Leggett’s accountancy partnership received some $1,039,983 in professional fees for the period 1 December 2013 to 18 November 2014 and that the provision of services, the issuing of invoices and the receipt of payment therefor should be regarded as an uncommercial transaction for the purposes of s 588FB of the Act. Amongst other things, the Court would be required to determine: (a) whether Fairfield was insolvent throughout the insolvency period within the meaning of s 95A of the Act; (b) whether the partnership was an unsecured creditor of Fairfield when it received the relevant payments; (c) whether the quantum of fees charged by the partnership to Fairfield was a commercial amount in view of the “benefits and detriments” factors prescribed by s 588FB of the Act, including whether (as the plaintiffs alleged) – (i) Fairfield received little or no benefit by reason of making the payments; and (ii) the true value of services which Fairfield had required and had sought from Mr Leggett and/or the partnership was no more than $150,000; (d) whether Mr and Mrs Leggett could make out any of the statutory defences contained in s 588FG of the Act; (e) whether Mr Leggett breached his fiduciary and/or statutory duties in causing Fairfield to pay the relevant payments on account of the partnership’s professional fees; and (f) whether the Court ought to order equitable and/or statutory remedies against Mr Leggett as a result of any such breaches. [36] The equitable compensation claim was founded on the proposition that Mr Leggett had accessory liability in respect of a transaction which was said to have been made by the de jure director, Mr Sadler, in breach of his fiduciary duty to Fairfield. It was said that Mr Sadler breached his fiduciary duty when, on or about 2 September 2014, he caused Fairfield to enter into arrangements associated with a debtor finance facility provided to it by Buzz Convenience Australia Pty Ltd, which had the effect that Mr Sadler and his wife, Tania Dawn Sadler, in their capacity as trustees of the Ross Holdings Superannuation Fund or -- 9 of 22 -- 10 alternatively in their personal capacities, received a benefit of $722,538 from, or at the expense of, Fairfield. Amongst other things, the Court would be required to determine: (a) whether the arrangements were in fact carried out by Fairfield as alleged; (b) whether Mr Sadler and/or Mrs Sadler (whether in their capacity as trustees of the Ross Holdings Superannuation Fund or in their own capacities) received a benefit from, or at the expense of, Fairfield as a result of the arrangements being carried out by Fairfield (and, if so, the quantum of that benefit); (c) whether Mr Sadler breached his fiduciary and/or statutory duties owed to Fairfield by carrying out the arrangements; (d) whether Mr Leggett had sufficient knowledge of the carrying out of the arrangements to be rendered liable as a participant in Mr Sadler’s breaches of fiduciary and/or statutory duties, including whether (as the plaintiffs alleged) Mr Leggett had actual or constructive knowledge that the arrangements were dishonest and fraudulent and constituted a breach of duty by Mr Sadler; (e) whether Mr Leggett was sufficiently involved in, and sufficiently participated in, the arrangements to be rendered liable as a participant in Mr Sadler’s breaches of fiduciary duty; (f) whether Mr Leggett himself owed fiduciary and/or statutory duties to Fairfield; (g) whether Mr Leggett breached those duties by causing, procuring or assisting Fairfield to carry out the arrangements; and (h) whether the Court ought to order equitable and/or statutory remedies against Mr Leggett as a result of any such breaches. [37] The claim for the recovery from Mr and Mrs Leggett of preference payments was founded on the contention that monies received by them in repayment of a loan which they had made to Fairfield should be recoverable by Fairfield. It would, amongst other things, require the Court to consider: (a) whether Fairfield was insolvent throughout the insolvency period within the meaning of s 95A of the Act; (b) whether Mr and Mrs Leggett’s accountancy partnership was an unsecured creditor of Fairfield when it received the relevant payments; (c) whether Mr and Mrs Leggett could make out any of the statutory defences contained in s 588FG of the Act; (d) whether Mr Leggett himself owed fiduciary and/or statutory duties to Fairfield; (e) whether Mr Leggett breached those duties by causing, procuring or assisting Fairfield to make the relevant payments to the accountancy partnership; and (f) whether the Court ought to order equitable and/or statutory remedies against Mr Leggett as a result of any such breaches. [38] It will be apparent from the foregoing that the proceeding involved complex issues of fact and law. Amongst other things, the proceeding involved the plaintiffs advancing serious allegations of wrongdoing against Mr Leggett. -- 10 of 22 -- 11 The course of the litigation up to discontinuance [39] Before the proceeding commenced, there had been correspondence between the parties’ respective solicitors in which: (a) by letter dated 27 July 2017, the plaintiffs’ solicitors foreshadowed a claim for recovery of alleged preference payments and a claim for recovery of professional fees and demanded payment of just over $2 million; (b) by letter dated 15 August 2017, the defendants’ solicitors sought the provision of information and supporting documents so that they could advise their clients and put themselves in a position to respond to the letter on behalf of their clients; (c) by letter dated 22 August 2017, the defendants’ solicitors requested further information and documents in relation to the matters asserted by the plaintiffs’ solicitors; (d) by letter dated 5 October 2017, the plaintiffs’ solicitors advised they were not prepared to provide the information sought and regarded the request to be a delaying tactic. They flagged their intention to commence the proceeding within a week. They advised: It is clear from what has passed between our respective firms that it will, on any view, be necessary for our clients to commence legal proceedings before meaningful discussions can take place between our respective clients with a view to the matters in dispute being resolved. Further, for the parties to engage in truly meaningful settlement discussions it appears that it will be necessary for pleadings to be exchanged and the parties to participate in a formal mediation conducted by an experienced mediator. It may also be necessary for them to undertake disclosure and inspection. [40] I have recorded that the proceeding commenced on 2 November 2017, the defence was filed on 18 December 2017 and the reply was filed on 24 January 2018. [41] My order of 30 July 2018, which placed the proceeding on the commercial list, made some timetabling orders concerning particulars, required disclosure to take place by 28 September 2018 (the pleadings having already closed), and scheduled a directions hearing on 19 October 2018. [42] By order made on 19 October 2018, I made timetabling orders for the filing and service of expert opinion evidence, addressed some complaints about disclosure, and made an order referring the matter to mediation to take place no later than 5 April 2019. On 8 and 20 November 2018, orders were made extending the date by which the plaintiffs were required to deliver their expert evidence. [43] On 26 November 2018, the plaintiffs’ expert opinion evidence was filed. It comprised a lengthy report by an independent forensic accountant who concluded that Fairfield was insolvent from at least 31 March 2014 and continued to be insolvent thereafter until the appointment of the liquidators on 18 November 2014. [44] On 13 December 2018, I made timetabling orders aimed at having a dispute concerning disclosure either resolved by or heard in mid-February 2019, set a timetable for amendments to the defendants’ defence, extended the time for the defendants’ expert opinion evidence, and extended the time by which the contemplated mediation would take place to 30 April 2019. I set the next date for review on 3 May 2019, after the mediation. [45] There was some slippage in the defendants’ compliance with the timetable for filing their amended defence, which was dealt with by orders, and the amended defence was filed on -- 11 of 22 -- 12 19 March 2019. Over the next six months, time was taken in amending pleadings, delivering amended particulars, and in further slippage in the timetable for expert opinion evidence by the defendants. That report was ultimately filed on 11 June 2019. The analysis of the defendants’ independent forensic accountant supported a conclusion that Fairfield was solvent as at 31 March 2014 and became insolvent on 23 October 2014. [46] By August 2019, the parties were fighting about the adequacy of the particulars of the defence. On 16 August 2019, I set a timetable aimed at having that dispute either resolved by or heard in early October 2019. I also set a timetable for notices to admit facts, any application for security for costs by the defendants, and an expert conclave and production of a joint expert report. [47] The mediation was eventually held in August 2019 and the proceeding failed to settle. [48] By letter dated 20 September 2019, the plaintiffs made a formal offer to settle under the Uniform Civil Procedure Rules. The offer required the defendants to pay the plaintiffs $1.5 million with each party otherwise to bear its own costs. It was open to be accepted for 14 days. The solicitors’ letter enclosing the offer stated: Our clients have a strong claim against your clients and stand to receive a substantial judgment against them. However, they are motivated to avoid the delay, cost and risk of proceeding to a trial and harbour serious concerns about your clients’ capacity to meet a substantial judgment. Both parties will expend a great deal of money in preparing for the trial and that, of itself, will substantially deplete your clients’ finite financial resources. Indeed, it may result in our clients’ victory being entirely pyrrhic. These combined factors have caused them to make the Offer to Settle. They consider it to be generous. [49] The defendants did not accept the offer. [50] On 25 October 2019, I set the proceeding down for a 10-day trial before me commencing on 18 May 2020. I made timetabling directions as follows: (a) The evidence in chief of lay witnesses was to be given orally, and evidence in chief of expert witnesses was to be given by affidavit. (b) By 4.00pm on 20 December 2019, the plaintiffs were required to serve a list of witnesses they intended to call and to file and serve written witness summaries for each lay witness. (c) By 4.00pm on 14 February 2020, the defendants were required to do the same. (d) By 4.00pm on 6 March 2020, the plaintiffs were required to file and serve any witness summaries in reply. (e) Evidence at trial was to be confined to that fairly disclosed by the steps taken in compliance with those directions. (f) By 6 weeks before the trial date, the plaintiffs were to provide a draft index of documents for inclusion in a trial bundle and a list of issues for trial. (g) By 4 weeks before the trial date, the defendants were to provide their response. (h) By no later than 2 weeks before the trial date, the plaintiffs were to provide my associate with an agreed trial bundle and an agreed list of issues. (i) At least a week before trial, the parties were to agree on a trial plan. [51] The joint report of the experts was filed on 13 December 2019. That report demonstrated that there was still very extensive disagreement between the experts in their analysis of issues -- 12 of 22 -- 13 relevant to the proper identification of the insolvency period and also in relation to the conclusions which should be drawn on those matters. They maintained their respective views on the insolvency dates. [52] The plaintiffs filed their witness summaries as follows: (a) on 20 December 2019 – (i) a 10-page summary in respect of Mr Frewen (who had been the CFO of Fairfield between 3 February 2014 and 20 June 2014); and (ii) a 7-page summary in respect of Mr Moubarak (who had been the CFO of a related company between 24 September 2012 and 15 December 2013); and (b) on 17 February 2020 – (i) amended summaries in respect of Mr Frewen (10 pages) and Mr Moubarak (7 pages); (ii) summaries in respect of the de jure directors Mr Sadler (16 pages) and Mr Bence (13 pages); (iii) a 7-page summary in respect of Mrs Sadler; (iv) an 11-page summary in respect of Mr Woods (who had been a contracts administrator and operations manager of Fairfield); (v) a 10-page summary in respect of Mr Markey, one of the liquidators; and (vi) a 4-page summary in respect of Ms Vaughan (who had been a projects co- ordinator and payroll and accounts officer of Fairfield). [53] On 14 February 2020, I made orders giving the plaintiffs leave to rely on all the summaries they had provided3 and extended the time for the defendants’ summaries and the plaintiffs’ reply summaries by three weeks to 6 and 27 March 2020 respectively. Further extensions of time were subsequently accommodated by orders made on 12, 20 and 30 March 2020. There was no controversy before me in relation to any of those orders. That last order extended the time to 2 and 23 April 2020 respectively. [54] Ultimately the defendants filed a 195-page statement of Mr Leggett dated 6 April 2020 and a 5-page statement of Mrs Leggett of the same date. Drafts of the statements had been provided to the plaintiffs on 3 April 2020, which had been finalised save for internal paragraph cross-referencing and the completion of document ID cross-references. Mr Leggett’s statement took the form of a very detailed response, paragraph by paragraph and organised into subject headings, to what had been expressed in the plaintiffs’ witness summaries. Where he agreed, his statement said so, and where he disagreed, his statement said so and expressed reasons why, often with specific references to documents by their document ID references. [55] On 6 April 2020, and consequent upon the impact of the COVID-19 pandemic on the processes of the Court, I made directions that the trial would proceed by video link and, with the cooperation of the parties, made directions aimed at facilitating that outcome. No alteration was made to the 18 May trial dates and the matter was listed for review on 5 May 3 The plaintiffs’ summaries filed on 17 February 2020 had been provided to the defendants some time earlier, albeit still after the deadline which had been set. -- 13 of 22 -- 14 2020. None of the matters raised by the exchange of correspondence to which I will next refer were raised before me. [56] By letter to the defendants’ solicitors dated 14 April 2020, the plaintiffs’ solicitors contended that the defendants’ conduct had caused the need for an adjournment of the coming trial. They suggested that the defendants’ evidence was late, Mr Leggett’s statement was so extensive that the trial would end up being part-heard, and the content of Mr Leggett’s statement revealed that there had been a failure to provide timely disclosure of some documents. They proposed agreement on a form of orders adjourning the trial and setting it down for 18 days rather than 10 days on a date to be fixed, with the defendants paying the plaintiffs’ costs thrown away. [57] The defendants’ solicitors’ response was dated 17 April 2020. It was a lengthy and detailed riposte to the plaintiffs’ solicitors’ letter. It submitted that the degree of delay past the directed 2 April 2020 deadline for delivery of Mr Leggett’s statement was minor, and in any event was ameliorated by the fact that a draft had been delivered on 3 April 2020. It suggested that Mr Leggett’s statement represented the result of a thorough and comprehensive response to the pleaded case advanced against the defendants, which response should have been anticipated by the plaintiffs and which the plaintiffs should be prepared to meet at trial. It rejected the proposition that there had been any significant breach of the disclosure obligation, developing an analysis which, it suggested, showed any failure was minor at best. It proposed the preparedness of the defendants to cooperate with a view to managing the efficient conduct of the trial. It opposed any adjournment, pointing to the very substantial time and effort which had been put into trial preparation and to the substantial personal and financial prejudice which the defendants would suffer if the proceeding was adjourned. [58] The plaintiffs did not make an adjournment application. [59] Rather, on 21 April 2020, the plaintiffs made an open offer to settle the proceeding on a walk away basis. Their offer proposed that there would be mutual broad releases and discharges and the proceeding would be discontinued with no order as to costs. The defendants could prove in the winding up for the amount they claimed as creditors of Fairfield. The offer was expressed to be open for less than 24 hours. [60] The following day, on 22 April 2020, and after the expiry of the 24 hour period, the defendants rejected the plaintiffs’ offer and made an open counter-offer to settle. The defendants’ offer proposed that the proceeding would be dismissed and the plaintiffs would pay the defendants’ costs fixed in the sum of $875,000 (which was said to be 85% of their actual costs). There would be a broad release and discharge given by the plaintiffs. The plaintiffs would accept for dividend purposes the accountancy partnership’s proof of debt in the amount of $224,140, although they would not warrant that any dividend would be paid. That offer too was expressed to be open for less than 24 hours. It was not accepted. [61] The next step was the plaintiffs flagging to the defendants and to the Court that they intended to bring an urgent application for leave to discontinue the proceeding on the basis that there be no order as to costs and they would undertake not to commence fresh proceedings in relation to the matters the subject of the present proceeding. That was drawn to the attention of the Court by email on 24 April 2020, and then the application was listed and dealt with in the manner identified at [2] to [6] above. -- 14 of 22 -- 15 Consideration of the competing arguments on costs [62] In support of their argument that there should be no order as to costs, the plaintiffs first put before me – (a) all of their summaries of evidence for trial (except that of Mr Markey); (b) both expert reports plus the joint report; and (c) an extensive affidavit of Mr Markey, one of the two liquidators of Fairfield. [63] It is not necessary to summarise the former two categories of evidence. [64] Mr Markey’s affidavit comprised a 44-page affidavit with 1287 pages of exhibits. It was essentially a recitation of the history of the decisions which the liquidators made in the course of their conduct of the liquidation insofar as those decisions related to the commencement and continued prosecution of the proceeding against the defendants. Amongst other things, in the affidavit: (a) Mr Markey set out the results of preliminary investigations and views he formed about when Fairfield was likely to have become insolvent (and why) and the results of early liquidators’ reports to creditors. (b) Mr Markey explained that consequent upon those investigations he became concerned about the conduct of Mr and Mrs Leggett and formed the view that there might be possible claims against them in relation to the areas which ultimately were advanced in the proceeding. (c) Mr Markey explained the steps taken in relation to public examinations concerning the affairs of Fairfield and the views which he formed about the viability of claims against Mr and Mrs Leggett, including by stating what his investigations had been able to identify in relation to factual matters underlying such claims. (d) Mr Markey set out the various reports which had been made to creditors, and the support which the creditors had given to the prosecution of the proceeding by the liquidators. (e) Mr Markey explained that he carefully considered the information obtained through investigations and considered that it was in the interests of creditors for the proceeding to be commenced against Mr and Mrs Leggett. (f) Mr Markey explained that he considered the merits of the claims and formed the view that Mr and Mrs Leggett owned or might have access to sufficient financial resources to either (1) pay a substantial settlement to the liquidators if any of the claims were compromised or (2) meet a substantial judgment if any of the claims were to proceed to trial. He did not make the decision lightly; he was well aware that litigation is expensive and uncertain but formed the view that litigation would result in a greater dividend to creditors than if he had simply paid a dividend from funds in the winding up without prosecuting the proceeding. (g) Mr Markey deposed that consequent upon information obtained during the public examinations in April 2017 (and apparently prior to the commencement of this proceeding in November 2017) he formed the view that Mr and Mrs Leggett appeared to own a substantial portfolio of real property assets, including nine properties in Queensland in their own names and as trustees for various trusts. He was aware that -- 15 of 22 -- 16 all of the properties were cross-collateralised to secure a debt facility payable to a bank with a total facility amount of $7.5 million. In particular, he deposed: 85. My staff had undertaken the exercise of obtaining evidence of the value of each of these properties. These searches suggested that Mr and Mrs Leggett held very significant equity in these properties. Indeed, it appears from these enquiries that the net equity held by them was in the order of $1,600,000 to $5,400,000. 86. After reviewing the evidence as to the value of these properties and undertaking this analysis, I appreciated that some further investigations would need to be undertaken in relation to these properties at some stage and it would be necessary to further test the claim that some properties were held on trust. Nonetheless, there appeared to be ample evidence that Mr and Mrs Leggett were persons of substantial financial standing and very much in a position to meet a substantial judgment. 87. The claims which the Liquidators were able to assert against Mr and Mrs Leggett were substantial in size and appeared to have merit, for the reasons set out above. As Mr and Mrs Leggett appeared to hold substantial assets, I believed that the Liquidators were duty-bound to pursue them. (h) Mr Markey explained the views that he formed at various stages of the prosecution of the proceeding against Mr and Mrs Leggett. He was astute to the proposition that proceeding to trial against Mr and Mrs Leggett would be an expensive exercise, that a trial would last for “quite some days”, and that Mr and Mrs Leggett would “significantly deplete their own resources in defending the claims made against them and that would reduce the assets against which a judgment might be enforced”. He explained his strategy was that the claims should be prosecuted in the commercial list with a view to having a mediation after close of pleadings, disclosure and exchange of expert reports, and at that time Mr and Mrs Leggett might be persuaded to enter into a commercial settlement. (i) Mr Markey deposed that, by letter dated 8 March 2019, and in anticipation of a mediation which was then contemplated to occur in April 2019, he sought to update his understanding of the asset and liability position of the defendants. He did so because he was concerned that the information obtained in the public examinations in April 2017 might not be current and he had found that the defendants had in fact sold two properties since the proceeding had commenced. (j) Mr Markey explained that the mediation was delayed until August 2019. He and his staff carried out an updated analysis of Mr and Mrs Leggett’s assets and liabilities. He appreciated that the analysis was, to an extent, speculative because it was based on limited information. He considered and rejected the possibility that the defendants had insurance which would respond. He formed the view that the only basis on which he could expect to receive funds from successfully pursuing Mr and Mrs Leggett, whether through a settlement or judgment, was from the assets held by them outside of their trust structures. He and his staff concluded that Mr and Mrs Leggett held assets outside their trust structures in the order of $890,000 to $1,100,000. That did cause him to become concerned about Mr and Mrs Leggett’s ability to meet a substantial judgment. He expected that the cost of preparing for trial would cause Mr and Mrs Leggett’s “non-trust” assets to be diminished even further if they continued to expend them to fund the defence of the proceeding. -- 16 of 22 -- 17 (k) Mr Markey thought that his litigation strategy against Mr and Mrs Leggett was affected in part by his litigation strategy in respect of proceedings against Mr and Mrs Sadler which were also being prosecuted. He deposed:4 138. I still believed the claims against Mr and Mrs Leggett to have good prospects, but was concerned that: (a) the funds in the liquidation were diminishing; (b) I had not yet settled the claim against [Mr] and Mrs Sadler, but expected to do so in the near future; (c) there was little prospect in settling against Mrs Sadler if I did not also press the claim against the Leggetts; (d) I would myself expend considerable funds to take the matter to trial; (e) I would need to reserve funds in the liquidation to pay an adverse costs order, in the event the claim against [Mr] and Mrs Leggett was unsuccessful and I was ordered to pay their costs; and (f) the ability of Mr and Mrs Leggett to meet a judgment or pay a settlement was limited. 139. Prior to the mediation, I undertook an updated modelling of: (a) the funds in the liquidation; (b) the funds I would expect [to have to pay the liquidators’ solicitors, experts and counsel], if the matter were to proceed to a ten day trial; (c) what I would be expected to receive from [Mr] and Mrs Sadler as a settlement or from the execution of a judgment; (d) what I would need to reserve to pay an adverse costs order, in the event Mr and Mrs Leggett were able to successfully defend the claim against them and obtain a costs order; (e) what further sums the Liquidators would be expected to charge for remuneration and expense throughout the winding up; and (f) what sum ought to be reserved for creditors and the cost of executing a judgment against [Mr] and Mrs Leggett. 140. On the basis of that modelling I determined that I could fund a ten day trial, but, it would be very tight and reliant upon the Liquidators reaching a settlement with [Mr] and Mrs Sadler in an amount of at least $300,000 or so. I was very confident of achieving that kind of settlement with Mrs Sadler. However, it remained a concern that a judgment against [Mr] and Mrs Leggett might only yield a recovery of around $500,000.00 at most after their own assets had been further depleted by the cost of preparing for, and attending, a trial. (l) Mr Markey explained that after the August 2019 mediation failed and I set the proceeding down for a 10-day trial commencing 18 May 2020, he decided to press on to the trial. He thought that he would need to reach a settlement with Mrs Sadler and he could then make another attempt to reach a settlement with Mr and Mrs Leggett on commercial terms. He determined to monitor the cost of the litigation against Mr and Mrs Leggett and imposed a strict budget on his legal team. He instructed his solicitors to deliver the plaintiffs’ summaries of evidence, he decided he would then receive and review Mr and Mrs Leggett’s summaries of evidence when delivered, and he would then approach Mr and Mrs Leggett with a view to enlivening settlement discussions and settling promptly on the best possible terms, and otherwise proceed to trial. 4 Typographical errors have been corrected in the quotation from the affidavit. -- 17 of 22 -- 18 (m) Mr Markey explained that in January 2020 he settled the litigation against the Sadlers at mediation and obtained the sum of $500,000. He reviewed the material provided by Mr and Mrs Leggett when it was provided. He formed the view that responding to their evidence would necessitate the calling of additional witnesses and extensive further inquiries. He thought the trial would now be longer than the 10-day estimate and the costs of both the plaintiffs and the defendants would be increased. He updated his cost-benefit analysis and concluded that he could not justify continuation. (n) Mr Markey concluded with these propositions: 192. The Liquidators seek leave to discontinue on the basis that each party bear its own costs. Leave on those terms is sought because: (a) the Liquidators respectfully maintain that they have acted reasonably having regard to: (1) their consideration of information gleaned as Liquidators; (2) the conduct of the public examination; (3) the report of Mr Collins; (4) the consistent position taken in the pleadings; and (5) their participation in a mediation; (b) the absence of any relevant offers from the Defendants; and (c) the discontinuation of proceedings is not sought on the basis that there is no case to answer and, on the contrary, the statement of Mr Leggett leaves substantial questions unanswered, especially in relation to the quantum of his fees, the timing of their payment, his arrangements with Mr Sadler to the exclusion of Mr Bence. 193. As a condition of leave to discontinue being granted, I offer on behalf of the Company and the Liquidators an undertaking not to commence any fresh proceeding against Mr and Mrs Leggett in respect of the matters that are the subject of the existing proceeding. [65] In support of their argument the defendants put before me – (a) both of their statements of evidence for trial; and (b) an affidavit from Mr Leggett and an affidavit from Mrs Leggett. [66] It is not necessary to summarise the trial evidence. [67] Mr Leggett’s affidavit comprised a 23-page affidavit and 1154 pages of exhibits. It was essentially a selective response to Mr Markey’s affidavit. Amongst other things, in the affidavit: (a) Mr Leggett rejected the proposition which had been expressed in the plaintiffs’ solicitors’ letter of 14 April 2020 and, to an extent, reprised in Mr Markey’s affidavit that Mr Leggett’s trial statement involved the delivery of extensive new material justifying an adjournment. (b) Mr Leggett dealt with his conduct once Fairfield went into liquidation. He explained that despite his expressed willingness to assist he was not approached for assistance by the liquidators other than to provide copies of financial records. He said that he would have been able to provide to the liquidators the detail that he ultimately put in his trial statement, if he had been asked to do so. (c) Mr Leggett explained what occurred when he was the subject of public examination. But he said that the examination summons did not require him to produce any -- 18 of 22 -- 19 documents in relation to his financial position, or that of his wife or any business or entity associated with them. (d) Mr Leggett developed a recitation of the history of the decisions which he and his wife made in the course of their defence of the proceeding. He explained that, due to the nature of the allegations, their professional indemnity insurer would not cover the claims or the defence costs and they had had to do so from their own resources. He said that they had incurred costs in excess of $1.1 million in defending the proceeding, comprising $620,000 up to the conclusion of the mediation in August 2019 and in excess of $500,000 since then. (e) Mr Leggett deposed that he and his wife had responded to the letter dated 8 March 2019 by which the liquidators had sought to update their understanding of the asset and liability position of the defendants. They did so by having their solicitors provide to the plaintiffs a statement of their assets and liabilities on 13 June 2019 and an updated statement on 2 September 2019. (f) Mr Leggett dealt with a number of matters which had been dealt with in his trial statement, adding to that material and otherwise repeating and relying on what had appeared in his trial statement. This material responded to some parts of Mr Markey’s affidavit which had dealt with the merits of the claims against Mr and Mrs Leggett. (g) Mr Leggett concluded with these propositions:5 97. The effort involved in defending this proceeding has been enormous and has had a significant detrimental effect on my health, my wife’s health and our financial position. Further, the fact that serious allegations of fraud and [dishonesty] have been made against me has added significantly to the stress and hurt my wife and I have suffered and endured. Claim for indemnity costs 98. My wife and I seek an order that the [plaintiffs] pay our costs of defending this proceeding, to be assessed on the indemnity basis, because (without limitation to other relevant matters): (a) We never had assets or resources sufficient to satisfy any judgment for a claim of just over $2 million (as was originally claimed in July 2017), that alone for a claim of just over $12 million (as was claimed in the proceedings commenced in November 2017); (b) The plaintiffs did not make a proper effort to ascertain our financial position until mid- 2019, over 2 years after the public examination, and even then, seemed to ignore the information we provided, and did not seek clarification regarding any of the information provided, and instead proceeded to have the matter set down for trial for 10 days, serve witness summaries, receive our witness summaries, seek an adjournment of the trial so that it could be set down for a longer period (which we refused to agree to) and one week later, only 4 weeks out from the 10 day trial, seek leave to discontinue the proceeding, and as a result, up until the leave to discontinue was granted, we had instructed our lawyers and counsel to defend the claims at trial and had committed significant resources to do so (c) We have defended the claims consistently since we filed our defence in December 2017, and the only amendment to our defence flowed from an assessment of the plaintiffs’ disclosure regarding the alleged debts of the company the subject of the insolvent trading claim; (d) We maintain, that upon a proper analysis of the material available to the plaintiffs (including the PE transcripts), none of the claims made in the proceeding are valid, and 5 Typographical errors have been corrected in the quotation from the affidavit. -- 19 of 22 -- 20 in particular, not the de facto director claim, which is relied on to support a claim of around $9 million against both my wife and I for alleged insolvent trading; (e) We maintain that the plaintiffs have not properly considered ALL of the evidence available to them to properly assess the various claims; (f) We maintain that the true reason for the plaintiffs discontinuance of the action was because the plaintiffs failed to properly prepare their claim for trial and because the [plaintiffs’] claims were misconceived based on an inadequate investigation of the facts; (g) We feel as though the plaintiffs have made a large claim against me and my wife hoping that we would settle prior to trial without regard to the prospects of the claim. [68] Mrs Leggett’s affidavit comprised a 4-page affidavit and 49 pages of exhibits. Mrs Leggett rejected the merits of the claims against her, inter alia, by deposing to the correctness of the contents of her trial statement, by contending that she had been advised that the claim that she had vicarious liability for the insolvent trading claim advanced against her husband had no basis, and by adopting the contents of her husband’s affidavit. Mrs Leggett also explained, from her point of view, the steps which had been taken by the liquidators to establish the nature and value of the assets which might be available to respond to any judgment and on the information which she had provided to the liquidators in this regard. She also emphasised the prejudice which the proceedings had caused to her and her husband. [69] The plaintiffs responded to the defendants’ material by placing before me a second affidavit of Mr Markey. The second affidavit comprised a 14-page affidavit with 122 pages of exhibits. It comprised a response to some of the matters raised by Mr and Mrs Leggett. Most notably, it expanded upon the litigation strategy which he had adopted and on the reasons why he ultimately determined that the plaintiffs should discontinue. [70] Mr Markey was cross-examined before me, principally with a view to challenging the adequacy of the cost-benefit analyses which he and his staff had carried out, and whether they made any adequate analysis of the assets which might be available to meet any judgment debt, given that particular assets were held on trust. Consideration [71] I have explained the nature of the issues which arise in this proceeding and have identified that both parties put a great deal of their trial material before me. [72] Most of the material from the plaintiffs was directed to persuading me that the plaintiffs reasonably formed a positive view as to the merits of their case against the defendants, that they had prosecuted the case in a reasonable way, and that they had reasonably taken the decision to withdraw when a cost-benefit analysis suggested that was the sensible course. Some of their material was also directed at the case which ultimately was not pursued at the hearing before me, namely whether an order should be made interfering with what would otherwise be the liquidators’ right of indemnity for their costs and expenses. [73] For their part, the defendants’ material was directed to demonstrating the converse of the plaintiffs’ argument about the merits of the case with a view to supporting their argument that they should have an indemnity costs order on one or other of the bases mentioned at [26] above. Their material sought to persuade me against forming a view of the reasonableness of the conduct of the liquidators, particularly in relation to the adequacy of the liquidators’ cost-benefit analysis (and of the element of that analysis which involved an assessment of the amount which could have been recovered from the defendants). Their material was also directed at the case which ultimately was not pursued at the hearing before me regarding the liquidators’ right of indemnity. -- 20 of 22 -- 21 [74] I reject the notion that this is a case where I either can or should form a view that the parties have acted reasonably (or unreasonably) in the way each side contends. Objective reasonableness could only be established if I was prepared to assess the merits of each side’s case. I have explained that the Court cannot try a hypothetical action between the parties to determine the question of costs. Both the plaintiffs’ argument, which seeks to persuade me of the reasonableness of their conduct, and the defendants’ argument, which seeks indemnity costs, seek to have me do just that. To my mind, the factual and legal complexity of each side’s case at trial makes it obviously impractical to take that course. For that reason, I cannot accept either this aspect of the plaintiffs’ argument or the defendants’ argument for indemnity costs. [75] I turn to the evidence addressing the plaintiffs’ reasons for discontinuance. [76] Rational conduct by a plaintiff considering the commencement and prosecution of complex commercial litigation would involve the plaintiff carrying out some form of analysis of both the costs which might thereby be incurred and the benefits which might thereby be obtained. Risk and uncertainty attends the assessment of many of the variables involved on each side of the analysis. The costs side involves at least predicting the time and associated cost of the miscellany of steps involved in taking complex commercial litigation to trial. It involves also assessing the risk of becoming subject to adverse costs orders. The benefits side involves at least assessing not just the prospects of success at trial, but also the costs and likelihood of recovery in respect of any money judgment obtained. [77] Mr Markey’s evidence reveals that he appreciated these matters and that he conducted a cost-benefit analysis. On the information available to him, the defendants could not hope to pay the entire amount claimed. But he thought that they did have funds which would permit them to make a substantial payment in the event of a settlement or a judgment requiring them to do so. And Mr Markey was well aware that their capacity to pay either a settlement or judgment would be reduced by the process of defending the claims. To his mind, his analysis justified commencement of the litigation. [78] Mr Markey’s affidavit then reveals that he considered the question again in early 2019 and, based on that consideration, formed a strategy going forward in August 2019 once the mediation failed. That strategy involved putting a “strict budget” on his team in advance of their carrying out the work necessary to comply with my directions as to filing and serving witness summaries. But the extent of the defendants’ evidence received in response made it clear to him that the plaintiffs had a great deal more work to do than had been anticipated. That would involve considerably more time and cost, thereby adversely affecting what was already a finely balanced calculus. More time and cost on the plaintiffs’ side inevitably meant more time and cost on the defendants’ side, thereby eating into their capacity to give the plaintiffs a recovery, even if the plaintiffs won the trial. When he reassessed the cost-benefit analysis, he made the decision that it did not justify proceeding further. Settlement attempts failed, and he made the decision unilaterally to withdraw. [79] The defendants challenged the adequacy of Mr Markey’s cost-benefit analysis. The defendants sought to demonstrate that no adequate examination was done, either at the stage of the public examination or any later stage, of the assets which might be available at the end of a successful trial. They sought to demonstrate that no rigorous assessment of the implications of the fact that some assets were held in trust was ever made. Perhaps such a challenge to the assessments made by Mr Markey might need to be resolved if I were considering whether an order should be made interfering with what would otherwise be the -- 21 of 22 -- 22 liquidators’ right of indemnity for their costs and expenses. But that is not the present task. To my mind, the present exercise of discretion does not require me to decide whether the plaintiffs’ cost-benefit analysis was competently performed. [80] In my view, the distinction to which Burchett J referred in ONE.TEL Ltd can be drawn in this case. This case falls into the category of plaintiffs having surrendered or capitulated to the defendants. There was no supervening event which removed, or modified, the subject of the dispute. Nor did the plaintiffs obtain the relief they sought in the action by settlement or by extra-curial means. Nor did the proceeding become futile for some external reason. All that happened is that the plaintiffs formed the view, three weeks out from trial, that it was better for them to withdraw from the contest they had started, rather than to fight it to the end. That assessment might well have been a prudent assessment from the plaintiffs’ subjective perspective, but that does not matter when one comes to consider what costs order should be made from the point of view of doing justice as between the two contesting sides. [81] The plaintiffs unilaterally abandoned the contest into which they had drawn the defendants, in the full knowledge that, as was the fact, the defendants must have incurred considerable costs in preparing for the contest and were apparently ready will and able to participate in it. This gives rise to a strong reason to award costs against the discontinuing plaintiffs. The plaintiffs have not established anything which outweighs that reason in the discretionary balance. In my view, the only just exercise of the costs discretion in the present circumstances is one which requires the plaintiffs to compensate the defendants for the costs they incurred in having to defend the proceeding which the plaintiffs decided not to pursue. The plaintiffs must also pay the defendants their costs of the current application. [82] Out of an abundance of caution, I should note that Mr Markey’s first affidavit contained some reference to the fact that the impact of the COVID-19 pandemic added to the time and cost which would be involved in responding to Mr and Mrs Leggett’s trial evidence. The plaintiffs did not in their written or oral argument before me suggest that the impact of the pandemic should be regarded as a significant causal factor in the decision to discontinue so as to be material to the exercise of my discretion. They did not suggest that, but for the impact of the pandemic, Mr Markey would not or might not have made the decision to discontinue. In case it matters, I record that my view is that Mr Markey’s evidence did not persuade me to find that the impact of the pandemic should be regarded as a supervening event which so altered the proceeding as to justify the order the plaintiffs sought as to costs. Conclusion [83] The plaintiffs must pay the defendants’ costs of the proceeding, including the present application, to be assessed on the standard basis. -- 22 of 22 --