In December last year, we reported on a Federal Court judgment ordering costs against a non-party director for his unreasonable conduct to materially influence the conduct of a company involved in the winding up of the company. You can read the article here. Earlier this year, the New South Wales Court of Appeal (the Court) exercised similar powers in Brand2Content t/as Franchise Works v Dalby  NSWCA 16 by ordering a non-party director, Mr Dalby to pay for Brand2Content Pty Ltd’s (Brand2Content) legal costs given his personal interest in the outcome of the appeal proceedings.
In November 2016, Brand2Content commenced proceedings in the New South Wales Supreme Court against three companies for claims of damages arising from alleged breaches of contract and for misleading and deceptive conduct.
Mr Dalby was a director of all three defendants and up until 8 February 2018, he held 80% of total shares in each of those companies. In February 2018, Ball J delivered judgment in favour of Brand2Content.
In March 2018, the three defendant companies' lodged an appeal, and Mr Dalby, in his personal capacity, entered into a cost agreement with Osborn Law for provision of legal services with respect to appeal.
On 12 March 2018, Osborn Law wrote to Brand2Content’s solicitors:
“We are instructed to seek a stay of the judgment on the basis that the defendants do not have capacity to pay. If necessary we will rely upon the enclosed financial documents. It is clear on any reading of the documents that our clients, including [SABA], do not have capacity to pay.”
The financial documents concerned the financial position of each appellate company, which largely comprised of unpaid entitlements owing to the family trusts associated with Mr Dalby.
On 15 March 2018, Brand2Content provided an offer of compromise, which was rejected by the appellants. Shortly thereafter, Brand2Content twice requested from the appellants' security for its costs of the appeal, which was also rejected, thus prompting Brand2Content to file a notice of motion for security of costs later that month. Prior to the motion being heard, one of Mr Dalby’s companies, Solar & Batteries Australia Pty Ltd (SABA) which was a cross-claimant in the original proceeding entered into voluntary liquidation with debts of more than $5 million and all of Mr Dalby’s companies ceased using the services of Osborn Law. Brand2Content’s solicitors were also unsuccessful in their efforts to contact the appellants.
Soon after, Brand2Content filed a notice of motion to dismiss the appeal for want of due despatch.
Despite being served with the motion, the appellants did not appear at the hearing and the appeal was ultimately dismissed by Simpson AJA.
Brand2Content sought orders for the costs of the appeal be paid on an indemnity basis and that Mr Dalby, the non-party director of the appellants, pay those costs.
When non-party cost orders can be made
The Court’s power to order costs against a non-party is derived from section 98(1) of the Civil Procedure Act 2005 (NSW), which provides that:
“Subject to rules of court and to this or any other Act:
(a) costs are in the discretion of the court, and
(b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and
(c) the court may order that costs are to be awarded on the ordinary basis or an indemnity basis”
To determine whether a non-party costs order should be made pursuant to section 98(1), Gaudron J adopted the following five well-established principles set out by Basten JA in FPM Constructions v Council of the City of Blue Mountains  NSWCA 340 at :
“1. the unsuccessful party to the proceedings was the moving party and not the defendant;
2. the source of funds for the litigation was the non-party or its principal;
3. the conduct of the litigation was unreasonable or improper;
4. the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest’ and
5. the unsuccessful party was insolvent or could otherwise be described as a person of straw.”
Application of the principles
Mr Dalby disputed four of the five principles that Brand2Content submitted were satisfied.
Was Mr Dalby the source of funding for the appeal?
Simpson AJA accepted that it was “more likely than not that Mr Dalby was the source of funds for the appeal” given:
- the dire financial position of the parties as disclosed in the March 2018 correspondence; and
- the unlikelihood of Osborn Law agreeing to engage with the appellants unless Mr Dalby agreed to personally finance the appellants’ legal costs.
Were the appellant companies insolvent, or at the least, impecunious?
Simpson AJA observed that the point of time in which the appellant companies’ insolvency should be assessed “… to be the time at which the order is sought or is made” given that the order is for payment by a third party of a costs obligation. His Honour was satisfied that the appellant companies were insolvent, or at the least, impecunious as at the relevant time.
Did Mr Dalby have a personal interest in the outcome of the appeal?
Simpson AJA agreed with the submissions made by Brand2Content that Mr Dalby had a substantial personal and financial interest in the outcome of the appeal as Mr Dalby:
- accepted liability for personally funding the appeal (for reasons set out above);
- was a unitholder of the trust and beneficiary for the Dalby Family Trust. He also held shares in the other appellant companies that were trustees for the Adam Dalby Family Trust (ADFT). Mr Dalby was the primary beneficiary of the ADFT, which was owed a substantial debt by an appellant company; and
- had a history of effecting asset transfers between his entities. Therefore, failure of the appeal could cause his companies to be placed in liquidation, which would affect his capacity to control those assets.
Did Mr Dalby act unreasonably or improperly during the course of the proceedings?
Simpson AJA held that Mr Dalby controlled the appellant companies’ conduct during the litigation, and his Honour accepted that some of Mr Dalby’s conduct can be described as unreasonable or improper given his failure to cause the appellate companies to:
- cooperatively engage with Brand2Content regarding their requests for security for costs;
- file a notice of discontinuance; and
- update Osborn Law of their proper address for service.
Although Simpson AJA observed that Mr Dalby, on balance, did not act unreasonably or improperly, her Honour viewed that Mr Dalby commenced and conducted the appeal for personal benefit through his family trusts, the appellant companies and to defeat Brand2Content’s rights to the judgment debt.
Accordingly, Simpson AJA ordered that the costs of the appeal be paid on an indemnity basis from 16 March 2018, being the date on which the offer of compromise was made, and that Mr Dalby pay the costs of the appeal.
Take away messages
- Directors beware – the Court has a wide-reaching discretion to award non-party cost orders if the director’s personal interest is the driver behind pursuing court proceedings unreasonably.
- Failure to provide a personal undertaking for security of court costs does not limit exposure to non-party cost orders.
- As previously described in our article “Court Orders against Non-Party Directors” and shown in Brand2Content, similar powers vest in other State and Federal Courts to make non-party cost orders.