By Stuart Eustice, Partner and Gregor Campbell, Lawyer

The Court of Appeal was recently required to consider the decision by the County Court to pierce the corporate veil and join a building company’s director to a costs order. The Court took the opportunity to further discuss the circumstances in which a non-party may be joined to a costs order.

Background

The Applicant in this matter was the director of a building company, Tugnation (Director) who alongside the Respondent, an architecture firm (Architect) was sued in 2019 in relation to defective building works carried out on a hotel in Echuca (the proceeding). During the course of the building defects proceeding Tugnation filed a notice of contribution against the Respondents.

Tugnation was ultimately unsuccessful in the building defects proceeding, with the trial judge giving judgment for the plaintiff (hotel owner) and dismissing Tugnation’s notice of contribution against the Architect.

The Architect subsequently applied for a non-party costs order against the Director, in circumstances where Tugnation had recently been placed into liquidation. The County Court in granting the order reasoned:

1. Tugnation was insolvent or a “man of straw” with the County Court concluding that the Director’s ultimate plan was to ‘phoenix’ Tugnation so that Tugnation could avoid paying the costs of the proceeding; and
2. The Director played a sufficiently active role in the conduct of the litigation of Tugnation, and had sufficient interest in its outcome through both his role as director, as well as a result of lending money to Tugnation to fund a portion of the litigation.

Held

The Court of Appeal found differently. The divergence in conclusions was primarily a result of the Court of Appeal categorising the Director’s behaviour differently to the County Court.

In contrast to the County Court, the Court of Appeal consider that:

1. The Director was no more active or interested in the litigation than any other director complying with their duties. He had obtained, and acted on, advice prior to giving instructions to file the notice of contribution so as to defray the potential liability of Tugnation.
2. The notice of contribution was not summarily dismissed, and the Architect was found responsible for some of the loss suffered by the original plaintiff. In the Court of Appeal’s mind this vindicated the decision to file a Notice of Contribution.
3. There was nothing unusual nor necessarily inappropriate in a director lending money to a company, particularly so as to enable that company to defray it’s liability. This did not bestow upon the Director any special interest in the outcome of the litigation.
4. Based on Tugnation’s financial history at the time of filing of the notice of contribution, even if Tugnation was not then insolvent, losing the proceeding would have put the company into liquidation. In these circumstances, it was appropriate, for the Director to make a decision to attempt to avoid and/or reduce the liability of Tugnation.

The Court of Appeal therefore rejected the County Court’s finding that the Director had been engaged in a phoenixing operation to avoid any costs, instead concluding that Tugnation’s insolvency was an inevitable consequence of failing in the proceeding.

Relevance 

This case stands as an interesting counter-point to the recent decision in MC Wholesaling Pty Ltd v Zheng [2024] VSCA 248 where in the Court of Appeal upheld a non-party cost order against a sole director.

The key difference in these two matters appears to be that the Applicant in this matter:

1. sought and act on advice when filing the notice of contribution; and
2. that the insolvency of Tugnation was an inevitable result of the proceeding rather than any deliberate action of the Director in controlling it’s finances.