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Non-party costs orders - Directors of company litigants beware

The recent Queensland Court of Appeal decision in Murphy v Mackay Labour Hire Pty Ltd [2018] 90 QCA upheld the criterion from the High Court decision of Knight v FP Special Assets Ltd (1992) 174 CLR 17 by dismissing the Appellant’s appeal against a non-party costs order made against him. He was a director of a company unsuccessful in litigation who was ordered to pay costs when the company was put into liquidation.

In Knight it was found that, for a non-party to be ordered to pay costs, circumstances must arise where the non-party falls into a “general category of case where a non-party costs order might be appropriately made”. Further, the non-party costs order must be in the interests of justice.

The general category consists of three principles:

1.      The party to the litigation is an insolvent person or man of straw;

2.      the non-party has played an active part in the conduct of the litigation; and

3.      where the non-party has an interest in the subject of the litigation (e.g. by having an interest in a company party to the litigation).

In Mackay Labour Hire Pty Ltd v Collhart Investments Pty Ltd [2013] QDC 84, the Appellant, Mr Murphy was the sole director of the defendant. The defendant was being sued in the District Court of Mackay for various unpaid debts. The hearing commenced on 13 June 2016 and evidence was finalised on 15 June 2016. The defendant entered voluntary liquidation five days after the trial, therefore effectively bringing an end to the proceedings. The plaintiff successfully brought an application for a non-party costs order against Mr Murphy. The Judge applied the circumstances to the three general category principles in Knight as follows:

Category 1:      The defendant had been insolvent for at least three months prior to the trial and the winding up was not the result of a sudden financial collapse;

Category 2:      Mr Murphy wound the defendant up at the close of evidence and allowed the defendant to partake in the litigation while insolvent. Mr Murphy even deposed to the fact that he “had not made the decision to wind up the company until the very last moment” and attested that he continued to support the defendant to enable it to continue with the litigation; and

Category 3:      Mr Murphy was the sole director and made the resolution to wind the defendant up.

The Appellant appealed the non-party costs order on multiple grounds, one of which being that the primary Judge erred in the application of Knight in failing to consider the defendant’s solvency, Mr Murphy’s involvement in the litigation and his interest in the defendant.

In her decision, Philippides JA of the Queensland Court of Appeal addressed the primary Judge’s approach in considering the three general category principles in Knight and found:

1.      The primary Judge had sufficient evidence to support a finding that the defendant was insolvent for a period of up to at least three months prior to the trial;

2.      The primary Judge was correct in finding Mr Murphy played an active part in the litigation because the Appellant had “allowed the trial to run on” and “more than actively promoted the defendant’s interest by pursuing litigation” (the defendant had filed a counterclaim). This was evidenced by Mr Murphy’s affidavit material in which he swore that he “would continue to ensure there was support available to the defendant so as to enable it to continue with the litigation in these proceedings”; and

3.      Mr Murphy was not only the sole director, he had sworn in his affidavit that it was his decision to put the defendant in liquidation, which is a decision to be made by a member of the company. The affidavit material of Mr Murphy made it clear that the defendant was his company and the primary Judge found correctly that he had an interest in the subject of the litigation.

Philippides JA (Fraser JA and Boddie J agreed) found no error had been established in the decision of the primary Judge and was satisfied that there was enough evidence to satisfy the three general category principles in Knight to justify the making of a non-party costs order. As such, the Court of Appeal found that the primary Judge had used her discretion appropriately and the appeal was dismissed with costs.

 Murphy has reinforced the Court’s approach that it is willing to make non-party costs orders in circumstances were directors are taking advantage of the corporate veil to pursue litigation.

Tom O’Shea