Show me the money: Third party costs orders

In the decision in Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Pty Ltd (No 2) [2021] FCA 72, the Federal Court considered the circumstances where third parties standing behind a plaintiff who challenged a DOCA could be ordered to pay the costs of the proceedings

The issue

As explained in our previous update regarding the decision in Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Ltd [2020] FCA 1395, this matter involved a challenge by Habrok (Dalgaranga) Pty Ltd (Habrok) to a DOCA approved by the creditors of the Gascoyne Resources group of companies (GCY Group).

Habrok was a special purpose vehicle that was incorporated for the specific purpose of purchasing a debt owed by the GCY Group, using its newly acquired status as a creditor to challenge the GCY Group DOCA, and ultimately acquiring the GCY Group assets.

Habrok was initially incorporated by, and was a wholly owned subsidiary of, Habrok Mining Pty Ltd (Habrok Mining).  Habrok Mining had put forward a DOCA proposal to acquire the assets of the GCY Group but this proposal had not been accepted by the GCY Group creditors.

Subsequently, after the proceedings were commenced, Adaman Resources Pty Ltd (Adaman) acquired 100% of the shares in Habrok.  Adaman owns a mine close to the GCY Group’s Dalgaranga processing plant and stood to benefit from efficiencies in having its ore processed at that processing plant.

After Habrok’s challenge to the GCY Group DOCA was defeated, the GCY Group defendants applied for orders requiring Habrok Mining and Adaman to jointly pay the defendants costs of the proceedings as liable non parties to the proceedings.

The law

Justice Beach observed at the outset that there are no fixed categories of cases where third party/non-party cost orders will be appropriate, and that the overriding consideration is whether it is in the interests of justice to make such an order.

However, His Honour went on to note that it was well accepted that the Court may exercise its discretion to make third party cost orders where some of the following factors are present:

  • the unsuccessful party was the moving party and not the defendant;
  • the source of funds for the litigation was the non-party or its principal;
  • the conduct of the litigation was unreasonable or improper;
  • the non-party or its principal had an interest (not necessarily financial) equal to or greater than that of the party, or if financial, a substantial interest; or
  • the unsuccessful party was insolvent or could otherwise be described as a person of straw

Decision

Justice Beach was satisfied that factors 1, 2, 4 and 5 of the above 5 factors were present in the Habrok case.

His Honour also noted the admission during cross examination by a director of Habrok, who was also a director of Habrok Mining and Adaman, that “Habrok Mining and Adaman stood behind the plaintiff and would pay the costs of the proceeding."1

His Honour then went on to hold that third party cost orders should be made against both Habrok Mining and Adaman for the following reasons:

  • Habrok was a “special purpose vehicle” incorporated for the purpose of commencing the proceedings and acquiring the GCY Group’s assets.
  • Habrok was initially a wholly owned subsidiary of Habrok Mining when the proceedings were commenced and subsequently became a wholly owned subsidiary of Adaman.
  • Habrok Mining and Adaman owned profitable mining projects in Western Australia, whereas the only assets held by Habrok were a debt of $616,953 and $300,000 paid into the Court for security.
  • The likely party/party taxed costs would well exceed the assets of Habrok.
  • Habrok Mining and Adaman played an active role in the litigation which:

… involved strategic commercial litigation instituted by an entity specifically incorporated by Habrok Mining for the purpose of advancing claims such as to provide Adaman and/or Habrok Mining with the opportunity to acquire the defendants’ assets …2

  • The director of Habrok Mining and Adaman gave evidence that those entities would stand behind Habrok and pay the costs of the proceedings if required.

Lavan comment

As the restructuring sector in Australia continues to mature, resulting in more complex transaction structures, this case is a timely reminder of the risks that can arise for non-parties who fund litigation and who have a strategic and/or financial interest in the outcome of that litigation.

It seems clear that the courts will use their ability to “lift the veil” to award costs against third parties who have the necessary strategic and financial involvement but who are not parties to the proceedings.

This is a complex area and you should contact the experienced Lavan restructuring team if you have any questions.