FEDERAL COURT OF AUSTRALIA

Sky Cloud Pty Ltd v Shi [2017] FCA 1579

ORDERS

THE COURT ORDERS THAT:

1.    The cross-claimants provide security for the cross-respondents’ costs of the cross-claim in the sum of $100,000 up to trial.

2.    If an amount of the ordered security is proposed to be paid by the cross-claimants by March 2018, liberty is reserved for the cross-claimants to apply for the security to be paid by way of instalments commencing on 7 March 2018.

3.    Subject to any application made pursuant to liberty reserved to the cross-respondents, the amount of security is to be paid by 7 March 2018.

4.    The cross-claimants pay the cross-respondents’ cost of the interlocutory application dated 16 October 2017.

5.    The matter be listed for a further case management hearing at 9.30 am on 9 March 2018.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

(Revised from the transcript)

LEE J:

A    INTRODUCTION

1    By interlocutory application dated 16 October 2017 (Interlocutory Application), the cross-respondents seek an order for security for costs pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth), s 1335 of the Corporations Act 2001 (Cth) and FCR 19.01 against the second cross-claimant, IT Express Pro Pty Ltd (IT Express). By reason of the sensible approach taken to the disposition of the Interlocutory Application by both counsel, it is possible – despite the volume of the affidavit material – to be relatively brief in providing the reasons why I have reached the conclusion that the security sought by the cross-respondents ought to be ordered as sought.

2    The cross-claim contains allegations concerning oppression and breach of copyright. The breach of copyright claim alleges that the plaintiff, Sky Cloud Pty Ltd (Sky Cloud), used a source code of what is alleged to be a program belonging to IT Express (EOI Program) to produce what is described as Sky Cloud’s Presale 365 program. This allegation is denied by Sky Cloud.

3    It is unnecessary, for the purposes of these reasons, to set out in any detail the nature of the oppression claim. It suffices to note that there will be dispute that the first defendant, Mr Yajun Shi, or a company or trust he nominated, was to have a 40 per cent shareholding in Sky Cloud as alleged, and there will also be dispute as to the contributions to the set-up and provision of the initial capital and contributions towards the ongoing costs of Sky Cloud by IT Express and Mr Shi. In short, it will be alleged at final hearing that Mr Shi voluntarily left Sky Cloud after a series of dealings between the parties.

B    CONSIDERATION

4    There is no issue between the parties as to power to award security, nor as to the principles that inform the exercise of that power. This is unsurprising as those principles are well known and do not require repetition.

5    Additionally, there is no dispute that there is reason to believe that the cross-claimants will be unable to pay the costs of the cross-respondents of the cross-claim if so ordered. In fact, that fact is embraced on behalf of the cross-claimants as the foundation for their resistance to the award of security. That contention arises in this way. After conceding that the cross-claimants will be unable to pay any adverse costs, counsel for the cross-claimants, Mr Wood, frankly submitted that the only substantive basis for resisting an award of security was that it would have the effect of stultifying the cross-claim in circumstances where there was some overlap between the issues that arise in relation to the cross-claim, and the issues that arise in the principal proceeding.

6    In doing so, Mr Wood made, subject to what follows, the initially attractive submission that the second cross-claimant, Mr Shi, was prepared to provide an undertaking that he would be personally liable for any costs awarded against IT Express. Often, of course, this will be a powerful factor militating against an award of security. If those who will benefit from a judgment in favour of a company come out from the shadows and put their individual assets on the line by provision of an undertaking, security will often not be ordered.

7    Having said this, in circumstances where the only real basis for resisting an award is stultifying the claim, a related point needs to be made about those who stand behind the company. As the Full Court (Sheppard, Morling and Neaves JJ) explained in Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4:

In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts.

8    I return to this matter below, but before doing so, there is a difficulty in accepting the proffered undertaking as a satisfactory resolution of the issue that has arisen in relation to security. This is because the evidence from Mr Shi as to his financial position (which, admittedly, was not the subject of challenge by way of cross-examination) was, in some respects, less than complete. For example, the evidence reveals that Mr Shi has not provided an adequate response to a notice to produce served by the cross-respondents by providing basic financial information, such as the financial statements of IT Express and taxation returns.

9    There is also an absence of information as to how Mr Shi’s weekly living expenses are funded. Further, except for a somewhat speculative suggestion that he will receive money in relation to a future property transaction, there is no detail, or at least no sufficient detail, of how it is that he has sufficient income to pay lawyers; how he funds his travelling expenses (which have included two trips to the People's Republic of China this year); and how he proposes to fund expert reports which have been foreshadowed to be filed in the proceeding. Notwithstanding the affidavit affirmed by Mr Shi on 16 November 2017, which gives details as to his current employment, pay, and some details as to assets, I am left with the uneasy feeling that the financial position of Mr Shi is somewhat difficult to understand with any degree of confidence. I am not satisfied on the evidence that the proffered undertaking is an adequate protection for the cross-respondents, should they be awarded costs.

10    Returning to the issue of stultification, it may have been that the lack of established worth in the undertaking of Mr Shi could have been at least partially addressed by a similar undertaking being given by the other shareholder in IT Express, being Mr Shiyu Qu, who appears from the evidence to be a resident of New South Wales (and, for all I know, may have very substantial assets). However, I am informed candidly by Mr Wood that Mr Qu does not wish to be involved in the proceeding. In these circumstances, it is, perhaps, understandable that Mr Qu does not propose to give an undertaking to be responsible for the costs of the cross-claim, in whole or in part. If substantive relief is obtained by the cross-claimant pursuant to the terms of the cross-claim, then there is no doubt that Mr Qu, as a beneficial owner of around 25 per cent of the issued shares in IT Express, would likely benefit. Given that it is an essential part of the case of a company seeking to contend that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts (see [7] above), the absence of any evidence about Mr Qu (other than his unwillingness to stand behind the company) is highly relevant.

11    I should also note that although both IT Express and Mr Shi are named as cross-claimants, the substantive relief sought in the cross-claim, on the way in which the case is put in the statement of cross-claim, is relief to which IT Express is entitled. As Mr Wood again acknowledged, Mr Shi was named as a cross-claimant against the prospect that there may be some opposition by the cross-respondents to the declaratory and other related relief sought by IT Express on the basis that Mr Shi was, in fact, the true copyright owner; but this is not the primary case being advanced in the cross-claim. Accordingly, this is not the sort of case where there are two cross-claimants with distinct causes of action where it may be an appropriate exercise of discretion to stay the claim made by a corporate cross-claimant, yet allow a cross-claim brought on behalf of an individual to proceed on the basis of the well-established reluctance to order security for costs against individuals.

12    Although there was some faint suggestion in the evidence that the impecuniosity of Mr Shi was caused by the cross-respondents, there was no articulation of this contention, and it is not established on the evidence. I can deal in relatively summary terms with the other matters relied upon by the cross-respondents in their written submissions. I note briefly that it is unnecessary for the determination of this application for me to consider whether or not it has been established that Mr Shi is presently an ordinary resident of Australia by virtue of him being a permanent resident. That was in dispute initially, but is not determinative of the Interlocutory Application in the way in which it came to be argued.

13    Although there is some force in the contention that there is some commonality between the issues in the cross-claim and those raised in the plaintiff's own claim, the statement of cross-claim (as one would expect with an oppression suit) raises significant additional issues, over and above those that would be necessary to determine the plaintiff’s claim. Finally, there are some aspects of the way in which the cross-claimants have, thus far, advanced their case that causes some concern.

14    The first aspect is that there have been a number of breaches of directions to serve evidence in chief in support of the cross-claim. Notwithstanding that an order to serve such evidence has been extended on more than one occasion, it is apparent that there is still additional evidence to be served which, I understand, encompasses both expert and lay evidence. Indeed, Mr Wood indicated that it would be necessary to seek leave to adduce additional evidence in the event that the cross-claim proceeded. Further, despite the fact that the substantive affidavit in the proceeding, affirmed by Mr Shi on 28 November 2017, was read without challenge for the purposes of the Interlocutory Application, the evidence thus far served does not establish that the cross-claimants have a case which could be described as strong.

15    The second aspect concerns the evidence in support of the cross-claim. I hesitate to express any well-developed views on these matters because of the possibility that I may, at some stage, be called upon to determine the cross-claim on significantly different evidence, but it suffices to note the following allegations in the statement of cross-claim:

(a)    the source code for the EOI Program was made available to employees of Sky Cloud who made “amendments” to it and “adjusted” its functionality to produce Presale 365; and

(b)    Presale 365 is a “reproduction” of the EOI Program, an “adaption” of the EOI Program, or reproductions of a “substantial part of the EOI Program”.

16    Neither (a) nor (b) appear, however, to be addressed in any satisfactory way in Mr Shi's affidavit. Rather, Mr Shi's evidence is that IT Express adapted the software. Yet, in the cross-claim, it is alleged that employees of Sky Cloud were granted access to, and made amendments to, the source code. There is presently no evidence I can see (or at least was pointed out to me) that employees of Sky Cloud produced Presale 365, or amended or adjusted the functionality of the EOI Program, or reproduced or adapted that program. As the cross-respondents submit, the evidence presently filed and read on the Interlocutory Application does not disclose a basis such that the pleaded allegations in respect of the alleged breach of copyright are likely to be made out. Of course, I stress, this could change as the evidentiary material is supplemented. I am conscious, of course, that there is also an oppression claim, which seeks payment for the two shares of IT Express “at market value”. As I indicated above, this apparently is to be the subject of the yet unserved evidence.

17    I am conscious of the fact that in considering the application for security, the Court must consider the totality of the circumstances: CBS Records Australia Ltd v Telmak Teleproducts (Aust) Pty Ltd (1987) 72 ALR 270 at 284-285 per Bowen CJ. In some cases, this requires a broad brush approach which ensures that adequate and fair protection is provided to the parties seeking security, and avoiding injustice to the other party: see Pathway Investments Pty Ltd v National Australia Bank Limited [2012] VSC 97 per Davies J.

18    In all the circumstances, I consider that this is a case where, doing the best that one can to balance the relevant considerations, security should be awarded.

19    As to quantum, Mr Wood, again frankly, conceded that it is difficult to see why, irrespective of any overlap between the cross-claim and the principal proceedings, the quantum sought by way of security did not reflect the commercial realities of litigation in a superior court, particularly litigation involving the consideration of expert evidence. Mr Freeman, who appears on behalf of the cross-respondents, suggested, on the basis of the evidence, that an amount of $100,000 as security is appropriate.

C    CONCLUSION & ORDERS

20    There is no reason to think that $100,000 is not an appropriate figure, given the nature of the case advanced on the cross-claim. At the end of the day, Mr Wood did not maintain a submission that it was an excessive amount, given the likely duration of any hearing of the issues on the cross-claim.

21    Mr Wood has asked for a period until the end of March 2018 for the provision of the security; Mr Freeman opposed such a lengthy period. I am inclined to give the cross-respondents the opportunity of doing what they can to see whether or not they can raise the necessary funds by way of security. Accordingly, the orders of the Court are as follows:

(1)    The cross-claimants provide security for the cross-respondents’ costs of the cross-claim in the sum of $100,000 up to trial.

(2)    If an amount of the ordered security is proposed to be paid by the cross-claimants by March 2018, liberty is reserved for the cross-claimants to apply for the security to be paid by way of instalments commencing on 7 March 2018.

(3)    Subject to any application made pursuant to liberty reserved to the cross-respondents, the amount of security is to be paid by 7 March 2018.

(4)    The cross-claimants pay the cross-respondents’ cost of the interlocutory application dated 16 October 2017.

Associate:

Dated:    22 December 2017

SCHEDULE OF PARTIES