FEDERAL COURT OF AUSTRALIA
Guildford International Group Pty Ltd, in the matter of Aviation 3030 Pty Ltd v Aviation 3030 Pty Ltd [2018] FCA 600
ORDERS
DATE OF ORDER: |
THE COURT ORDERS THAT:
1. The plaintiff’s application dated 17 April 2018 to review Registrar Luxton’s decision dated 29 March 2018 be dismissed.
2. The plaintiff pay the second defendant’s costs of the application.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
O’CALLAGHAN J:
1 The plaintiff brings this application under s 35A(5) of the Federal Court of Australia Act 1976 (Cth), seeking judicial review of a decision of a Registrar of this court, who ordered that the plaintiff provide security for the second defendant’s costs in the sum of $150,000 up to and including the first day of trial. This court’s power under s 35A(5) of the Federal Court of Australia Act 1976 (Cth) extends to reviewing questions of fact and law. The review is in the nature of a rehearing de novo: see Harris v Caladine (1991) 172 CLR 84.
2 The second defendant opposes the plaintiff’s application, and continues to press its case that it should be granted security for such costs in the sum of $525,000. The second defendant’s application is brought pursuant to s 1335 of the Corporations Act 2011 (Cth) and s 56 of the Federal Court of Australia Act 1976 (Cth).
3 Sub-section 1335(1) of the Corporations Act 2011 (Cth) provides:
Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.
4 Section 56 of the Federal Court of Australia Act 1976 (Cth) provides:
(1) The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her.
(2) The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs.
(3) The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given.
(4) If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed.
(5) This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security.
5 The plaintiff accepted that “there is reason to believe that [it] will be unable to pay the costs of the [second] defendant if successful in … its defence.” It was bound to do so because the evidence establishes, and senior counsel for the plaintiff accepted, that the plaintiff has no assets. It follows that jurisdiction to order security is enlivened. The plaintiff thus has the evidentiary burden to establish a reason for which security should not be granted. However, the burden rests on the second defendant “from first to last, to persuade the court that the order for security should be made”: Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 at [21].
6 Those principles are oft repeated in the cases and there was no dispute about them here. The parties disagreed, however, about the significance of a number of discretionary factors about which submissions were made.
7 Before turning to consider the competing contentions, I should set out a brief description of the proceeding, the issues in dispute between the plaintiff and each of the defendants, and the circumstances of the plaintiff (and those who stand behind it).
8 This in an oppression proceeding. The first defendant was incorporated in 2011 for the purpose of purchasing land at Werribee South/Point Cook, in Victoria, rezoning it, and then either selling or redeveloping it. It then sought to raise money from investors to finance the acquisition. The plaintiff is one of a number of investors. The value of the land has increased significantly since the purchase.
9 The plaintiff pleads that the first defendant has engaged in oppressive conduct of various kinds. Critically, for present purposes, the plaintiff contends that the first defendant diluted the value of the shares which it, the plaintiff, purchased by issuing three additional tranches of shares to other parties called the July 2011 Share Issue, December 2012 Share Issue and March 2016 Share Issue, respectively. No allegations of wrongdoing are made by the plaintiff against the second defendant, but the plaintiff seeks relief against the first and second defendants, relevantly for the purposes of this application, arising out of the March 2016 Share Issue, in which the first defendant issued to the second defendant 76 million shares at $0.01 per share for a total of $76,000. It seeks, among other relief, a declaration that the March 2016 Share Issue was invalid, void and of no effect or an order that the first defendant purchase the shares of the second defendant for $152,000. Similar allegations are made in respect of shares issued to the first defendant. The defendants, including the second defendant, deny that the issuing of the shares was oppressive or otherwise wrong or improper, and say that the terms by which the plaintiff was offered, and agreed to purchase, its shares provided for, or permitted the issuing of, additional shares, including the March 2016 Share Issue.
10 In substance, the plaintiff alleges that, but for what it says was the improper issuance of the three tranches of shares, its shares would be worth between 0.8% and 0.9% of the value of the land, not the current value (approximately 0.3% of the value of the land).
11 The plaintiff is the trustee of the Guildford Unit Trust. Ms Ngo and her husband Mr Tran hold their units in the Guildford Unit Trust through the T&N Family Trust, of which they are both trustees and discretionary beneficiaries. The only assets held by the plaintiff in its capacity as trustee of the Guildford Unit Trust are its shares in the first defendant. The net assets of the Guildford Unit Trust are $2. The most recent balance sheet of the plaintiff, which is dated 31 January 2018, shows net liabilities of $7,745.
12 Senior Counsel for the plaintiff, Mr Evans QC, agreed that the evidence filed with respect to this application, including a declaration signed by Ms Ngo, revealed that Mr Tran and Ms Ngo “did, and still do, control assets in excess of $2.5 million which means that they are entitled to the benefit of the sophisticated investor exception [in s 708(8)(d) of the Corporations Act 2001 (Cth)].” It was also accepted that Mr Tran and Ms Ngo “stand behind” the plaintiff and will benefit from the litigation if it is successful, because they are the ultimate beneficiaries of the Guildford Unit Trust.
13 I turn now to consider the discretionary matters in respect of which the parties made submissions.
14 First, the second defendant submits that a critical matter in favour of making an order for the provision of security is that the plaintiff has declined to adduce any evidence about the financial position of Ms Ngo and Mr Tran (being the persons who stand behind the plaintiff, and who will benefit from the litigation if it is successful). In that regard, counsel for the second defendant, Mr Northrop, relied on this well-known passage from the judgment of the Full Court in Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4:
The principal matter relied upon by counsel for the appellant in order to persuade us to a different conclusion was that the question of the ability of those behind the company to finance the litigation had not been the subject of evidence or argument before the primary judge. In his submission it was for the respondent to raise that matter in support of its application for security of costs. If it did not, it was not open to the judge to take into account any considerations other than the impecuniosity of the appellant and the question whether, if an order for security were made, the litigation would be stifled. We rejected this submission.
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.
15 Mr Evans said that he had nothing to say in response to Mr Northrop’s submission, and that his instructions are that Ms Ngo and Mr Tran, in fact, control assets in excess of $2.5 million.
16 Mr Northrop submitted, that being so, that the case for an order to be made for the provision of security is a strong one because the evidence establishes, and the plaintiff concedes that (1) the plaintiff has no assets to meet an order for costs; (2) those standing behind the plaintiff who stand to gain from any fruits of success in the litigation do have assets and can provide security; and (3) they have declined to adduce any evidence of the type that the Full Court in Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 said was “an essential part of the case of a company seeking to resist an order for security”.
17 The plaintiff resisted the application for security. First, it contended:
(1) there is a very substantial overlap between what is sought to be raised positively, or by way of defence, by the second defendant and the other defendants (principally, the first defendant), and that only one of the six complaints made in the Amended Statement of Claim in respect of the conduct of the first defendant concerns or affects the second defendant (the March 2016 Share Issue);
(2) although the second defendant is entitled to separate legal representation, it has a complete identity of interest with the first defendant with respect to the allegations about the March 2016 Share Issue and seeks to defend the claim on the same grounds as the first defendant;
(3) the first defendant’s director, Mr Lao, is the beneficial owner of the shares in the second defendant; and
(4) in those circumstances, if the second defendant were to succeed, it would not recover its costs in full.
18 Secondly, the plaintiff says that it has already provided an undertaking to each of the defendants and to the court that it will not give any charge over the shares or offer them as security. The undertaking, given on 27 June 2017, relevantly includes these terms:
7. The trustee has not and will not give any charge or offer as security any interest that it has in the shares in the first defendant.
…
12. They [being, effectively, Ms Ngo and Ms Tran] will subordinate any claims they may have against the plaintiff or the [Guildford Unit Trust], for loans or otherwise, to any claim by the second defendant’s costs ordered against the plaintiff and, in particular, no demand will be made by the T&N Family Trust for the loan said to be owing to it and they will not seek to prove in any winding-up of the plaintiff any debt awing to the T&N Family Trust unless and until all amounts owing to the second defendant for the payment of any costs awarded have been satisfied.
19 Thirdly, Mr Evans submitted that I should conclude that “the plaintiff is funding this proceeding out of resources other than security or debt borrowed against the shares and that the shares are being effectively made available to meet the second defendant’s costs … in priority to any other claims upon them by the plaintiff.” He further submitted that, even assuming the shares to have a value of 0.3% of the value of the land (an estimate of which was provided to the Court on a confidential basis), that is “a significant amount” and that no order for security should be made in excess of it, even assuming that the second defendant would only share in half of the proceeds of the shares (because the third defendant has the benefit of an identical undertaking).
20 Mr Evans also relied, albeit faintly, on what he said was a delay by the second defendant in bringing the application; that the March 2016 Share Issue is the cause of the plaintiff’s impecuniosity; and that there are “public interest” considerations involved because other shareholders (who make no complaint about the share issues) stand to benefit from any unwinding of the relevant transactions.
21 In my view, the matters relied on by the plaintiff are not compelling. It is true that the second defendant has an identity of interest with the first defendant, but the relief sought against it would directly affect it, and, as the plaintiff conceded, it is entitled to separate representation. The considerations summarised at [17] above go to a quantum, because they implicate the time that will be needed for the second defendant to prepare its case for trial. The undertaking point is of no assistance to the plaintiff because, as Mr Northrop put it, “if the plaintiff does not succeed in the case and then those orders for costs are made against it … the only assets of the plaintiff … would be available to all unsecured creditors which would include the first defendant, assuming it gets costs, the second defendant, the third defendant, the plaintiff’s solicitors to the extent that the moneys had not been borrowed by Ms Ngo and her husband in order to fund those solicitors.” Further, as Mr Northrop submitted, “all of this is unreal because there is a concession made by the plaintiff that if an order for costs is made then it’s likely to be unable to pay those costs.” I agree.
22 As to the other matters of supposed delay and the public interest, I am not persuaded that those considerations are of much significance in this case. As for the suggestion that the March 2016 Share Issue was the cause of the plaintiff’s impecuniosity, there is no evidence to support that suggestion.
23 In my view, the second defendant correctly identifies the critical considerations in this case, (being the impecuniosity of the plaintiff, the lack of evidence regarding the financial position of those who stand behind it and the failure of the undertaking to provide meaningful security) which means that the discretion to order security should be exercised in the second defendant’s favour.
24 As to quantum, security is generally not ordered on the level of full indemnity: Virk Pty Ltd v Yum! Restaurants Australia Pty Ltd [2016] FCA 1468 at [13]. The second defendant did not contend otherwise. It is now thought, since the second defendant’s costs estimate was prepared, that the trial will take more like two than four weeks, because the parties have agreed that evidence will be led by affidavit, and not viva voce. But that being so, presumably more expense will be incurred preparing affidavits that is not part of the second defendant’s costs estimate. The second defendant seeks over $500,000 in costs to the first day of trial. Taking into account the nature of the case pleaded against the second defendant, its role in the case as a whole, its alignment of interest with the first defendant, it seems to me, doing the best that I can, that the amount fixed by the Registrar, namely $150,000, is the appropriate amount of security to order in this case.
25 Accordingly, I will order as follows:
(1) The plaintiff’s application dated 17 April 2018 to review Registrar Luxton’s decision dated 29 March 2018 be dismissed.
(2) The plaintiff pay the second defendant’s costs of the application.
I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Callaghan. |
