Federal Court of Australia

Chief Disruption Officer Pty Ltd as Trustee for the McDonald Family Trust v Michel, in the matter of Laava ID Pty Ltd [2022] FCA 148

ORDERS

THE COURT ORDERS THAT:

Rule 30.01 Application

1.    The plaintiffs’ application in paragraph 5 of the Interlocutory Process dated 3 February 2022 for an order pursuant to r 30.01 of the Federal Court Rules 2011 (Cth) is refused.

2.    The plaintiffs are to pay the first to fifth defendants’ costs of that application.

First to Fourth Defendants’ Application for security for costs

3.    The first plaintiff is to provide security for the first to fourth defendants’ costs of and incidental to this proceeding in the amount of $275,000 (1-4D Security Amount).

4.    The 1-4D Security Amount be provided by an irrevocable bank guarantee issued by an Australian bank in favour of the first to fourth defendants, or by payment into the Court, by 4 March 2022.

5.    In the event that the 1-4D Security Amount is not provided in accordance with orders 3 and 4, the proceeding be stayed as against the first to fourth defendants until such security is provided.

6.    Liberty is reserved to the first to fourth defendants to apply for further security.

7.    The first plaintiff is to pay the costs of the first to fourth defendants of and incidental to the Interlocutory Process filed by the first to fourth defendants and dated 11 February 2022.

Fifth Defendant’s Application for security for costs

8.    The first plaintiff is to provide security for the fifth defendant’s costs of and incidental to this proceeding in the amount of $200,000 (5D Security Amount).

9.    The 5D Security Amount be provided by an irrevocable bank guarantee issued by an Australian bank in favour of the fifth defendant, or by payment into the Court, by 4 March 2022.

10.    In the event that the 5D Security Amount is not provided in accordance with orders 8 and 9, the proceeding be stayed as against the fifth defendant until such security is provided.

11.    Liberty is reserved to the fifth defendant to apply for further security.

12.    The first plaintiff is to pay the costs of the fifth defendant of and incidental to the Interlocutory Process filed by the fifth defendant and dated 11 February 2022.

Sixth, Seventh and Ninth Defendants’ Application for security for costs

13.    The first plaintiff is to provide security for the sixth, seventh and ninth defendants’ costs of and incidental to this proceeding in the amount of $165,000 (679D Security Amount).

14.    The 679D Security Amount be provided by an irrevocable bank guarantee issued by an Australian bank in favour of the sixth, seventh and ninth defendants, or by payment into the Court, by 4 March 2022.

15.    In the event that the 679D Security Amount is not provided in accordance with orders 13 and 14, the proceeding be stayed as against the sixth, seventh and ninth defendants until such security is provided.

16.    Liberty is reserved to the sixth, seventh and ninth defendants to apply for further security.

17.    The first plaintiff is to pay the costs of the sixth, seventh and ninth defendants of the Interlocutory Process filed by the sixth, seventh and ninth defendants dated 17 February 2022.

Eighth Defendant’s Application for security for costs

18.    The first plaintiff is to provide security for the eighth defendant’s costs of and incidental to this proceeding in the amount of $56,307.50 (8D Security Amount).

19.    The 8D Security Amount be provided by an irrevocable bank guarantee issued by an Australian bank in favour of the eighth defendant, or by payment into the Court, by 4 March 2022.

20.    In the event that the 8D Security Amount is not provided in accordance with orders 18 and 19, the proceeding be stayed as against the eighth defendant until such security is provided.

21.    Liberty is reserved to the eighth defendant to apply for further security.

22.    The first plaintiff is to pay the costs of the eighth defendant of and incidental to the Interlocutory Application filed by the eighth defendant and dated 18 February 2022.

Costs of amendments to the Originating Process and Points of Claim

23.    The plaintiffs are to pay the fifth defendant’s costs thrown away by the amendments to the Originating Process and the Points of Claim.

Discovery

24.    The first to fourth defendants are to provide discovery of documents in the following category:

(a)    Documents recording the remuneration or income of the first defendant from Watt Solutions from 6 March 2017 to 30 March 2018.

Future conduct

25.    The plaintiffs have leave to file and serve any application for the appointment of a Court expert pursuant to r 23.01 of the Federal Court Rules 2011, with an affidavit and an outline of submissions in support thereof, by 28 February 2022.

26.    If the plaintiffs exercise the leave in order 25, then the parties are to liaise with the Associate to Goodman J to fix a case management hearing at the earliest opportunity after 28 February 2022.

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

REASONS FOR JUDGMENT

GOODMAN J

INTRODUCTION

1    This proceeding concerns allegations of oppressive conduct of the affairs of the fifth defendant and is set down for final hearing for four days commencing on 8 March 2022.

2    This judgment concerns interlocutory applications pursuant to which:

(1)    the plaintiffs seek an order pursuant to r 30.01 of the Federal Court Rules 2011 (Cth) for three questions to be determined after the determination of other issues in the proceeding;

(2)    each of the defendants seeks an order that the first plaintiff, Chief Disruption Officer Pty Ltd as trustee for the McDonald Family Trust, provide security for their costs in the amounts specified in their interlocutory processes;

(3)    the fifth defendant seeks its costs thrown away by reason of amendments made by the plaintiffs to their Originating Process and Points of Claim; and

(4)    the plaintiff seeks an order for discovery of a disputed category of documents, which order is resisted by the first to fourth defendants.

BACKGROUND

3    On 5 November 2021 the plaintiffs filed an Originating Process, which sought various species of urgent interlocutory relief and final relief.

4    On that day, Yates J made orders for the Originating Process to be returnable instanter; for the service of the Originating Process and evidence; and for the proceeding to be listed for case management on 9 November 2021.

5    On 9 November 2021, his Honour noted undertakings given by the first, second and fifth defendants that they would not take certain actions with respect to a Shareholders Deed and the issue of options or shares, and a cross-undertaking in the form of the usual undertaking as to damages given by the plaintiffs. His Honour also made interlocutory orders including setting down the plaintiffs’ application for interlocutory relief for hearing on 19 November 2021.

6    On 17 November 2021, the first plaintiff produced documents as to its financial position in answer to a notice to produce.

7    On 19 November 2021, I made orders by consent resolving the plaintiffs’ interlocutory application on the basis of undertakings given by the first to fifth defendants. The orders included an order listing the matter for final hearing commencing 8 March 2022 with an estimate of three to four days and a timetable for the preparation of the matter for hearing on an urgent basis. That timetable included:

(1)    orders for the filing of Points of Claim by 3 December 2021 and Points of Defence by 10 December 2021;

(2)    an order that the parties attend a mediation in the week commencing 13 December 2021;

(3)    orders that the plaintiffs file and serve any further evidence upon which they sought to rely by 13 January 2022 and the defendants file any further evidence by 28 January 2022; and

(4)    orders that categories of discovery be agreed by 31 January 2022 and for discovery of documents responding to those categories to occur by 4 February 2022.

8    On 10 December 2021, the plaintiffs filed their Points of Claim. In broad terms and at the risk of over-simplification, the plaintiffs’ case as pleaded was:

(1)    the fifth defendant was incorporated as part of a tripartite venture between the second plaintiff and the first and second defendants on the basis that they would have equal shareholdings, voting rights and representation on the board of directors;

(2)    the initial directors of the fifth defendant were the second plaintiff and the first and second defendants;

(3)    the initial shareholders of the fifth defendant were the first plaintiff, the third defendant and the fourth defendant who are associated with the second plaintiff and the first and second defendants respectively;

(4)    subsequently, the second plaintiff resigned as a director;

(5)    the first and second defendants:

(a)    caused the fifth defendant to issue further shares, issue options over shares, enter loan transactions, and issue convertible notes;

(b)    withheld information from the second plaintiff;

(c)    purported to appoint the seventh and ninth defendants as directors of the fifth defendant; and

(6)    such conduct was oppressive within the meaning of s 232 of the Corporations Act 2001 (Cth); in breach of the duties owed by the first and second defendants to the fifth defendant as directors; or unconscionable conduct within the meaning of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth).

9    On 22, 23, 24 December 2021 and 4 January 2022 the parties participated in a mediation which was unsuccessful.

10    On 5 January 2022, the first to fourth defendants filed their Points of Defence.

11    On 14 January 2022, the solicitors for the plaintiffs wrote to the solicitors for the first to fifth defendants foreshadowing the preparation of an Amended Originating Process and Amended Points of Claim.

12    On 15 January 2022, the plaintiffs briefed a new senior counsel, as their former senior counsel was not available to appear at the trial scheduled to commence on 8 March 2022.

13    On 25 January 2022, the plaintiffs’ solicitors provided to the first to fifth defendants’ solicitors a copy of proposed amendments to the Originating Process and Points of Claim, together with a draft interlocutory process and orders, and sought the first to fifth defendants’ consent to the amendments and orders proposed.

14    On 1 and 2 February 2022, the first to fourth defendants and the fifth defendant respectively provided a response indicating their consent to some but not all of the orders sought by the plaintiffs. The consent included consent to the filing of the proposed Amended Originating Process and Amended Points of Claim.

15    On 3 February 2022, the plaintiffs filed an Interlocutory Process seeking orders for leave to file and serve an Amended Originating Process and Amended Points of Claim; an order for the joinder of the sixth to ninth defendants; and the following order pursuant to r 30.01:

5.    An order pursuant to rule 30.01 of the FCR for:

a.    the following questions to be determined after the determination of the other issues:

i.    the computation of the number of shares to be issued as sought in paragraph 15C of the AOP;

ii.    the number of shares and options to be cancelled or restrained from issue, as sought in paragraphs 15A to 16A of the AOP;

iii.    any questions of valuation, were the Court minded to grant any relief that involves the valuation of the Fifth Defendant or its shares;

iv.    the computation of damages; and

v.     whether the Fifth Defendant should be wound up, as sought in paragraph 17 of the AOP.

16    The proposed Amended Points of Claim expanded upon the instances of alleged contravening conduct and added the sixth to ninth defendants as parties. The proposed Amended Originating Process re-cast the relief sought, including the addition of orders for the rescission or setting aside of particular transactions to which the fifth defendant was a party and an order that the fifth defendant offer such shares or options as is appropriate to restore the first plaintiff’s shareholding to a position of parity.

17    On 9 February 2022, the plaintiffs completed the service of their evidence in chief. As noted above, this was due to have occurred by 13 January 2022.

18    On 11 February 2022, the first to fourth defendants and the fifth defendant filed interlocutory processes, seeking orders for the provision of security for costs.

19    On 14 February 2022, at the first return date of the plaintiffs’ Interlocutory Process, I made orders for the joinder of the sixth to ninth defendants; an order granting leave to the plaintiffs to file and serve, on all defendants, the Amended Originating Process and Amended Points of Claim; orders for the filing of Points of Defence to the Amended Points of Claims (with an order that the plaintiffs pay the costs of the first to fourth defendants thrown away by reason of the amendments); orders for the filing of lay evidence; orders concerning discovery; and orders for the filing of evidence in connection with the proposed separate questions sought by the plaintiffs and the security for costs applications filed for the first to fourth and fifth defendants.

20    On that day I listed for hearing on 21 February 2022: the plaintiffs’ application for separate questions; the first to fourth and fifth defendants applications for security for costs; the question whether the plaintiffs should pay the fifth defendants’ costs thrown away by reason of the amendments; the discovery dispute between the plaintiffs and the first to fourth defendants; and any application by the sixth to ninth defendants to vary any orders made on that day. I also made orders for the exchange of opening submissions and the preparation of the court book ahead of the hearing scheduled for 8 March 2022.

21    On 18 February 2022, the sixth, seventh and ninth defendants, and separately the eighth defendant, filed applications for security for costs.

THE APPLICATON FOR THE DETERMINATION OF SEPARATE QUESTIONS

22    At the hearing of the plaintiffs’ application for a determination of separate questions, the plaintiffs narrowed the form of order sought. As varied, the order sought by the plaintiffs is:

5.    An order pursuant to rule 30.01 of the FCR for:

a.    the following questions to be determined after the determination of the other issues:

…

iii.    any questions of valuation, were the Court minded to grant any relief that involves the valuation of the Fifth Defendant or its shares;

iv.    the computation of damages; and

v.     whether the Fifth Defendant should be wound up, as sought in paragraph 17 of the AOP.

23    I will refer to the questions in (iii), (iv) and (v) as the proposed separate questions.

24    This application is opposed by the first to fifth defendants. The sixth to ninth defendants neither consent to, nor oppose, it.

25    Rule 30.01 provides:

(1)  A party may apply to the Court for an order that a question arising in the proceeding be heard separately from any other questions.

(2)  The application must be made before a date is fixed for trial of the proceeding.

26    Sub rule 30.01(2) provides that an application for the separation of a question must be made before a date is fixed for the trial of the proceeding. As noted above, the date for the trial was fixed on 19 November 2021 and the Interlocutory Process was filed on 3 February 2022, with the consequence that the plaintiffs did not comply with this sub-rule.

27    The Court has power to dispense with this requirement: r 1.34. It is convenient to consider the question of dispensation and the substantive application for the separation of the proposed separate questions together, and I do so below.

28    The Court’s discretions are to be exercised in a manner which best promotes the overarching purpose of facilitating the just resolution of disputes according to law as quickly, inexpensively and efficiently as possible: s 37M(1) of the Federal Court of Australia Act 1976 (Cth). As French J (as his Honour then was) stated in Olbers v Commonwealth of Australia (No 3) [2003] FCA 651 at [8], the overarching consideration informing the exercise of the discretion to order the questions be heard separately is efficient case management.

29    For the reasons set out below I am not satisfied that the bifurcation of the issues in the manner suggested by the plaintiffs would reflect efficient case management.

30    As noted above, the proceeding has been set down for hearing on an expedited basis and was set down on the (at least implicit) basis that all issues would be determined together. The undertakings given by the first to fifth defendants will expire on 11 March 2022. The first to fifth defendants wish to have the entirety of the hearing dealt with between 8 and 11 March 2022. The sixth to ninth defendants, who were joined as parties on 14 February 2022 and became subject to orders made that day requiring them to act quickly to prepare the matter for hearing, have not sought any variation of those orders.

31    Further, whilst an uncoupling of the proposed separate questions may produce the result that it is unnecessary to determine those questions, this is but a possibility and against this is to be balanced the real possibility that those questions will still require determination and this will involve additional court resources and additional legal costs. As French J stated in Olbers at [31]:

… any prophesied economies are to be balanced against the fragmentation of the trial of the issue.  Experience in the courts over many years has demonstrated that fragmentation of proceedings rarely result in any saving of time in the long run and that projections as to costs savings are likely at best to be speculative. 

32    Similarly, in Tepko Pty Ltd v Water Board [2001] HCA 19; (2001) 206 CLR 1 at 55 [168], Kirby and Callinan JJ observed that “the attractions of trials of issues rather than of cases in their totality are often more chimerical than real”. That is not to say that in an appropriate case such an order should not be made: see Doyle’s Farm Produce Pt Ltd v Murray Darling Basin Authority (No 2) [2021] NSWCA 246; (2021) 395 ALR 131 at 133 [6] per Bell P.

33    It appears that a significant catalyst for the application is the unpreparedness of the plaintiffs to deal with the proposed separate questions at the hearing. In this regard, the evidence served by the plaintiffs in the proceeding does not include valuation evidence and the plaintiffs indicated in their submissions that it would not be possible to have such evidence prepared in time for the hearing.

34    The plaintiffs suggested in submissions that they had been unable to obtain evidence on the issue of valuation pending the provision of discovery. However, there is no evidence to this effect, including evidence from a valuer that particular information is necessary. Further, the plaintiffs agreed to the orders for discovery made on 19 November 2021 which required discovery to have been completed by 4 February 2022 and made no application to vary those orders prior to their Interlocutory Process dated 3 February 2022.

35    The plaintiffs also submitted that the nature of the valuation exercise to be undertaken is dependent upon the Court’s findings concerning the impugned share and option issues. In this regard, it was submitted that the number of shares held by each of the shareholders would be a product of the Court’s findings concerning the impugned share and option issues and that this would affect the value of each shareholder’s shareholding. Whilst it may be accepted that the total number of shares held by each shareholder affects the total value of their shareholding, it does not follow that valuation evidence needs to await the Court’s determination.

36    It would be open to a valuer to ascribe a total value to all of the shares in the fifth defendant and, from that total value, to deduce the value of an individual shareholder’s shareholdings as a matter of simple mathematics. To the extent that it might be suggested that the value of a particular shareholder’s shareholding is not commensurate with the number of shares they hold (for example, if the valuer were to opine that there is a control premium) this should be able to be accommodated by the provision of appropriate assumptions in the instructions provided to the valuer. Similarly, to the extent that the plaintiffs consider that the value of an individual shareholder’s shareholdings may depend upon the outcome of the Court’s determination as to the validity of particular share or option issues, this may be addressed by the formulation of appropriate assumptions as to the possible permutations and combinations.

37    There is no evidence that a valuer has indicated that he or she would be unable to opine on issues of value prior to a determination of the Court as to the respective shareholdings of the particular shareholders.

38    The plaintiffs also submitted that the proposed hearing time of four days would be insufficient if valuation evidence were to be adduced at that hearing. However, this submission is academic in circumstances where the plaintiffs have not prepared valuation evidence.

39    Finally, and of particular relevance to the question of dispensation from compliance with sub - rule 30.01(2) is that the plaintiffs provided no explanation for their failure to comply. As senior counsel for the plaintiffs appropriately and fairly conceded, there was no such explanation.

40    For the above reasons, the application in paragraph 5 of the Interlocutory Process dated 3 February 2022 is refused.

the applications for security for costs

41    As noted above, each of the defendants seeks an order that the first plaintiff provide security for their costs. Such an order is sought pursuant to one or more of s 56 of the Act, r 19.01 of the Rules, s 1335 of the Corporations Act and the inherent jurisdiction of the Court. No defendant seeks an order that the second plaintiff provide security.

Principles

42    The applicable principles were conveniently summarised by Allsop CJ in All Class Insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Australia Limited [2020] FCA 840 at [40]-[44]:

40    Where the applicant is a corporation, the Court is empowered to order security for costs pursuant to s 1335 of the Corporations Act 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”. Once this threshold is met, the Court will turn to the matters relevant to the exercise of its discretion to order security for costs: Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65; 98 ACSR 301.

41    Section 56 of the Federal Court of Australia Act does not expressly impose any threshold to be met before the Court considers the various discretionary matters. However, the applicant’s inability to pay the costs of the respondent remains an important consideration in the exercise of the Court’s discretion.

42    The Court’s discretion to require the provision of security for costs is broad and the factors informing the exercise of that discretion cannot be stated exhaustively. The only limitation is that the discretion be exercised judicially: Bell Wholesale Co Ltd v Gates Export Corporation [1984] FCAFC 29; 2 FCR 1 at 3. The matter which lies at the heart of the discretion is one of fairness, both in terms of whether security should be granted, and if so, in what amount: Madgwick v Kelly [2013] FCAFC 61; 212 FCR 1 at 21 [92]. The Court aims to achieve a “balance between ensuring that adequate and fair protection is provided to the defendants, and avoiding injustice to an impecunious plaintiff by unnecessarily shutting it out or prejudicing it in the conduct of the proceedings”: Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 at 470 (Giles J).

43    The Court’s discretion should be exercised having regard to all of the circumstances of the case (see Merribee Pastoral Industries Pty Ltd v Australia and New Zealand Banking Group Ltd [1998] HCA 41; 193 CLR 502 at 513 [26] (Kirby J)). There are a number of well-established factors relevant to the Court’s exercise. These include (see KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; 56 FCR 189 at 197–198 per Beazley J): whether the application for security for costs has been brought promptly; the strength and bona fides of the applicant’s case; whether the applicant’s impecuniosity was caused by the respondent’s conduct subject of the claim; whether the respondent’s application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate; and whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security.

44    An additional factor to add to this list is whether there are aspects of public interest which weigh in the balance against the making of an order (see Equity Access Ltd v Westpac Banking Corporation [1989] FCA 520; ATPR 40-972 at 50,635 per Hill J).

43    In circumstances where an order for security for costs is sought against a corporate plaintiff such as the first plaintiff, it is convenient to approach the task by reference to the three issues identified by Brereton J in Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 at [5], where his Honour stated:

On an application for security for costs under s 1335 or under r 42.21(1)(d), three issues generally arise: the first is whether the ground referred to in the section or the rule is established; the second is whether, if the ground has been established, as a matter of discretion an order for security should be made; and the third is the quantum of and terms upon which any order for security is to be made.

Is there credible testimony that demonstrates that the first plaintiff is unable to pay the defendants’ costs?

44    The amounts of security sought by the defendants and the amounts which the first plaintiff submitted were reasonable are summarised as follows:

45    The first plaintiff brings this action in its capacity as trustee.

46    The evidence establishes that it holds, in its capacity as trustee, assets including an investment portfolio with a value exceeding $7.5 million (including $834,215 in cash) but holds no assets in any other capacity.

47    It is appropriate to have regard to the practical difficulties which the defendants would face in enforcing an order for costs against the first plaintiff where its assets are held on trust and unless some step has been taken to alleviate those difficulties it is reasonable and just to treat the first plaintiff as if it were without assets to meet such a liability: Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) 7 ATPR 40-584 at 46,729 per Smithers J: ACN 105 921 962 Pty Ltd v Wiggett [2012] NSWSC 1526 at [10] per Black J. For the reasons discussed below at [70]-[80] with respect to the undertakings proffered by the plaintiffs, I am not satisfied that those difficulties have been alleviated.

48    Taking into account the matters set out above, I am satisfied that there is credible evidence that the first plaintiff would be unable to pay the defendants’ costs, even using the figures suggested by the first plaintiff as reasonable.

Discretionary considerations

Risk that the defendants’ costs will not be paid

49    For the reasons discussed above, there is a real risk that any costs order in favour of the defendants against the first plaintiff will not be satisfied.

Delay

50    The plaintiffs submitted that an important factor informing the exercise of the discretion is the delay on the part of the first to fifth defendants in making their applications for security for costs, calling in aid the longstanding and important principle that applications for security for costs must be brought promptly: Southern Cross Exploration v Fire NL & All Risks Insurance Co Ltd (1985) 1 NSWLR 114, 123 and KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189, 197. The plaintiffs point out that they produced documents as to the financial position of the first plaintiff as early as 17 November 2021 in answer to a notice to produce and that the applications for security for costs of the first to fourth defendants and the fifth defendant were not filed until 1 and 2 February 2022 respectively.

51    The first to fifth defendants each submitted that they acted promptly after service of the proposed Amended Originating Process and Amended Points of Claim and that in any event there is no evidence suggesting that the plaintiffs are prejudiced in any way by the delay or that they would have acted differently had the applications for the provision of security for costs been made earlier.

52    It is well established that applications for security for costs should be brought at the earliest opportunity. However, the effect of that delay and its importance in the exercise of the discretion depend upon the particular circumstances of the case at hand. In Wiggett, Black J said at [19]:

… An application for security for costs should be brought promptly, and that has plainly not occurred in this case: Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd (1984) 1 FCR 311; 8 ACLR 818 at 820; Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 514. Delay in bringing a security for costs application will have particular significance where a plaintiff has spent substantial monies on the conduct of the litigation, which would be wasted if the proceedings were brought to an end because security cannot be provided: Litmus Australia Pty Ltd (in liq) v Canty [2007] NSWSC 670; (2007) 25 ACLC 1141 at [26]. However, the significance of delay is reduced where it is not suggested that the plaintiffs or those standing behind it would be unable to provide the required security from its or their own resources, so there is no likelihood that the proceedings would be stultified by an order for security. I would nonetheless give that delay some weight in the exercise of the court's discretion.

53    In the present circumstances, there is no suggestion that the conduct of the proceeding would have changed in any way if the applications of the first to fourth and fifth defendants had been brought in November or December 2021. Accordingly, the delay is a factor that I take into account, but it is of little weight.

Strength and bona fides of the first plaintiff’s case

54    The strength and bona fides of the first plaintiff’s case are matters which I regard as neutral. The general principle is that the Court should not embark upon a detailed consideration of the merits of a plaintiff’s case where, as in the present case, it is evident that the claims it makes are made bona fide and are arguable: see Fiduciary Ltd v Morningstar Research Ltd [2004] NSWCA 664; (2004) 208 ALR 564 at 574 [37]-[38] per Austin J and the authorities there cited; Hill v Zhang [2019] FCA 1562 at [40] per Griffiths J.

The second plaintiff as a co-plaintiff

55    The plaintiffs submit that the Court should take into account the presence of the second plaintiff as a co-plaintiff and that he has some liability to costs. The plaintiffs submitted, in reliance upon Fiduciary at [62] and Hill at [35]-[38], that his presence is to be taken into account in considering whether security should be ordered but it is not an absolute bar to the ordering of security.

56    The presence of the second plaintiff as a co-plaintiff is a matter to be taken into account. However, it is a matter of less weight in circumstances where it appears that all of the causes of action in the Amended Points of Claim, with the possible exception of unconscionable conduct, are propounded on behalf of the first plaintiff. As the defendants submitted, there is a question as to whether the second plaintiff should be a party to the proceeding in circumstances where it is not a shareholder of the fifth defendant.

57    For all of the above reasons, and in particular the risk that a costs order against the plaintiffs will not be met, I am satisfied that an order for the provision of security for costs should be made.

Quantum and Terms

58    Thus it is necessary to consider the quantum of such security and its terms.

Quantum

Generally

59    It is well established that the Court should take a broad brush approach to the amount to be ordered as security for costs. It is also well established that it is not the purpose of such an order to provide any defendant with a full indemnity for the costs that it may incur.

60    The plaintiffs submitted that aspects of the costs estimates should be discounted because of a lack of detail or because some of the items were excessive or disproportionate. Consistent with the broad brush approach to be adopted, it is not necessary to delve into the minutiae of the particular costs estimates. The estimates were provided by experienced practitioners and were for the most part unremarkable. I also note that the plaintiffs did not adduce any contrary evidence.

61    The plaintiffs submitted that any order for the provision of security for costs in favour of the first to fifth defendants should exclude past costs, on the basis of their delay in making their applications. For the reasons set out above at [50] to [53] with respect to delay, I do not accept that submission.

The First to Fourth Defendants

62    The first to fourth defendants have incurred costs to date of $148,234 (inclusive of GST). Their solicitor estimates that the future costs will be $167,997-$403,507. The midpoint of the range of estimated future costs is $285,752 which, when added to the past costs, provides a total of $433,986. In my view, it is appropriate to discount this amount so as to exclude for GST in circumstances where there is no evidence as to the entitlement or otherwise of these defendants (or indeed any of the defendants) to a credit for GST. It is also appropriate to apply a discount on the basis that not all party/party costs are recoverable, but recognising that in the usual event most of counsel’s fees are recoverable. In these circumstances, and taking a broad brush approach, I will apply a further discount of 30%, producing an amount of $276,173, which I will round to $275,000.

Fifth Defendant

63    The plaintiffs submitted that no provision should be made as security for the fifth defendant’s costs, on the basis that the fifth defendant should take a passive role in the proceeding. I do not accept that submission. I am not satisfied that the fifth defendant has no independent role to play in the proceeding, particularly in view of the relief now sought. Of course it remains open to the plaintiffs to maintain their argument for the purposes of the oppression case or on an assessment of costs but there is no present reason to deny the fifth defendant the benefit of an order for security for costs.

64    The evidence establishes that the fifth defendant has incurred costs to date of $97,655.83 (exclusive of GST) and anticipates further costs of $299,450 (exclusive of GST), a total of $397,105.83 (exclusive of GST).

65    The fifth defendant seeks security in the amount of $277,974.08, being 70% of $397,105.83. In my view this figure is excessive in the context of the likely extent of the fifth defendant’s involvement in the proceeding, and by comparison to the position of the first to fourth defendants. An appropriate amount of security is $200,000.

Sixth, Seventh and Ninth Defendants

66    The sixth, seventh and ninth defendants estimate their future costs to be in the range of $222,326-$307,332 (inclusive of GST). The midpoint of this range is $264,829. The sixth, seventh and ninth defendants seek an order for the provision of security in amount of $185,030.25, being 70% of this midpoint.

67    In my view, this figure needs to be discounted further so as to exclude GST. That calculation produces a figure of $168,209 which I will round to $165,000.

Eighth Defendant

68    The first plaintiff and the eighth defendant agreed on a figure of $56,307.50.

69    Thus the security to be provided is:

(1)    $275,000 for the first to fourth defendants;

(2)    $200,000 for the fifth defendant;

(3)    $165,000 for the seventh, eighth and ninth defendants; and

(4)    $56,307.50 for the eighth defendant,

being a total of $696,307.50.

The Form of the Security

70    Each of the defendants seeks security by way of payment into Court or the provision of a bank guarantee.

71    The plaintiffs submitted that the Court should not make such an order in circumstances where the defendants would have sufficient protection pursuant to undertakings proffered by them.

First plaintiff’s undertakings

72    The first plaintiff proffered the following undertaking:

1.    The first plaintiff undertakes to the Court that, if an order is made that the first plaintiff pay part or all of the costs of the defendants in these proceedings, the first plaintiff will do all things as are reasonably necessary to enable the first plaintiff to enforce its right of indemnity out of the assets for the time being comprising the McDonald Smith Family Trust.

2.    The first plaintiff undertakes to the Court that, until further order of the Court, it will not dispose of, deal with, encumber, or otherwise in any way diminish, the cash sum of $310,036, which is presently held by the first trustee as trustee for the McDonald Smith Family Trust on account with Credit Suisse (the Asset).

3.    The first plaintiff undertakes to the Court that, until further order of the Court, it will not make any distributions from the McDonald Smith Family Trust that have the effect that the total unencumbered value of the Asset falls beneath $310,036.

4.    The first plaintiff undertakes to the Court that, until further order of the Court, it will not borrow any funds in its capacity as trustee.

5.    The first plaintiff undertakes to the Court that it is authorised by each of the beneficiaries of the McDonald Smith Family Trust named in Schedule 1 of the Trust Deed to make the above undertakings.

6.    The second plaintiff undertakes to the Court that he is authorised by himself and by Ms Smith to undertake that the Asset shall be made available to meet any cost order made against the plaintiff and that he and Ms Smith will not replace the first plaintiff as trustee.

73    During the hearing the first plaintiff:

(1)    indicated that the cash sum of $310,036 referred to in paragraphs 2 and 3 could be increased to a limit of $834,215 (corresponding to the cash available in the first plaintiff’s investment portfolio);

(2)    proffered a further undertaking:

The First Plaintiff undertakes to the Court that:

(a)    Until any Costs Order made is satisfied, it will not resign as trustee of the McDonald Smith Family Trust;

(b)    Until any Costs Order made is satisfied, it will not seek to amend the Trust Deed of the McDonald Smith Family Trust.

The expression “Costs Order” means any order in the proceedings that the First Plaintiff pay the costs of the Defendants (or any of them)

74    The form of the security to be provided is a matter in the discretion of the Court. Whilst the payment of an amount into Court or the provision of a bank guarantee may be the most common form of security, other forms (including an undertaking) may be acceptable, depending upon the facts of the particular case: Firexpress Australia Pty Ltd v Imago Exchange Pty Ltd [2022] FCA 129 at [47], [59] per Markovic J.

75    In considering an undertaking proffered by a plaintiff, the Court must be satisfied that the undertaking is adequate in that it satisfies the protective object of an order for security for costs, namely to provide a fund or asset against which a successful defendant can readily enforce an order for costs against the plaintiff: see Commissioner of Taxation v Vasiliades [2016] FCAFC 170 at [72] per Kenny and Edelman JJ; Adeva Home Solutions Pty Ltd v Queensland Motorways Management Pty Ltd [2021] QCA 198 at [18], [22], [24(a)] per Bond JA (Fraser and Wilson JJA agreeing); DIF III Global Co-Investment Fund, LP v BBLP LLC [2016] VSC 401 at [38], [40(3)], [63] per Hargrave J; Firexpress at [31], [37], [46].

76    The defendants made various submissions as to why the proposed undertakings were inadequate. It is not necessary to traverse all of those submissions, particularly as some of them fell away as the plaintiffs amended the proposed undertaking during and after the hearing. It is sufficient to indicate that there are aspects of the proposed undertakings which cause me concern and prevent me from being satisfied that the proposed undertakings are an adequate means of providing a fund or asset against which the defendants or some of them could readily enforce a costs order against the first plaintiff. In particular, the position of the beneficiaries is not clear. The first plaintiff in paragraph 5 of its proposed undertaking undertakes that it is authorised by each of the beneficiaries named in schedule 1 of the trust deed to make the undertakings in paragraphs 1 to 4. The beneficiaries named in schedule 1 are the second plaintiff and his wife, Ms Smith. However, the terms of the trust deed provide for classes of other beneficiaries (for example, their relatives). Thus, it is not clear that all of the beneficiaries authorise the proposed undertaking. Further, Ms Smith has not provided any evidence that she authorises the first plaintiff to provide the undertakings. There is no evidence from her and she has not provided an undertaking. In these circumstances there remains a possibility that a dispute between the beneficiaries of the trust and the first plaintiff as to the giving of the undertakings will become an obstacle to the ready recovery by the defendants of their costs.

The second plaintiff’s undertaking

77    During the hearing of the application the plaintiffs also proffered an undertaking on the part of the second plaintiff in the following form:

The Second Plaintiff undertakes to the Court that he will consent to an order that he be liable for such costs as the First Plaintiff is adjudged liable to pay the Defendants, or any of them.

78    In order to consider the value of this undertaking, it is necessary to consider the second plaintiff’s asset position. The evidence establishes that the only asset of the second plaintiff sufficient to pay costs in the order of $696,307.50 is a bank account with a balance in the order of $1 million which is owned jointly by the second plaintiff and his wife, Ms Smith.

79    The undertaking is an inadequate form of security as it is open to Ms Smith to withdraw funds from that account at any time in an amount sufficient to remove any protection for the defendants. Again, Ms Smith has provided no undertaking to the Court and there is no evidence from her.

80    I am not satisfied that any of the undertakings proffered by the plaintiffs is an adequate form of security. Security should be provided by payment into Court or by irrevocable bank guarantee.

the fifth defendant’s costs thrown away by reason of the amendments to the originating process and the points of claim

81    As noted above, I made an order on 14 February 2022 for the plaintiffs to pay the costs of the first to fourth defendants thrown away by reason of the amendments to the Originating Process and the Points of Claim.

82    That order was made by consent. There was no such agreement with respect to the fifth defendant’s costs. The fifth defendant seeks an order in the same terms.

83    The fifth defendant submitted that the usual price of an amendment is an order that the amending party pay the opposing party’s costs thrown away by reason of the amendment (and where appropriate, costs of the application to amend); there is nothing to displace the usual position, particularly in circumstances where the amendments have had the effect of completely changing the nature of the claims being made and have strengthened the need for the fifth defendant’s active involvement in the proceeding; and the mere fact that its legal advisers have had to consider, advise upon and respond to the Originating Process and Points of Claim produced costs that are now thrown away.

84    The plaintiffs submitted that expenditure by a company which is the subject of an oppression suit should be limited to the protection of the company’s discrete interests (as opposed to providing support to the majority interests in the form of expenditure of legal costs) and that it was difficult to see that the fifth defendant had any discrete interest to defend. They submitted that the proceeding in substance relates to the way in which the first to fourth defendants had conducted the affairs of the fifth defendant at the expense of the plaintiffs and that it is not appropriate that the fifth defendant play any active role in the proceeding. The plaintiffs also submitted that to the extent that the relief sought will affect third parties, those third parties have been joined and it is not the role of the fifth defendant to represent the interests of those third parties.

85    The plaintiffs also submitted that any order of the kind sought by the fifth defendant should not be made now and should await the conclusion of the hearing at which point more will be known as to the extent to which the fifth defendant needed to play an active role in the proceeding.

86    I will make the order sought by the fifth defendant. I see no reason to depart from the usual position that the price of an amendment is the payment of costs thrown away by that amendment. I am not prepared to find that the fifth defendant has no entitlement to costs, where the relief sought has been amended to include relief which appears to have a direct effect upon the fifth defendant in its own interest. It is also not appropriate to defer the question further.

the discovery dispute

87    The plaintiffs and the first to fourth defendants are at issue with respect to the following category of documents of which the plaintiffs seek discovery:

Documents recording the remuneration or income of [the first defendant] from Watt Solutions from 6 March 2017 to 1 January 2020.

88    The plaintiffs press the category limited to the period 6 March 2017 to 30 March 2018.

89    The first to fourth defendants objected to the above category on the basis of relevance and submitted that the remuneration of the first defendant from Watt Solutions during the specified period did not relate to any pleaded fact in issue.

90    The plaintiffs submitted that the documents sought are relevant to the issue whether the first defendant was contributing to the business of the fifth defendant and this was a matter put in issue by the following paragraphs of the Amended Points of Claim:

28A     As at March 2018, Michel:

a.    was not substantially contributing to the business of [the fifth defendant], and worked in the business part time;

…

29     By March 2018, McDonald had raised concerns about Michel’s conduct in the business of [the fifth defendant] with Surtees, including that:

a.     Michel was not contributing to the business of [the fifth defendant] and worked in the business rarely part time;

91    The first to fourth defendants submitted that it is unclear how the documents sought could rationally inform the question of whether Mr Michel was contributing to the fifth defendant’s business.

92    In my view, the documents sought are sufficiently relevant to the matters pleaded in paragraphs 28A and 29. In circumstances where the first to fourth defendants have not suggested that production of the documents would be burdensome, I will order that such discovery be provided.

APPOINTMENT OF A COURT EXPERT

93    During the hearing, senior counsel for the fifth defendant floated the idea of the appointment of a Court expert to determine valuation issues. In submissions filed after the hearing, the plaintiffs indicated that they have identified an expert who would be prepared to act as such an expert. The plaintiffs sought an opportunity to make further submissions and to file and serve an affidavit addressing this issue. In my view the most efficient course would be to allow the plaintiffs to file and serve any application pursuant to r 23.01 of the Rules, together with any affidavit and submissions in support and have a further case management hearing at the earliest opportunity to allow this matter to be addressed.

Associate:

Dated:    25 February 2022

SCHEDULE OF PARTIES