Federal Court of Australia

Auslink Golf Course Pty Limited v Zhongsheng Group Pty Ltd [2023] FCA 397

ORDERS

THE COURT ORDERS THAT:

1.    The plaintiff is to provide security for the costs of the first, third and fourth defendants by payment into Court or by way of an unconditional bank guarantee in a form acceptable to those defendants as follows:

(a)    $100,000 within 28 days of the date of these Orders; and

(b)    $340,000 14 days after the date of the conclusion of any mediation, if unsuccessful, or 12 weeks prior to the commencement of any final hearing, whichever is the earlier.

2.    In the event that the security in Order 1(a) and/or (b) above is not provided within the time specified, the proceeding against the first, third and fourth defendants be stayed until further order.

3.    Liberty to apply on three days’ notice.

4.    The plaintiff is to pay the first, third and fourth defendants’ costs of their interlocutory application filed on 5 July 2022.

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

ORDERS

THE COURT ORDERS THAT:

1.    The plaintiffs are to provide security for the costs of the first, second, third and fourth defendants by payment into Court or by way of an unconditional bank guarantee in a form acceptable to the first, second, third and fourth defendants as follows:

(a)    $100,000 within 28 days of the date of these Orders; and

(b)    $199,000 14 days after the date of the conclusion of any mediation, if unsuccessful, or 12 weeks prior to the commencement of any final hearing, whichever is the earlier.

2.    In the event that the security in Order 1(a) and/or (b) above is not provided within the time specified, the proceeding be stayed until further order.

3.    Liberty to apply on three days’ notice.

4.    The plaintiffs are to pay the first, second, third and fourth defendants’ costs of their interlocutory application filed on 15 June 2022.

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

REASONS FOR JUDGMENT

MARKOVIC J:

1    There are two applications for security for costs before the Court for determination: one filed in proceeding NSD 1030 of 2021 (which I will refer to as the Auslink Proceeding) and one filed in proceeding NSD 253 of 2022 (which I will refer to as the Zhongsheng Proceeding).

2    The Auslink Proceeding is between Auslink Golf Course Pty Limited as plaintiff and Zhongsheng Group Pty Ltd, Zhongsheng Management Pty Ltd, Yun Luo and Jialin Luo as first, second, third and fourth defendants respectively. Zhongsheng Management is in administration and therefore, in the absence of written consent of the administrator or the leave of the Court, Auslink Golf cannot proceed against it: see s 440D of the Corporations Act 2001 (Cth). No application for leave has been made to the Court and I am not aware of any written consent having been provided by the administrator.

3    The Zhongsheng Proceeding is between Zhongsheng and Yun Luo as first and second plaintiffs respectively and Auslink Investment Co Associates Pty Limited, Xi Chen, Hangbi Lin, Auslink Golf, William Wen Bo Wang and WB Legal Pty Limited as first, second, third, fourth, fifth and sixth defendants respectively.

4    The Auslink Proceeding and the Zhongsheng Proceeding are related, are being case managed, and will be heard, together.

5    In the Auslink Proceeding Zhongsheng, Mr Luo and Ms Luo (who I will refer to collectively as the Zhongsheng Parties) seek orders pursuant to r 19.01 of the Federal Court Rules 2011 (Cth) that Auslink Golf provide security for their costs in the amount of $440,325 within 28 days of the making of any order for security by payment into Court or by way of an unconditional bank guarantee from an Australian bank in a form acceptable to them.

6    In the Zhongsheng Proceeding Auslink Investment, Ms Chen, Mr Lin and Auslink Golf (who I will refer to collectively as the Auslink Parties) seek orders that Mr Luo, or alternatively Zhongsheng and Mr Luo, provide security for their costs of the proceeding.

7    I will address each of the applications for security for costs in turn below. Before doing so it is convenient to set out the background to both proceedings and the applicable legal principles.

Background

8    Zhongsheng and Zhongsheng Management were incorporated in 2015. Zhongsheng and Zhongsheng Management respectively were to purchase, and in May 2016 did purchase, the property at 1 Arundel Place, Arundel, Queensland (Property) and the business known as Arundel Hills Country Club (Business) which operated on the Property. The purchase price for the Property and the Business was $13.5 million.

9    Mr Luo and Ms Luo are each 40% shareholders in Zhongsheng and Zhongsheng Management and Auslink Golf holds the remaining 20% of shares in each of those companies.

10    Mr Luo has been a director of Zhongsheng since 25 September 2015 and a director of Zhongsheng Management since 8 June 2017 and Ms Luo has been a director of Zhongsheng since 15 June 2018 and a director of Zhongsheng Management since 22 June 2018. It was not in dispute that Mr Luo and Ms Luo are both resident in the People’s Republic of China (PRC).

11    The current directors of Auslink Investment and Auslink Golf are Ms Chen and Mr Lin. The current shareholders of Auslink Investment are Ms Chen as to 60% and Mr Lin as to 40% and the current shareholders of Auslink Golf are Ms Chen as to 30%, Mr Lin as to 20%, Lingli Ou as to 30% and Yanli Ou as to 20%.

The Auslink Proceeding

12    The Auslink Proceeding was commenced in this Court on 5 October 2021. Auslink Golf seeks relief under s 233 of the Corporations Act against, relevantly, the Zhongsheng Parties. At the time it commenced the Auslink Proceeding, and it seems for some time thereafter, Auslink Golf was unaware of the commencement of the Zhongsheng Proceeding in the Supreme Court of New South Wales (see below).

13    At a very high level, by its amended statement of claim filed in the Auslink Proceeding on 2 May 2022 Auslink Golf alleges that:

(1)    in September 2015 Ms Chen and Mr Luo agreed to form special purpose companies to purchase the Property and the Business and agreed the terms on, and manner in, which those companies would operate, including in relation to the making, and repayment, of loans by their shareholders to the companies (Agreement);

(2)    Zhongsheng purchased the Property and Zhongsheng Management purchased the Business;

(3)    in accordance with the Agreement $2,815,355.70 was advanced to Zhongsheng and $249,892 was advanced to Zhongsheng Management by or on behalf of Auslink Golf;

(4)    it was an implied term of the Agreement that each of the parties would act in good faith in the performance of it;

(5)    Mr Luo and Ms Luo, as directors of Zhongsheng and Zhongsheng Management, are under a fiduciary duty to act in good faith and for the benefit of the shareholders of each of Zhongsheng and Zhongsheng Management;

(6)    Zhongsheng and Zhongsheng Management have engaged in conduct which is oppressive or unfairly prejudicial to, or unfairly discriminatory against, Auslink Golf;

(7)    Mr Luo and Ms Luo are, by permitting or directing certain conduct of Zhongsheng and Zhongsheng Management, in breach of the Agreement and the implied term of good faith;

(8)    Mr Luo and Ms Luo have acted in breach of their fiduciary duties; and

(9)    the conduct of Mr Luo and Ms Luo is unconscionable in contravention of the Australian Consumer Law (ACL), being Sch 2 to the Competition and Consumer Act 2010 (Cth).

14    Among other things, in its originating application filed on 5 October 2021 Auslink Golf seeks: a declaration that the conduct of Zhongsheng’s affairs is oppressive or unfairly prejudicial to, or unfairly discriminatory against Auslink Golf in its capacity as a member; an order that Mr Luo and Ms Luo purchase its shares in Zhongsheng or, in the alternative, that Zhongsheng be wound up; and for damages in respect of the outstanding loans made by Auslink Golf to Zhongsheng.

15    The Zhongsheng Parties have filed their defence. In summary, they deny the allegations made against them by Auslink Golf.

Auslink Golf’s financial position

16    The evidence before me showed that in the financial years ended 30 June 2020 and 30 June 2021:

(1)    other than an insignificant amount of cash, Auslink Golf’s only asset was its receivables being the loans to Zhongsheng and Zhongsheng Management;

(2)    Auslink Golf’s current liabilities were made up of a loan from Ms Chen and Mr Lin and a loan from Ms Ou which together closely equate to the receivables recorded in each year; and

(3)    Auslink Golf reported negative equity.

The Zhongsheng Proceeding

17    The Zhongsheng Proceeding was commenced in the Supreme Court by summons filed on 14 September 2021 and amended on 12 October 2021. The amended summons was served on Ms Chen and Mr Lin in February 2022 and the proceeding was subsequently transferred to this Court. Again, at a very high level, by their amended summons and commercial list statement Zhongsheng and Mr Luo allege as against the Auslink Parties that:

(1)    at meetings which took place on 15 and 18 September 2015 Ms Chen on behalf of Auslink Investment made certain representations to Mr Luo about the Property;

(2)    at a meeting which took place between about 1 and 9 October 2015 Ms Chen on behalf of Auslink Investment made a representation to Mr Luo about the asking price for the Property and the Business;

(3)    in project proposals dated 26 September 2015 and 9 November 2015 provided to Mr Luo by Ms Chen on behalf of Auslink Investment, certain representations were made about the Property and its development;

(4)    on or about 4 November 2015 AHGC Holdings Pty Ltd, the vendor of the Property and the Business, entered into a consultancy agreement with Option Consultancy Pty Ltd;

(5)    from about November 2015 Ms Chen and/or Mr Lin entered into an arrangement for the purpose of profiting from the potential acquisition of the Property and Business by Zhongsheng, which was not disclosed to Mr Luo or Zhongsheng;

(6)    on or about 20 November 2015 AHGC as vendor and Zhongsheng as purchaser entered into a contract for sale of the Property and the Business. On 6 May 2015 the contract for sale settled;

(7)    since its acquisition by Zhongsheng the Business has not generated any profit;

(8)    in 2019 Ms Chen made certain admissions to Mr Luo to the effect that she knew that AHGC was prepared to sell the Property and the Business for only $12 million and that she and Ms Ou caused the purchase price to be increased by $1.5 million, shared the amount by which the purchase price was increased and deliberately withheld the purchase price information from Mr Luo;

(9)    the representations made to Mr Luo by Auslink Investments and Ms Chen (see (1), (2) and (3) above) were misleading or deceptive or likely to mislead or deceive contrary to s 18 and/or s 30 of the ACL and, among other things, in reliance on the misleading conduct or one or more of those representations:

(a)    Mr Luo entered into a framework agreement with Auslink Golf dated 23 October 2015 (Framework Agreement), caused Zhongsheng to enter into the contract for sale of the Property and the Business, funded part of the deposit for the purchase of the Property and the Business and decided not to pursue alternative investment opportunities; and

(b)    Zhongsheng entered into the contract for sale of the Property and the Business, acquired the Property and the Business and decided not to pursue alternative investment opportunities;

(10)    Ms Chen and/or Mr Lin and/or Auslink Investment engaged in conduct in breach of s 20 and/or s 21 of the ACL;

(11)    Ms Chen and Mr Lin breached their respective duties owed to Zhongsheng pursuant to s 180, s 181 and/or s 182 of the Corporations Act and their fiduciary duties owed to Zhongsheng; and

(12)    Auslink Golf breached a term of the Framework Agreement by permitting Ms Chen to make certain representations about the Property and the Business and, in the alternative, by preventing her from making or correcting those representations.

18    The Auslink Parties have filed their defence.

Statutory framework and legal principles

19    Section 56(1) of the Federal Court of Australia Act 1976 (Cth) empowers the Court to order an applicant in a proceeding in the Court to give security for the payment of costs that may be awarded against him or her.

20    Rule 19.01(1) of the Rules relevantly provides that:

(1)    A respondent may apply to the Court for an order:

(a)    that an applicant give security for costs and for the manner, time and terms for the giving of the security; and

   (b)    that the applicant’s proceeding be stayed until security is given; and

(c)    that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed.

21    An application seeking security for costs must be accompanied by an affidavit: r 19.01(2) of the Rules. The affidavit should state, among other things, whether the applicant (against whom security is sought) is ordinarily resident outside Australia: r 19.01(3)(b) of the Rules.

22    Section 1335 of the Corporations Act is an alternate source of power to award security for costs against a corporation and relevantly 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.

23    There was no dispute between the parties about the applicable principles. In Monarch Advisory Group Pty Ltd v Puxty [2021] FCA 341 at [23]-[26] I summarised them as follows:

23    The principles which apply when considering whether the Court should make an order for security for payment of an applicant’s costs of a proceeding are well settled. Those principles were recently summarised by Allsop CJ in All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Limited [2020] FCA 840 at [40]-[44] where his Honour said:

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).

24    In Beach Petroleum NL v Johnson, M.K. [1992] FCA 136; (1992) 7 ACSR 203 at 204 Von Doussa J said the following about the power of the Court to order security for costs under s 1335 of the Corporations Act:

The power of the court to order security for costs under s 1335 is conditioned on the court being satisfied by credible testimony that there is reason to believe that the applicant corporations (ie Claremont and Beach) will be unable to pay the costs of the respondents if they are successful in their defence. Subject to that condition being fulfilled the section gives the court an unfettered discretion which is to be exercised having regard to all the circumstances of this case: see Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] 2 All ER 273 at 285; Bell Wholesale Co Ltd v Gates Export Corp (1984) 2 FCR 1 at 4; 8 ACLR 588; Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 511.

25    At 204-205 his Honour said:

Although s 1335 requires that there be reason to believe that the plaintiff corporation "will be unable to pay the costs of the defendant if successful" — and I emphasise "will be unable to pay" — the section does not, in my opinion, require that the court be satisfied, as a matter of probability, that every eventuality which could lead to eventual payment of the costs be excluded. The section would be satisfied if it appeared by credible testimony that there is reason to believe that if the defendant is successful circumstances may then exist in which the plaintiff will be unable to pay the costs.

…

A corporation "will be unable to pay" the costs within the meaning of the section if it can only do so if given extended time to realise assets which might be difficult to realise, at least at a price sufficient to provide a surplus over other liabilities, sufficient to pay the costs: see Southern Cross Exploration NL v Fire &All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 121. The company will also be unable to pay the costs within the meaning of the section if the payment would be one that will amount to a preference of the defendant over other creditors such that the payment would be liable to be set aside either as a preference or as a fraudulent disposition (that is a payment made by the plaintiff corporation with the intention to defeat or delay one or more other creditors) in the event of the plaintiff corporation later going into liquidation. When the court is required to make a judgment which anticipates future events the court of necessity is required to judge the degree of probability that a particular event might occur. The court can do no more than evaluate the chances: cf Malec v JC Hutton Pty Ltd (1990) 92 ALR 545.

In my opinion the power of the court under s 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the-defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security.

26    As to which party bears the onus of establishing for the purposes of s 1335 that there is reason to believe that the plaintiff or applicant will be unable to pay the costs of the litigation if unsuccessful, in Austcorp Project Number 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371 at [25]-[27] Gleeson J said:

[25]    Once it appears by credible testimony that there is reason to believe that a corporation will be unable to pay the costs of the defendant if successful in its defence, there is an evidentiary burden on the party resisting the order for security for costs to establish a reason why security should not be granted: Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [30] (“Wollongong City Council”), Topcide Pty Ltd v Charter Financial Planning Ltd [2010] FCA 1151 at [12] and Power Infrastructure Pty Ltd v Downer EDI Engineering Power Pty Ltd [2010] FCA 1222 at [9].

[26]    Even so, the burden rests on the defendants, 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].

[27]    In Cornelius v Global Medical Solutions Australia Pty Ltd (2014) 98 ACSR 301; [2014] NSWCA 65 at [18] to [20], Macfarlan JA said:

The defendants contended on appeal that the primary judge erred in stating that the burden of proof rests upon applicants for security “from first to last“: see [5] above. They submitted that this was contrary to the following statement of Beazley JA in [Wollongong City Council] at [30]:

[30]    Once the defendant has discharged the onus of establishing that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful, the onus shifts to the party against whom the order is sought (who I will refer as the plaintiff) to establish a reason why security should not be granted: KP Cable Investments v Meltglow [1995] FCA 76; 56 FCR 189; Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972; Pioneer Park v Australia and New Zealand Banking Corporation (2007) 65 ACSR 383; [2007] NSWCA 344; Prynew Pty Ltd v Nemeth [2010] NSWCA 94.

I do not consider that there is an inconsistency, as alleged, as Beazley JA was in my view referring to the evidentiary (or evidential) burden shifting in the circumstances described to the party against whom security is sought. In fact, her Honour made that explicit in her earlier decision in Prynew Pty Ltd v Nemeth 28 ACLC 10–026; [2010] NSWCA 94 at [16] where in the same context she referred expressly to the evidentiary burden shifting.

The expression “evidential burden” can be used in at least three senses: Strong v Woolworths Ltd [2012] HCA 5 at [46]–[64]. For present purposes, it is sufficient to say that it includes reference to the principle that in certain circumstances a party who does not bear the ultimate burden of proof may have to raise for consideration matters that favour it if it wishes them to be taken into account in the determination of the case. The evidential burden of raising a matter is thus distinct from the legal onus of proving entitlement to an order for security for costs which it is correct to describe as resting throughout on an applicant for such an order.

24    In relation to a plaintiff or applicant who resides outside of the jurisdiction, in PS Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 558; [1991] HCA 36 at [7] McHugh J observed:

To make or refuse to make an order for security for costs involves the exercise of a discretionary judgment. That means that the court exercising the discretion must weigh all the circumstances of the case. The weight to be given to any circumstance depends not only upon its own intrinsic persuasiveness but upon the impact of the other circumstances which have to be weighed. A circumstance which may have very great weight when only two or three circumstances have to be weighed may be of minor significance when many circumstances have to be weighed. However, for over 200 years, the fact that a party, bringing proceedings, is resident out of the jurisdiction and has no assets within the jurisdiction has been seen as a circumstance of great weight in determining whether an order for security for costs should be made. Indeed, for many years the practice has been to order such a party to provide security for costs unless that party can point to other circumstances which overcome the weight of the circumstance that that person is resident out of and has no assets within the jurisdiction.

The Auslink Proceeding

The Zhongsheng Parties’ application for security for costs

25    The Zhongsheng Parties seek security for their costs in the sum of $440,325 from Auslink Golf.

26    They submitted that the evidence establishes that Auslink Golf lacks substance. It has paid up capital of $10, it does not own any real property and its only asset is its equity investment in Zhongsheng which is the subject matter of the dispute in the Auslink Proceeding and in the Zhongsheng Proceeding.

27    As to the latter the Zhongsheng Parties submitted that if the claim made by Zhongsheng and Mr Luo in the Zhongsheng Proceeding is successful then Auslink Golf will be faced with a judgment that exceeds its claim against Zhongsheng in the Auslink Proceeding and nothing will be available to pay any adverse costs order. In the alternative, the Zhongsheng Parties submitted that if Zhongsheng and Mr Luo are not successful in the Zhongsheng Proceeding but successfully defend the Auslink Proceeding and obtain a costs order, it is unlikely that the loans made by Auslink Golf will be paid out in full so there is a risk that there will be an unsatisfied costs order.

28    The Zhongsheng Parties submitted that, despite a request for it to do so, Auslink Golf refused to provide information as to its financial position in order to assist the Zhongsheng Parties in determining whether it would be able to satisfy any adverse costs order. Some information was provided in answer to a notice to produce based on which the Zhongsheng Parties submitted there is reason to believe that Auslink Golf will be unable to pay a possible adverse costs order and thus the threshold issue has been satisfied.

29    As to the matters impacting on the exercise of the discretion to order security for costs, the Zhongsheng Parties submitted:

(1)    there has been no relevant delay. They refrained from filing their security for costs application until they were faced with such an application in the Zhongsheng Proceeding and, apart from service, the transfer of the Zhongsheng Proceeding to this Court, close of pleadings, and initial disclosure, no further steps have been taken in the Auslink Proceeding;

(2)    in any event, the Zhongsheng Parties do not seek security for costs already expended and it follows that there is no prejudice to Auslink Golf in the Court entertaining their application now;

(3)    Auslink Golf has no financial substance;

(4)    the claim made in this proceeding is an oppression suit. Such litigation tends to be complex, fact driven, long running and costly;

(5)    any impecuniosity of Auslink Golf has not been caused by the Zhongsheng Parties as alleged but is due to the fact that Auslink Golf, and the persons standing behind it, advanced money to Zhongsheng to purchase a specialist asset with the occasion for repayment of the loan having not yet occurred, given that sale of the Property and the Business had not yet settled at the time of the hearing of the security for costs applications;

(6)    the real drivers of this litigation and those which stand to benefit are the individuals standing behind Auslink Golf. Even if funds were to flow from Zhongsheng to Auslink Golf, instead of to the lenders to Zhongsheng (apparently being the individuals standing behind Auslink Golf), then it may be expected that Auslink Golf will immediately distribute those funds to its shareholders and there will be nothing left to satisfy any adverse costs order. Those standing behind Auslink Golf have not offered to give an undertaking to be liable for costs;

(7)    the respective prospects of success of the parties are difficult to assess at this stage. That factor should be treated as neutral; and

(8)    given the overlap between this proceeding and the Zhongsheng Proceeding, it would be unfair to treat the two proceedings differently.

30    Auslink Golf submitted that the following factors weigh against the exercise of the Court’s discretion to order payment for security of the Zhongsheng Parties’ costs:

(1)    Zhongsheng and Zhongsheng Management were the cause of the commencement of the Auslink Proceeding because they would not give an undertaking to retain money in Australia from the sale of the Property and the Business;

(2)    Auslink Golf has had to bring the proceeding in order to obtain basic financial information and confirmation that moneys it has advanced would be repaid;

(3)    the Zhongsheng Parties’ application was not brought promptly;

(4)    regard should be had to the strength and bona fides of Auslink Golf’s case;

(5)    Auslink Golf’s impecuniosity has been caused by Zhongsheng’s conduct and the fact that it has not repaid the sum of $2,815,335.70;

(6)    the continuing obstructive behaviour of the defendants to the Auslink Proceeding; and

(7)    the failure of the directors of Zhongsheng and Zhongsheng Management to give any evidence.

Consideration

31    The Zhongsheng Parties principally rely on s 1335 of the Corporations Act as a basis for seeking security.

32    That being so, the threshold question to be answered and which enlivens the Court’s discretion is whether I am satisfied by credible testimony that there is reason to believe that Auslink Golf will be unable to pay the Zhongsheng Parties’ costs if they are successful in their defence.

33    Having regard to the evidence before me I am so satisfied.

34    According to Juliana Ng Liah Nah, a solicitor in the employ of McLachlan Thorpe Partners, the solicitors for the Zhongsheng Parties:

(1)    Auslink Golf does not hold any real property in Queensland or New South Wales;

(2)    Auslink Golf’s position, based on an exchange of correspondence between McLachlan Thorpe and Goodwin & Co, its solicitors, is that Auslink Golf will have sufficient funds to pay any legal costs incurred in the Auslink Proceeding from the $2,815,355.70 advanced to Zhongsheng; and

(3)    it is anticipated that the damages claim against Auslink Golf in the Zhongsheng Proceeding will likely exceed $2,815,355.70.

35    In answer to an initial request from the Zhongsheng Parties, Auslink Golf did not provide any financial documents showing its current financial position. The Zhongsheng Parties served a notice to produce on Auslink Golf in response to which Auslink Golf produced unsigned financial reports for the financial years ended 30 June 2020 and 30 June 2021 and some bank statements.

36    Auslink Golf’s only assets are the loans from it to Zhongsheng and Zhongsheng Management. It has no cash at bank and, based on the bank statements produced by it in answer to the Zhongsheng Parties’ notice to produce, it appears to be funding its legal costs in this proceeding by advances of funds to its bank account variously described as a “Legal Fee Loan”, “Loanto Auslinkgolf” or similar.

37    Auslink Golf has no other source of income and, as is evident from the financial statements in evidence before me, it funded the loans to Zhongsheng and Zhongsheng Management by way of corresponding borrowings from Ms Chen, Mr Lin and Ms Ou. Further, as I have already observed, Zhongsheng Management is in administration and, I was informed, is subject to a deed of company arrangement (DOCA). There was no evidence before me as to what, if any, dividend may be payable to Auslink Golf pursuant to the DOCA.

38    As the threshold has been met, the discretion to make an order for security for the Zhongsheng’s Parties’ costs of the proceeding is enlivened. That discretion is to be exercised having regard to all of the circumstances of the case. The following factors are relevant.

39    First, and as is evident from the evidence referred to above, as things presently stand Auslink Golf is unlikely to be able to pay the Zhongsheng Parties’ costs if they are successful in their defence of the proceeding.

40    Secondly, Auslink Golf’s impecuniosity has not been caused by the conduct of the Zhongsheng Parties. Auslink Golf is a special purpose company. It was registered on 21 October 2015 and established to hold shares in Zhongsheng and Zhongsheng Management and to advance funds to those companies for the acquisition of the Property and the Business. Based on the Agreement as pleaded by Auslink Golf, it was an implied term of the Agreement that the moneys which were advanced were payable on demand if the relationship between the shareholders of Zhongsheng and Zhongsheng Management broke down. There is disagreement about what “on demand” means in the context of a special purpose borrower company that holds land. In any event, at the time the applications for security were before the Court, the Property was the subject of a contract for sale which had not yet completed. Given the purpose for which Auslink Golf was established, that its only assets are the shareholdings in, and its loans to, Zhongsheng (and Zhongsheng Management), the nature of the asset held by Zhongsheng and the terms on which the loan to it is repayable, it is difficult to see how Auslink Golf’s impecuniosity is caused by the conduct of the Zhongsheng Parties.

41    Thirdly, those standing behind Auslink Golf who are likely to benefit from the proceeding if it is successful have not offered a personal undertaking to pay the Zhongsheng Parties’ costs or any other form of security.

42    Fourthly, contrary to Auslink Golf’s submissions, I am not satisfied that the circumstances which precipitated the commencement of the proceeding by Auslink Golf are relevant to the exercise of my discretion. True it may be that the alleged conduct of the Zhongsheng Parties led to the commencement of the Auslink Proceeding. But there is nothing unique about that. Proceedings are regularly commenced because a party refuses, fails or omits to take a step or because relations break down between parties to a transaction. It is not a matter which I would take into account on an application of this kind.

43    Fifthly, the application was not brought promptly. The Zhongsheng Parties proffer two reasons for why that was so. They say they only brought the application when the Auslink Parties brought such an application in the Zhongsheng Proceeding. They considered that the same approach should be taken in both proceedings. That is not a proper explanation for the delay. If a party holds a genuine concern as to the ability of an applicant or plaintiff to meet a costs order in the event of their success that party should act promptly. The second reason was the intervening event of the transfer of the Zhongsheng Proceeding to this Court. I accept that the transfer of that proceeding may explain some but not all of the delay.

44    Sixthly, the strength of the case is not one which can be assessed at this stage. I would therefore treat it is a neutral factor.

45    Finally, the Zhongsheng Parties raise the effect of the overlap between the Auslink Proceeding and the Zhongsheng Proceeding as a reason why security would not be ordered in either proceeding or why both proceedings should be treated equally. My consideration of that submission in the context of the Zhongsheng Proceeding (see [72]-[73] below) applies equally here.

46    Having regard to the above factors, in my opinion an order that Auslink Golf provide security for the Zhongsheng Parties’ costs of the Auslink Proceeding is warranted.

Quantum of costs

47    The next question is the quantum of security to be provided.

48    Ms Ng has given evidence about that. She explains that the Zhongsheng Parties only seek security for future costs, which she quantifies as $440,325. Ms Ng has provided a detailed breakdown of the steps to be taken in the proceeding and the estimated cost for each step or phase of the litigation and has calculated the total amount of $587,100 for costs and disbursements. She opines that on a costs assessment, a costs assessor will likely allow 100% of counsel’s fees and disbursements and 70-75% of solicitors’ fees based on a party/party costs order. Ms Ng has therefore applied a single rate of 75% across her total estimate to arrive at the amount of $440,325.

49    Ms Ng’s estimate of the quantum of the Zhongsheng Parties’ likely costs has not been challenged by Auslink Golf and, despite the fact that she discounts her estimate of total costs by reference to an assessment procedure rather than taxation, which is the process adopted in this Court, there is no reason not to accept the estimate provided.

Conclusion

50    It follows from the above that an order should be made that Auslink Golf is to provide security for the Zhongsheng Parties’ costs in the sum of $440,000.

The Zhongsheng Proceeding

The Auslink Parties’ application for security for costs

51    The Auslink Parties seek security for their costs of the Zhongsheng Proceeding in the sum of $468,845.38.

52    The Auslink Parties submitted that the Zhongsheng Proceeding is substantially for Mr Luo’s benefit and he lives in the PRC. The Auslink Parties noted two things: first, that courts have observed that enforcement of Australian judgments in the PRC is ineffective, citing among others, Chen v Golden Land Enterprises Pty Ltd (No 2) [2022] NSWSC 985 at [81] (Parker J); and secondly, that their solicitors asked McLachlan Thorpe whether it was conceded that Mr Luo had no assets in Australia but received no response. The Auslink Parties contended that once they establish that Mr Luo is overseas, this enlivens the Court’s jurisdiction to make an order for security and provides a good reason for an order to be made.

53    In relation to Zhongsheng, the Auslink Parties submitted that it was only after the filing of an interlocutory application in the Auslink Proceeding that unaudited financial statements of Zhongsheng and Zhongsheng Management were produced. They observed that Zhongsheng had a net deficiency of assets for the financial years ended 30 June 2020 and 30 June 2021 and that the financial statements do not record the loans from Auslink Golf at their full value.

54    The Auslink Parties submitted that the failure by Zhongsheng to respond to a request to provide financial information or to establish its financial position when asked to do so should lead the Court to infer that such information would not establish that Zhongsheng would be able to meet an order for costs against it or, in the alternative, that the absence of evidence as to its financial position would permit an inference that such evidence would not assist its case.

55    The Auslink Parties submitted that in all the circumstances the Court would be satisfied that there is reason to believe that Zhongsheng will be unable to meet a costs order if they are successful in their defence because of its financial position as recorded in the latest financial statements coupled with the significant understatement of moneys owing to Auslink Golf and the fact that it does not trade.

56    Zhongsheng and Mr Luo submitted that the evidence does not establish that there is reason to believe that Zhongsheng will be unable to meet an adverse costs order. They say this is so because Zhongsheng is an asset rich company. At the time of the hearing of the application for security Zhongsheng had entered into an option agreement to sell its major asset and there are orders in place preventing Zhongsheng: from paying any money outside Australia to Mr Luo or Ms Luo, or its shareholders; and from repaying any relating party loans, save on terms agreed in writing between the parties.

57    Zhongsheng and Mr Luo submitted that a security for costs application is not a vehicle by which the Auslink Parties can obtain priority in respect of their allegedly outstanding shareholder loans to Zhongsheng which appears to be the purpose of the application. They contended that an order for security is not designed to afford an applicant a costs indemnity.

58    Zhongsheng and Mr Luo submitted, based on Zhongsheng’s financial statements for the financial year ended 30 June 2021, that, excluding related party loans totalling some $16.5 million which, under the current orders of the Court cannot be repaid, Zhongsheng has a substantial net surplus of assets over liabilities if the Property is realised at book value which, upon completion of the sale of the Property, will be cash. Zhongsheng and Mr Luo submitted that:

(1)    under the option agreement the sale of the Property will result in the payment of $17.5 million, $4 million more than its book value, to Zhongsheng;

(2)    confidentiality provisions in the option agreement prevent disclosure as to whether the option period has been extended or the option exercised; and

(3)    in any event, in those circumstances, there is no occasion for any adverse inference to be drawn such that the threshold issue has not been satisfied in respect of Zhongsheng.

59    Zhongsheng and Mr Luo submitted that the various relevant discretionary factors do not favour an order for security because:

(1)    the Zhongsheng Proceeding is being brought for the benefit of Mr Luo and Zhongsheng and they are likely to be jointly and severally liable for any adverse costs orders should their claims be unsuccessful and thus should not be treated differently for the purpose of this application. They contended this is sufficient to neutralise Mr Luo’s foreign residence;

(2)    the Auslink Parties have the benefit of two Court ordered restraints which prevent any moneys being paid outside of Australia or to Mr Luo and Ms Luo without the written agreement of Auslink Golf. There is no evidence that these orders have been breached. It ought therefore be concluded that there is no risk that Zhongsheng will dissipate its assets once the sale of the Property has been completed;

(3)    the Zhongsheng Proceeding is, in a substantive sense, the mirror image of the Auslink Proceeding and thus should be regarded in the nature of a cross-claim arising out of the same facts and circumstances;

(4)    insofar as orders for security are concerned the Zhongsheng Proceeding and the Auslink Proceeding ought to be treated equally which is a powerful factor weighing against an order for security in either proceeding or, if any order is to be made, requires an order to be made in both proceedings;

(5)    any deficiency in assets can be laid at the feet of the Auslink Parties because Zhongsheng purchased the Property on the basis of misrepresentations made by or on behalf of the Auslink Parties, leading to a loss of at least $1.5 million and possibly more than $2.8 million; and

(6)    the fact that the Zhongsheng Proceeding was not served at the time it was filed demonstrates nothing other than the fact that prompt service is not required under r 6.2(4)(a) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR). It has no relevance to the present application.

Consideration

60    There are two plaintiffs in the Zhongsheng Proceeding: Zhongsheng and Mr Luo.

61    Mr Luo is an individual who resides in the PRC. In Chen v Golden Land Parker J considered an application for security for costs made pursuant to r 42.21(1)(a) of the UCPR against an individual living in the PRC. That rule gives the Supreme Court a discretion to order security for costs in circumstances where it appears that a plaintiff is ordinarily resident outside Australia. There is no equivalent rule in this Court. Rather, s 56 of the Federal Court Act confers a general power to order security for costs.

62    In considering the application before him, Parker J surveyed the authorities in a number of Courts, including in this Court, where applications for security against a foreign plaintiff had been considered. Having done so his Honour concluded at [73] that:

I think it is now clear that the analogous approach to applications for security against foreign plaintiffs, represented by what McHugh J said in Chellaram, has prevailed. Certainly, I think the decision of the Court of Appeal in Li means that it has done so in this State.

63    As I have identified above, r 42.21(1)(a) of the UCPR, on the one hand, and s 56 of the Federal Court Act and r 19.01 of the Rules on the other, differ. However, taking that into account and the requirement in r 19.01(3) that the affidavit in support address the residency of the applicant, it seems to me that the approach identified by Parker J applies in this Court. That is, the fact that an applicant is resident outside Australia and has no assets in the jurisdiction is a matter to be treated as of “great weight”. However, ultimately the question of whether an order for security is to be made will depend upon all of the circumstances of the case.

64    Relevantly, it was not in dispute that Mr Luo is resident in the PRC. There was no evidence that he has any assets in Australia and no party attempted to argue that a costs order obtained in this Court was easily enforceable in the PRC. Those matters taken together are factors in favour of a grant of security against Mr Luo.

65    Zhongsheng and Mr Luo argued that they will be jointly liable for any costs order, if made, and the evidence does not establish that there is reason to believe that Zhongsheng will be unable to pay an adverse costs order. I do not accept that is so.

66    Based on one version of the unaudited and unsigned financial statements for Zhongsheng for the financial year ended 30 June 2021:

(1)    Zhongsheng’s total assets were recorded at $16,416,028.05 and its total liabilities were recorded as $18,937,713.50 (which includes the loan from Auslink Golf and its related parties) leaving a net deficiency of $2,521,393.02; and

(2)    its non-current assets include a loan to Zhongsheng Management. There was no evidence of the terms of that loan but as Zhongsheng Management is in administration it is unlikely that Zhongsheng will recover it in full. If that is so its net deficiency will increase.

67    An unaudited comparative trial balance for Zhongsheng for the year ended 30 June 2022 does not paint a more optimistic picture. It records total assets of approximately $23.6 million which include: moneys in McLachlan Thorpe’s trust account, of which I was informed the sum of approximately $1.4 million was paid to fund the administration of Zhongsheng Management; moneys held on trust by Money Chain, an organisation about which there was no evidence; and the loan to Zhongsheng Management recorded at $2,050,345.57 which, as I have already observed, is unlikely to be fully recoverable.

68    True it is that Zhongsheng holds the Property which, at the time of the hearing of the security for costs applications, was subject to a put and call option agreement for its purchase at a price of $17.5 million, with a security deposit of $3.5 million payable upon execution of the deed, and that the purchase price exceeds the book value of the Property. However:

(1)    as at 13 September 2022, only $290,779.13 remained of the security deposit after part payment of the agent’s commission on the sale and other expenses, including for the administration of Zhongsheng Management;

(2)    based on the evidence before me Zhongsheng’s liabilities exceed its assets; and

(3)    in an email dated 20 April 2022 from Ms Ng of McLachlan Thorpe to Steve Mo of Goodwin & Co, Ms Ng refers to the need to pay third party creditors from the proceeds of sale of the Property and notes that thereafter there are likely to be insufficient funds to repay related party loans in full.

69    The restraining orders in place do not assist Zhongsheng in relation to the threshold question, namely whether there is reason to believe that Zhongsheng will be unable to meet an adverse costs order. Those orders prevent payment of any related party loans, payments to any shareholders, payments to Mr Luo or Ms Luo and payment of any moneys outside Australia. That is they prevent dissipation of funds by payment to certain classes of persons. That is a different matter to the question of the company’s ability to pay an adverse costs order.

70    That being so I am satisfied that there is reason to believe that Zhongsheng will be unable to meet an adverse costs order such that the Court’s discretion to make an order for payment of security for the Auslink Parties’ costs is enlivened.

71    As to the discretionary matters:

(1)    Zhongsheng’s financial status is at best uncertain;

(2)    Mr Luo is resident in the PRC and does not have any assets in Australia;

(3)    there is no evidence that the proceeding would be stultified if an order for security was made;

(4)    the restraining orders made by the Court do not protect the Auslink Parties in relation to the availability of funds to meet an adverse costs order, as opposed to minimising the risk of dissipation;

(5)    the question of whether Zhongsheng’s deficiency in its assets rests at the feet of the Auslink Parties because of the alleged misrepresentations that led to the purchase of the Property is at the heart of the Zhongsheng Proceeding and not a matter on which a view can be formed at this stage;

(6)    relevantly, the question of prospects of success was not addressed. In any event, at this stage of the proceeding, it could at best be a neutral factor; and

(7)    despite the overlap in subject matter and the fact that the proceedings are being case managed together and are likely ultimately to be heard together, I would not treat this proceeding as a cross-claim. This proceeding was commenced before and independently of the Auslink Proceeding (albeit not served until after commencement of the Auslink Proceeding). Having regard to that fact and the nature of the claim made it could not truly be said to be a defensive proceeding.

72    The final matter concerns the Zhongsheng Parties’ submission in the Auslink Proceeding, repeated by Zhongsheng and Mr Luo in this proceeding, that because of the overlap in the two proceedings it is not appropriate for the Court to make any orders for security for costs and, if that is not considered to be a determinative factor, the two proceedings should be treated in the same way.

73    Although a superficially attractive submission, particularly given the commonality of parties, upon reflection I am not persuaded by it. Each proceeding must be considered having regard to its relevant circumstances and what is fair. The overlap is but one of those relevant circumstances. There are others (see [71] above). The appropriate course in the case of these applications was to consider each separately on its merits, which is what I have done.

74    Having regard to the matters set out above, in my opinion an order should be made that Zhongsheng and Mr Luo provide security for the Auslink Parties’ costs of the Zhongsheng Proceeding.

75    The Auslink Parties seek an order that Mr Luo provide the security on the basis that moneys paid to Zhongsheng, which are partly payable to them in discharge of the loans, should not be used to fund an order for security. However, the Auslink Parties have made out their claim for security against both Zhongsheng and Mr Luo. There is no proper basis on which an order should be made restricting the provider of any security to Mr Luo. The order for security will be against both Zhongsheng and Mr Luo. How they intend to comply with the order is a matter for them.

Quantum of costs

76    The solicitor for the Auslink Parties, Chenzi Yang of Goodwin & Co, has set out the actual costs incurred by the Auslink Parties as at the date of their application and an estimate of their future costs being $48,454.38 and $420,200 respectively. This comes to $468,654.38 in total and not $468,845.38 as submitted. Applying a recovery rate of 70%, which Mr Yang says is the usual recoverable percentage on a taxation, the total costs are calculated at $328,058.07‬.

77    Ms Ng has given evidence in response to Mr Yang’s estimate, raising issues in relation to certain attendances which, if accepted, would reduce the total estimate of future costs by $41,350 to $378,850. Ms Ng’s evidence is not challenged and I accept it.

78    In addition, Zhongsheng and Mr Luo submitted that the costs incurred by the Auslink Parties prior to the filing of their application for security should be excluded because there was a delay in bringing the application. The Auslink Parties filed their application for security for their costs on 15 June 2022. Given the time it took Zhongsheng and Mr Luo to serve this proceeding and the steps then taken to transfer it from the Supreme Court to this Court I do not consider that there was a relevant delay in the Auslink Parties’ filing of their application for security and their costs incurred prior to its filing are properly included.

79    Having regard to these matters, the total of costs incurred and estimated future costs is $427,304.38. Applying a recovery rate of 70%, as identified by Mr Yang, the total amount is $299,113. Given that, Zhongsheng and Mr Luo should be ordered to pay as security in the amount of $299,000 for the Auslink Parties’ costs.

Conclusion

80    It follows from the above that an order should be made requiring Zhongsheng and Mr Luo to provide security for the Auslink Parties’ costs of the proceeding in the sum of $299,000.

Disposition

81    I will make orders for the provision of security in the amounts identified in each proceeding. I will also make orders that in each proceeding security is to be provided by payment into Court or by way of an unconditional bank guarantee in a form acceptable to the defendants in each case.

82    The Auslink Parties were content for security, if ordered, to be paid in tranches. I propose to adopt that approach in each proceeding such that in each proceeding $100,000 is to be paid within 28 days of the date of the making of the orders and the balance is to be paid on the earlier of 14 days after the conclusion of any mediation, if unsuccessful, or 12 weeks prior to commencement of any final hearing. If security is not provided in accordance with the Court’s orders, the proceedings will be stayed until further order.

83    In each case, the applicants on the applications for security for costs sought their costs. That is the Zhongsheng Parties sought their costs of their application for security for costs filed in the Auslink Proceeding and the Auslink Parties sought their costs of their application for security for costs filed in the Zhongsheng Proceeding. As the applicants in each case have been successful in obtaining orders for payment of security for their costs I will make orders that the plaintiffs in each case pay the relevant defendants’ costs of those applications.

Associate:

Dated:    3 May 2023

SCHEDULE OF PARTIES