Federal Court of Australia

Ceni Enterprises Pty Ltd (in liq) v Sykes, in the matter of Ceni Enterprises Pty Ltd (in liq) [2024] FCA 842

ORDERS

THE COURT ORDERS THAT:

1.    The plaintiffs are to provide security in the sum of $747,000 for the costs of the first and second defendants up to the service of their evidence by payment into Court or by way of an unconditional bank guarantee in a form acceptable to the New South Wales District Registrar within 21 days of the date of these Orders.

2.    The plaintiffs are to provide security for the costs of the third and fourth defendants by payment into Court or by way of an unconditional bank guarantee in a form acceptable to the New South Wales District Registrar as follows:

(a)    $400,000 within 21 days of the date of these Orders; and

(b)    $350,000 within 14 days after the date on which any mediation concludes, if unsuccessful, or 12 weeks prior to the commencement of any final hearing, whichever is the earlier.

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

4.    Liberty is granted to the defendants to make any application for further security for their costs on reasonable notice.

5.    Paragraph 2 of the interlocutory application filed by the first and second defendants on 23 December 2023 (Sykes Parties’ IA) is dismissed.

6.    The plaintiffs are to pay:

(a)    the first and second defendants’ costs of para 1 of the Sykes Parties’ IA; and

(b)    the third and fourth defendants’ costs of their interlocutory application filed on 4 March 2024.

7.    The first and second defendants are to pay the plaintiffs’ costs of para 2 of the Sykes Parties’ IA.

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 before the Court: the first is brought by the first and second defendants, Adrian Sykes and Sykes Phoenix Pty Ltd (together, Sykes Parties), seeking an order that the plaintiffs, Ceni Enterprises Pty Ltd (in liquidation) and Glassurn Pty Ltd (in liquidation), pay security for their costs in the sum of $747,722.59 and an order pursuant to s 1324 of the Corporations Act 2001 (Cth) that the plaintiffs be restrained from paying, disbursing or otherwise removing any of their assets, including cash at bank, for the purposes of paying the Sykes Parties’ legal costs and disbursements; and the second is brought by the third and fourth defendants, Autosmart Australia Pty Ltd and David Buckley (Buckley Parties), seeking an order that the plaintiffs pay security for their costs in the sum of $750,000.

The proceeding

2    This proceeding was commenced on 11 January 2023 by the filing of an originating application and concise statement. The plaintiffs seek orders pursuant to s 1317H of the Corporations Act that: the defendants compensate them; that the defendants pay equitable compensation to them; and for an account of profits and, in the alternative, an order that Autosmart pay the unpaid balance of the “Purchase Price” as defined in the concise statement.

3    The originating application and concise statement were served on the Sykes Parties on 30 June 2023 and on the Buckley Parties in July 2023.

4    On 18 October 2023 the plaintiffs filed and served their statement of claim. On 22 December 2023 the Sykes Parties filed their defence and on 2 March 2024 the Buckley Parties filed their defence.

5    The plaintiffs’ claim is detailed (their statement of claim runs to some 60 pages). It is not desirable nor appropriate to set out the detail of the claim here.

6    In short, the plaintiffs’ primary claim relates to conduct which took place in the second half of 2017 at which time Mr Sykes was the sole director of each of Ceni and Glassurn.

7    Glassurn is a wholly owned subsidiary of Ceni which, in turn, is owned as to 49% by Sykes Phoenix and as to 51% by Hermitage Advisors Pty Ltd. Sykes Phoenix is a company under the control of Mr Sykes and Hermitage is a company under the control of Michael Fidler.

8    Glassurn operated a business of manufacturing and selling “Autosmart” branded car cleaning products to a network of Australian franchisees as the Australian master franchisee of Autosmart International Limited (AI), a company incorporated in the United Kingdom.

9    As recounted by Michael John Billingsley, the liquidator of Ceni and Glassurn:

(1)    by 1 July 2017 all relevant franchise agreements had expired. However, AI had made it clear that it was willing to grant a new master franchise agreement and all parties continued to trade on the same basis as they had before expiry of the agreements;

(2)    by mid-October 2017:

(a)    Mr Sykes was in a long running dispute with Mr Fidler about Ceni’s historical affairs;

(b)    AI had made an offer to purchase Hermitage’s shares in Ceni at a price which implicitly valued the plaintiffs at $6,764,060;

(c)    Mr Sykes seemed to take offence at what was proposed but said that AI could buy in once a tax audit that he sought to initiate was complete. He also made an offer to sell his 49% shareholding for $2.15 million;

(d)    despite holding himself out to Mr Fidler and AI that he was willing to go along with the abovementioned transaction, Mr Sykes in fact negotiated with Mr Buckley to cause the sale of all of Glassurn’s assets to a company under Mr Buckley’s control, Autosmart, which occurred on terms described by Mr Billingsley as favourable; and

(e)    in preparation for that proposed sale Mr Buckly incorporated Autosmart and Mr Sykes and Mr Buckley jointly met with Mr Buckley’s solicitor about the proposed sale so that he could prepare the sale documentation, which he did.

10    In short the plaintiffs allege that by mid-October 2017 Mr Sykes was pursuing a secret sale of the plaintiffs’ assets to Mr Buckley’s company, which ultimately occurred on “extraordinarily favourable terms” to Mr Buckley and Autosmart. He did so while buying time by pretending he was waiting for a tax audit to occur and knowing that, if what he was doing came to light, he could be removed as director of the plaintiffs by Hermitage, the majority shareholder.

11    The statement of claim pleads out the detail of the plaintiffs’ claims which are alleged to arise from the conduct summarised above.

12    As set out above, the Sykes Parties and the Buckley Parties have each filed their defences. Just as I have not set out the detail of the plaintiffs’ claims, I will not set out the detail of those defences save to note that the allegations made against the defendants are in dispute.

The liquidations of Ceni and Glassurn

13    Mr Billingsley was appointed as liquidator of Ceni and Glassurn on 7 February 2019, initially with Vaughan Neil Strawbridge as co-appointee. Mr Strawbridge ceased to act as liquidator of the plaintiffs on 28 June 2019.

14    Mr Billingsley’s appointment came about after he was contacted by solicitors acting for Mr Fidler and Mr Sykes and their respective companies that owned shares in Ceni. At the time Ceni and Glassurn were the subject of a shareholder dispute and proceedings had been commenced for their winding up on the just and equitable ground.

15    In order to resolve that dispute the shareholders agreed to appoint mutually agreeable liquidators. Both parties’ solicitors were familiar either with Mr Billingsley or Mr Strawbridge and considered them to be suitable appointees such that, at the time, they were appointed by agreement.

16    According to Mr Billingsley shortly after his appointment he met with Mr Sykes and his solicitor and at the time was informed that Mr Sykes wanted the liquidators to undertake an independent review of Ceni’s and Glassurn’s affairs. He was told Mr Sykes’ primary concern was transactions on Mr Fidler’s company loan account in Ceni and payments made by Ceni for the benefit of Mr Fidler and entities associated with him. Mr Billingsley understood that he was appointed on the specific understanding that he was to conduct investigations into the affairs of Ceni and Glassurn, which is what he set about to do.

17    Against that background I address below the security for costs applications and the additional relief sought by the Sykes Parties.

The applications for security for costs

18    As set out above there are two applications for security for costs; one brought by the Sykes Parties and the other brought by the Buckley Parties. Both applications are brought pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and r 19.01 of the Federal Court Rules 2011 (Cth) and/or s 1335 of the Corporations Act.

19    Section 56 of the FCA Act relevantly provides that the Court or a Judge may 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 in such amount and to be given at such time and in such manner and form as the Court or Judge directs.

20    Section 1335 of the Corporations Act, which is an alternate source of power for the award of security for costs against a corporation, relevantly provides that where a corporation is plaintiff in any 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.

21    The principles that apply in considering whether an order should be made for payment of security for a defendant’s or respondent’s costs are settled. In All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Limited [2020] FCA 840 Allsop CJ conveniently summarised them 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).

22    Here security is sought against two corporate plaintiffs. It is therefore convenient to approach the question of whether security should be ordered by reference to three issues: whether the ground referred to in s 1335 of the Corporations Act is established; whether, if the ground has been established, as a matter of discretion an order for security should be made; and the quantum and terms upon which any order for security is to be made (see Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 at [5]).

Does it appear by credible testimony that the plaintiffs will be unable to pay the defendants’ costs?

23    It is clear and indeed was not in dispute, given the plaintiffs’ own evidence, that the plaintiffs will be unable to pay the Sykes Parties’ and the Buckley Parties’ costs if they are successful in their defence of the proceeding. Mr Billingsley says that:

(1)    the plaintiffs’ financial position is such that they cannot pay the amount of security sought by the defendants collectively, at least without taking out litigation funding at a substantial expense that cannot be recovered even if the plaintiffs are successful in this proceeding;

(2)    as at 11 June 2024 he held $1,358,167.90 cash on hand in the plaintiffs’ liquidations, made up of $11,207.68 in the liquidation of Ceni and $1,346,960.22 in the liquidation of Glassurn; and

(3)    the plaintiffs are not in a position to provide security in the amount sought collectively by the Sykes Parties and the Buckley Parties without obtaining litigation funding because:

(a)    they do not have $1.5 million; and

(b)    even if the security sought was somewhat reduced, they also need to be able to fund their own costs of this proceeding. While Mr Billingsley could not predict the quantum of those costs, because he says he does not know the real substance of the defendants’ defences, he says that if the Sykes Parties’ and the Buckley Parties’ costs estimates are correct then the plaintiffs’ costs will presumably also be substantial.

24    Trevor Withane, the solicitor for the plaintiffs, has given evidence to like effect. It is not necessary to repeat it here.

Discretionary considerations

25    The plaintiffs raise four matters which they say, as a matter of discretion, would lead the Court to refuse to make the orders sought by the Sykes Parties and the Buckley Parties. They are: the strength of the plaintiffs’ case; relatedly that the defendants are the cause of their financial position; prejudice to the plaintiffs; and the public interest. I address each of these, as well as other relevant factors, below.

Strength and bona fides of the plaintiffs’ case

26    The plaintiffs submit that the strength and bona fides of their claim is a recognised relevant consideration in considering any application for security for costs and while in practice and, at least as a default position, that will usually be a neutral consideration given the difficulty of assessing the strength of a plaintiff’s claim at an interlocutory stage, that is not a fixed rule. So much is accepted.

27    The plaintiffs submit that the Court is (at least in an appropriate case) entitled and expected to have regard to the strength of a plaintiff’s case, referring to Kayler-Thomson v Colonial First State Investments Limited [2020] FCA 1867 at [11]-[12] and Hells Angels Motorcycle Corporation (Australia) Pty Ltd v Redbubble Ltd [2016] FCA 530 at [34]. They contend that this is a case where the Court – while refraining from making any final determinations – can see that the plaintiffs have “very serious prospects of success indeed”, and especially so as against the Sykes Parties. The plaintiffs submit that in the circumstances this should weigh heavily against the granting of security.

28    In Kayler-Thomson Beach J said at [11]-[12]:

11    It is not in doubt that I am entitled to go beyond the usual neutrality of merits position and to take into account the strength of the applicants’ claims where there is material from which some realistic assessment can be made. But is this such a case?

12    In Hells Angels Motorcycle Corporation (Australia) Pty Ltd v Redbubble Ltd [2016] FCA 530, Greenwood J said (at [34]):

It may very well be, however, that a case might come along in which the causes of action are demonstrated as having very serious prospects of success indeed and in such a case, it would be wrong in principle, to simply treat the prospects of success as a neutral factor. Doing so would be inconsistent with the scope of the broadly-based unfettered statutory discretion. The discretion must be sufficiently flexible so as to take into account cases where the pleading, taken together with “material from which some assessment can be made”, demonstrates a strong likelihood of success on the part of the applicant/claimant in the principal proceedings. That might be especially so in cases where the best the respondent can do is say we simply don’t know the facts and therefore cannot admit the facts asserted by the applicant and thus no affirmative case is asserted against what appears to be a robust claim.

29    The plaintiffs allege that the justification for the sale of the business and assets of Glassurn to Autosmart on what they contend to be “fire sale” terms and without any notice to the majority shareholder, Hermitage, was a work of pure fiction. They contend that, as laid out in Mr  Billingsley’s evidence, the truth, as established by the contemporaneous records, is that the sale was the culmination of a scheme agreed between Messrs Sykes and Buckley or, at the very least, was formulated by Mr Sykes and known to Mr Buckley. They submit that this is not a case where the plaintiffs ask the Court to find dishonesty or breaches of duty based upon arguable inferences or matters of judgment. Rather, it is a case in which the defendants’ own records (and admissions, including under examination) as summarised by Mr Billingsley disclose their dishonest scheme in the clearest of terms.

30    The plaintiffs contend that the defendants’ defences do not offer any dispute with the matters alleged against them. They say that:

(1)    the Sykes Parties’ defence is “almost entirely non-responsive”; and

(2)    the Buckley Parties have provided a responsive pleading in which they appropriately admit substantially all of the conduct identified by Mr Billingsley with the substance of their defence seeming to be that:

(a)    the actual dishonest conduct was undertaken by Mr Sykes and while Mr Buckley was fully aware of that conduct, he should not be found to have been aware that Mr Sykes was acting in breach of duty, which the plaintiffs describe as “an astonishing position”;

(b)    they do not admit that the impugned sale’s terms are unreasonable. The plaintiffs say that is simply irrelevant to claims arising out of a breach of fiduciary duty or s 181 or s 182 of the Corporations Act; and

(c)    because the plaintiffs’ majority shareholder did not complain about the sale immediately after it occurred, the sale should be taken to have been ratified. The plaintiffs say that there is no suggestion whatsoever that the majority shareholder knew the truth of what took place so as to be able to give informed consent such that this defence simply cannot arise.

31    This proceeding is at an early stage. The Sykes Parties and the Buckley Parties have each filed and served their defences to the detailed claims made by the plaintiffs but are yet to serve their evidence. Contrary to the plaintiffs’ submissions it is not the case that the Sykes Parties’ defence is non-responsive or that the Buckley Parties’ defence can be dismissed in the way described above. The defences put into issues the serious allegations made by the plaintiffs and put them to proof of those claims.

32    As is apparent from Mr Billingsley’s evidence and their detailed submissions, the plaintiffs have formed the view that their case is strong and that the defendants’ defences will fail. But, in the absence of having before me, at the very least, the defendants’ evidence, it is, in my view, simply too early to assess the strength of the plaintiffs’ claims. That is particularly so given the detail of the claims, their gravity, that many aspects of them are denied and that the only evidence before me in support of the claims is that marshalled by Mr Billingsley who, unsurprisingly, has sought to present the case he is prosecuting at its highest.

33    No realistic assessment of prospects can be made at this stage of the proceeding and it is not appropriate that I attempt to do so. While I do not question the bona fides of the plaintiffs’ claim, I would treat the factor of its strength as neutral for the purpose of these applications.

Are the defendants the cause of the plaintiffs’ financial position?

34    The plaintiffs submit that in this case the nature and strength of the plaintiffs’ claims are even more significant given that the defendants’ conduct underlying those claims, namely the manner in which Glassurn’s assets were sold to Autosmart on “fire sale” terms by way of a covert scheme, is also the cause of the plaintiffs’ current financial position. They submit that it has long been recognised that, where a defendant’s conduct is what has brought about a plaintiff’s financial position, that is a matter “most relevant” to the exercise of the discretion to order security and that to do otherwise would lead to the obviously unsatisfactory outcome that defendants may denude a company of much of its wealth and then rely upon that fact as a basis to avoid being called to account for their conduct.

35    The plaintiffs’ contention rests on the Court satisfying itself that their claims are of the strength for which they contend. However, where I have determined to treat the strength of the plaintiffs’ claims as neutral there is no basis on which I could be satisfied that the defendants’ conduct, in the sense of their alleged participation in the “scheme” which led to the sale of Glassurn’s assets, was the cause of the plaintiffs’ impecuniosity. This is not a factor which weighs against the grant of the applications for security.

Prejudice to the plaintiffs?

36    The plaintiffs do not contend that an order for security costs would stultify the proceeding. Rather, they submit that if security (at least in the order of what is sought by the defendants) is provided, the consequence is that they will need to obtain commercial litigation funding to pursue the proceeding. They say that that any litigation funding would necessarily come at material cost, which may not be recoverable from the defendants, and could seriously affect the commerciality of the proceeding. The plaintiffs do not suggest that this factor is determinative by itself but submit that it is a relevant consideration that must be considered in carrying out the present balancing exercise.

37    In his affidavit affirmed on 9 August 2023 Mr Withane deposes that:

(1)    at the time of commencement of the proceeding the plaintiffs intended to obtain an “after the event” insurance policy so as to insure against any adverse costs risk;

(2)    following consultation with the majority shareholder of Ceni (Hermitage) it was proposed not to fund the proceeding out of the plaintiffs’ cash reserves but rather to distribute those reserves; and

(3)    this meant that instead of obtaining “after the event” insurance a conventional litigation funding agreement would be needed and was at that time being arranged.

38    Despite Mr Withane’s evidence, that funding was not pursued. No explanation is given for why that is so. Rather, in his affidavit affirmed on 11 June 2024 for the purpose of responding to the security for costs applications Mr Billingsley deposes that:

(1)    he has solicited offers of litigation funding and has an offer for such funding;

(2)    that funding would enable him to conduct the litigation even if security was ordered in the amount sought by the defendants; but

(3)    it would come at a material cost including as a cost, among other things, a percentage of any recovery achieved.

39    Mr Billingsley says that he considers “it to be obviously contrary to the [plaintiffs’] interests to incur such litigation funding costs, which [he] would not expect to be recoverable from any defendant” but “that would be the consequence of ordering security for costs anywhere close to the amounts sought by the defendants”. Notwithstanding that, Mr Billingsley says that in the event that the Court does not accept his position and “intends to order substantial security for costs, then [he] would seek that it be ordered on a staged basis” which will allow him “to cause the [plaintiffs] to provide the first tranche of any security ordered out of cash on hand, and then have time to arrange litigation funding before any further security is required”.

40    The plaintiffs accept that the making of the orders for security as sought by the defendants will not stultify the proceeding. The plaintiffs will be able to carry on with the proceeding but will need to enter into an arrangement for litigation funding. That will come at a cost which, if the plaintiffs are successful, will affect recoveries. However, that is not a matter which I consider to be prejudicial to a plaintiff.

41    Litigation funding arrangements permit certain parties, for example companies in liquidation, to pursue litigation where otherwise they would not have funds available to them to do so. They are commercial arrangements and come at a cost. But, far from being prejudicial, they are a vehicle which permits a plaintiff to pursue a proceeding in circumstances where it would otherwise be unable to do so.

42    This is not a factor which weighs against the granting of security. To the contrary it favours the making of the orders sought in circumstances where it is plain to do so will not stultify the proceeding and where the plaintiffs have an avenue available to them to fund the proceeding and meet any adverse costs orders.

Would making the orders sought be contrary to the public interest?

43    The plaintiffs submit that the public interest is a relevant consideration in the present case. They say that the near indisputable fact is that the defendants (and especially the Sykes Parties) engaged in a dishonest and covert scheme, which by its very nature was in flagrant contravention of Mr Sykes’s statutory and fiduciary duties, being “public standards of conduct which are considered desirable and in the public interest”. The plaintiffs contend that there is a public interest in persons who engage in such conduct (and especially Mr Sykes as the director owing those duties) being called upon to explain why they should not bear liability for such conduct.

44    It has been recognised that the public interest of litigation may be a factor bearing upon the exercise of the discretion to order security: see Augusta Ventures Ltd v Mt Arthur Coal Pty Ltd (2020) 283 FCR 123 at [142]. Here the public interest is characterised as being affected by the defendants’ conduct which, particularly in the case of Mr Sykes, is alleged to be in contravention of both statutory and fiduciary duties.

45    Putting to one side that this is a proceeding between private parties and not necessarily one which could be said to be in the public interest, this argument is once again closely aligned to the plaintiffs’ contention about the strength of their case. Having determined that it is not appropriate at this stage to make any determination, even on a prima facie basis, about the strength of the plaintiffs’ claims it follows that I cannot conclude that there is a public interest weighing against making the orders sought by the defendants.

Other factors

46    In each case the defendants made their applications for security promptly, at an early stage in the proceeding and in accordance with the Court’s orders.

47    Mr Billingsley has offered an undertaking as a condition of security being refused or at least heavily curtailed that he will not draw remuneration from the plaintiffs except:

(1)    after the conclusion of this proceeding and after provision for payment of any priority payments in accordance with s 556 of the Corporations Act;

(2)    on three months’ written notice to the remaining active defendants in this proceeding;

(3)    if a litigation funding agreement is entered into by the plaintiffs, out of funding from that funder; or

(4)    upon further order of the Court.

48    Mr Billingsley proposes that his undertaking, if accepted by the Court, be accompanied by an order that “in the event that a litigation funding agreement is entered into by the Plaintiffs, he will cause the Defendants to be notified in writing of that fact within 2 business days of that agreement being entered into”.

49    The plaintiffs submit that the substantive practical effect of the proposed undertaking is that Mr Billingsley will not draw any remuneration (of which he is owed a substantial sum) from the plaintiffs’ assets so long as this proceeding remains on foot, such that those assets will (save to the extent required for the plaintiffs’ own legal costs) be preserved for the defendants. The plaintiffs contend that by offering the undertaking Mr Billingsley is “putting his own ‘skin in the game’”.

50    As the plaintiffs recognise, the undertaking proffered by Mr Billingsley does not provide absolute protection to the defendants. However, they suggest that it provides “adequate and fair” protection in the context of the claims being litigated and submit that to the extent that the plaintiffs may, despite the undertaking, not be able to fully meet the defendants’ costs if they are successful, that is the position in which the defendants themselves have put the plaintiffs.

51    The undertaking proffered by Mr Billingsley says nothing about payment of the defendants’ costs. Its effect is to defer payment of Mr Billingsley’s remuneration. However, there is no guarantee that the current funds available to the plaintiffs will, despite deferral of payment of Mr Billingsley’s remuneration, be available to meet the defendants’ costs at the conclusion of the proceeding, assuming the defendants are successful. That is particularly so in circumstances where the available pool of cash will be used to fund the plaintiffs’ own costs and disbursements incurred in connection with the proceeding. In those circumstances the proposed undertaking can give no comfort and does not assist the plaintiffs.

52    Nor does the addition of the proposed order by which the defendants would be given notice within two business days of entry into of a litigation funding agreement add any comfort. Indeed, it permits only a short period for the defendants in those circumstances to reinvigorate their applications for security and leaves them exposed in the meantime.

53    The plaintiffs also suggest that issues of liability and quantum might be separated but do not explain how doing so might affect the applications for security and the exercise of the Court’s discretion. That proposal which, as yet, is expressed as no more than an intention is not a factor which bears upon the exercise of the discretion in the present case. In any event it is apparent that, if such an application is made, it will be opposed.

Conclusion on discretionary matters

54    The jurisdictional threshold in s 1335 of the Corporations Act has been met. Having regard to all of the relevant factors, I am satisfied that in the exercise of my discretion orders should be made for the plaintiffs to provide security for the Sykes Parties’ and the Buckley Parties’ respective costs of the proceeding.

Quantum of security

55    The final issue concerns the quantum of the security to be provided.

56    Security may be ordered not only for future costs but also costs already incurred: see Bryant E Fencott & Assocs Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 515. The purpose of security is not to give a full indemnity to the respondent. Rather, the Court has a discretion to fix the amount it thinks fit in all the circumstances of the case: Reinsurance Australia Corporation Ltd v HIH Casualty and General Insurance Ltd (in liq) [2003] FCA 803 at [94]. The amount of security will not exceed the likely recoverable party-party costs on taxation and may be less: Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (1995) 134 ALR 187 at 200.

57    The Sykes Parties rely on the evidence of Paul Taylor, an experienced costs lawyer, who was instructed to prepare a report of their fair and reasonable costs for the purpose of this application. As a costs lawyer Mr Taylor’s responsibilities have included drawing bills of costs and supervising the drawing of bills in courts in New South Wales and Queensland, the Federal Court of Australia and the Federal Circuit Court, drawing notices of objections, providing advice and estimates of costs reasonably recoverable to clients and negotiating with costs opponents in an effort to settle costs disputes as to the quantum of costs payable.

58    Mr Taylor was provided with a letter of instruction, the pleadings, relevant costs agreements, accounts rendered to date and affidavits affirmed in support of the applications for security. He set out his methodology and then undertook the exercise of quantifying past recoverable costs, the recoverable costs of the Skyes Parties’ security application and future recoverable costs up to the service of evidence. He provides the following opinion:

Total fair and reasonable past costs            $340,551.59

Total fair and reasonable future costs            $365,211.00

Total fair and reasonable costs of this application     $41,960.00

Total                              $747,722.59

59    The Buckley Parties rely on evidence given by their solicitor, Micah Eliot Jenkins. Mr Jenkins provides details of the solicitors and counsel who are acting, or will act, for the Buckley Parties in the proceeding, sets out the costs incurred to date by the Buckley Parties and provides an estimate of future costs, assuming the proceeding runs to final hearing (estimated to be three weeks). Having calculated total solicitor client costs, based on his experience, Mr Jenkins applies a recovery of 100% of disbursements and 70% for solicitors’ costs to reach an amount of $752,722.59 for total recoverable party-party costs.

60    The plaintiffs have not led any evidence which directly challenges the estimates of costs provided by the Sykes Parties and the Buckley Parties. They submit that, even accepting the “broad brush” approach that will commonly be appropriate on applications for security, the defendants have not sufficiently explained how the issues in the proceeding lead (or at least properly lead) to the very substantial amounts of claimed costs. I disagree. Mr Taylor, on the one hand, and Mr Jenkins, on the other, have each carefully set out how they have calculated the relevant recoverable costs, noting the name of the solicitors and counsel, their hourly rates, tasks and estimate of time. They have done so having regard to the present state of the pleadings and the likely steps to be undertaken in future preparation of the proceeding for hearing.

61    Insofar as the plaintiffs are critical of the Sykes Parties’ claim for past costs where the bulk of the costs claimed relate to costs incurred in November and December 2023, I infer those costs related to the preparation of their defence. The Sykes Parties and the Buckley Parties have provided for undertaking the “usual steps” for the preparation of a matter of this nature. I am satisfied that in each case the estimates have been considered and determined by appropriately experienced solicitors and are properly made.

62    Finally, the plaintiffs submit that their proposal that liability with respect to the plaintiffs’ fiduciary duty and statutory duty claims (that is, the allegations of breach of duty against Mr Sykes, and accessorial liability against the other defendants) be determined separately from the question of quantum will further, and substantially, reduce costs by ensuring that any initial trial may be focused upon the real issue: whether Mr Sykes was acting in breach of duty and whether the other defendants had the requisite knowledge. They contend that will avoid the need for any possible expert valuation evidence or financial analysis, ensuring that a minimum of costs may be incurred until liability is ascertained, after which stage security for costs would also practically fall away.

63    However, the plaintiffs have not made any application for the separation of liability and quantum and, as I have already observed, if made that application will almost certainly be opposed by the defendants. Even if such an application was successfully made, it would not necessarily lead to the incurring of a “minimum of costs” or to the need for security “practically fall[ing] away”. At its highest it may provide definition for the provision of security in tranches. However, in the absence of any orders having been made for questions of liability to be determined before quantum, no such assessment can be made on that basis.

Security should be provided

64    It follows from the above that I am satisfied that the plaintiffs should provide security for the Sykes Parties’ costs in the sum of $747,000 and for the Buckley Parties’ costs in the sum of $752,000.

65    The plaintiffs have sought that, if orders for security are to be made, they should require that the security be provided in tranches. That course was not opposed by the Sykes Parties or the Buckley Parties and I intend to accede to that request.

66    Relevantly, the Buckley Parties suggest that if security is to be ordered in tranches then for their estimate of recoverable costs orders could be made that security be provided in the sums of: $400,000 for past costs and costs up to the end of preparation of their evidence and attendance at a mediation; and $350,000 for costs of the hearing. The Sykes Parties seek at this stage only one sum of $747,000 for security up to the end of preparation of their evidence and reserve their rights to approach the Court for further security should that be required for the purpose of any hearing. Security is to be provided by payment into Court or by way of the provision of an unconditional bank guarantee in a form acceptable to the New South Wales District Registrar.

67    Accordingly, I will make orders to that effect as well as orders that in the event that security is not provided within the time specified, the proceeding will be stayed until further order and will grant liberty to the defendants to make any application for further security for their costs on reasonable notice.

The Sykes Parties’ application for an injunction

68    The Sykes Parties additionally seek an order pursuant to s 1324 of the Corporations Act that the plaintiffs be restrained from paying, disbursing or otherwise removing any of their assets, including cash at bank, for the purposes of paying their legal costs and disbursements in this proceeding.

69    That order is sought on the basis of an alleged actual or threatened contravention of s 181 of the Corporations Act by Mr Billingsley who the Sykes Parties note is, given his appointment as liquidator, an officer of the plaintiff companies. Section 181 provides:

(1)    A director or other officer of a corporation must exercise their powers and discharge their duties:

(a)    in good faith in the best interests of the corporation; and

(b)    for a proper purpose.

70    Section 1324 of the Corporations Act relevantly provides:

(1)    Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:

(a)    a contravention of this Act; or

(b)    attempting to contravene this Act; or

(c)    aiding, abetting, counselling or procuring a person to contravene this Act; or

(d)    inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or

(e)    being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or

(f)    conspiring with others to contravene this Act;

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

…

(4)    Where in the opinion of the Court it is desirable to do so, the Court may grant an interim injunction pending determination of an application under subsection (1).

…

(6)    The power of the Court to grant an injunction restraining a person from engaging in conduct may be exercised:

(a)    whether or not it appears to the Court that the person intends to engage again, or to continue to engage, in conduct of that kind; and

(b)    whether or not the person has previously engaged in conduct of that kind; and

(c)    whether or not there is an imminent danger of substantial damage to any person if the first-mentioned person engages in conduct of that kind.

71    In Quality Medical Innovations Pty Ltd v Keogh [2021] FCA 154 I summarised the principles applicable to an application under s 1324 at [53]-[56]:

53    In Armstrong World Industries (Australia) Pty Limited v Parma (2014) 101 ACSR 150; [2014] FCA 743 at [21]-[22] Beach J observed that the statutory test for the grant of an injunction under s 1324(4) of the Corporations Act is in form, and partly in substance, different to the equitable basis and that the jurisdiction exercised by the Court under the former differs from the traditional equitable jurisdiction in at least one type of factor to be taken into account. His Honour identified the additional factor to be whether the injunction would have some utility or would serve some purpose within the contemplation of the Corporations Act such as preventing or ameliorating a threat or contravention of that Act, referring to the discussion in Australian Securities and Investments Commission v Mauer-Swisse Securities Limited (2002) 42 ACSR 605 at 613-614; [2002] NSWSC 741 at [34]-[36].

54    In In the matter of Ikon Group Limited (2015) 107 ACSR 146; [2015] NSWSC 980 Brereton J observed at [22] that the touchstone of s 1324 of the Corporations Act is a past or threatened contravention of the Corporations Act and that the power to grant an injunction under the section is conferred in respect of conduct that constituted, or would constitute, a contravention of that Act. At [26] his Honour said that where interim relief is sought under s 1324 of the Corporations Act, the relevant considerations are usually whether there is a sufficient seriously arguable case of an actual or threatened contravention of the Act, the balance of convenience and whether there are any other discretionary considerations informing the grant of interlocutory relief.

55    In Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238 (Samsung) at [55] a Full Court of this Court (Dowsett, Foster and Yates JJ), in considering the grant of an interlocutory injunction in the context of a patent case, identified that the two questions to be considered by the Court are: first, whether the plaintiffs have made out a prima facie case, “in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief”; and secondly, “whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted”, quoting from Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618.

56    At [67]-[68] their Honours observed that the two questions are interrelated, noting that the questions of whether there is a serious question or prima facie case should not be considered in isolation from the balance of convenience. Their Honours observed that the apparent strength of the parties’ substantive cases can be an important consideration to be weighed in the balance and that it may also be necessary to consider and evaluate the impact that the grant or refusal of an injunction will have or is likely to have on third persons and the public generally.

72    In support of their application the Sykes Parties drew my attention to the following further matters:

(1)    Mr Billingsley, as a liquidator, is an officer of Glassurn and owes duties under s 181 of the Corporations Act;

(2)    the shareholding in Ceni has the effect that there is an alignment and equivalence of Glassurn’s interests with Mr Sykes and Mr Fidler’s interests, including as to a 49/51% entitlement to the net proceeds of any realisation of the claims in these proceedings;

(3)    Glassurn is solvent. It holds cash of $1,346,960.22;

(4)    Glassurn has received extensive payments from Autosmart and alleges that approximately $2 million is owed by Autosmart to it. This claim, and the claims against the Sykes Parties are Glassurn’s only substantial realisable assets;

(5)    Ceni has negligible assets and it should be inferred that Glassurn’s funds have been used to fund investigations for the benefit of Ceni, an irresistible inference which is not disputed by Mr Billingsley in his evidence on this application;

(6)    the economic effect of pursuing this proceeding, in the event that the plaintiffs succeed, will be to see Mr Fidler receive something between nothing and $1.499 million, at a cost of $2.5 million, and Mr Sykes being deprived of the legal costs he has expended, and will expend, in the proceeding; and

(7)    in those circumstances, Mr Billingsley’s exercise of his powers as an officer of Glassurn have not been, and will continue not to be, exercised for a proper purpose and in contravention of s 181 of the Corporations Act. That is because the benefit to be produced is a benefit to Mr Billingsley in the form of remuneration, and a benefit to the plaintiffs’ legal representatives in the form of disbursements, but not to Glassurn.

73    The Sykes Parties submit that there is a sufficiently seriously arguable case, or a prima facie case, for breach of s 181 of the Corporations Act and that there can be no issues that they are persons whose interests have been and will be affected. They contend that Glassurn’s funds have been, and are being, expended to pursue litigation against them and, if the litigation succeeds, they will have paid $1.8 million in legal costs, in addition to Mr Billingsley’s legal costs and disbursements, and his remuneration, only to see an overall recovery of much less than that amount. The Sykes Parties submit that there is a stark disproportionate relationship between the cost of the litigation and the potential recoverable amount and it is that disproportion, and the self-evident benefits to be derived by the liquidator and his representatives in the form of remuneration and legal fees, that gives rise to the contravention of s 181 of the Corporations Act.

74    The Sykes Parties submit that in essence, their contention is that the power of the liquidator is being exercised vis-à-vis Glassurn’s assets not in the best interests of Glassurn and for a proper purpose, but in a way that sacrifices Glassurn’s interests and subordinates them to the liquidator’s purposes of generating remuneration for himself and legal fees for those representing the plaintiffs. They submit that is plainly a seriously arguable contention having regard to the liquidator’s statutory reports and annual administration returns, and the inherent logic of the allegations set out in their defence.

75    The Sykes Parties submit that the balance of convenience favours the issuance of an injunction. They contend that if the plaintiffs are restrained from utilising funds in their estates for the purposes of this proceeding, they will be substantially unaffected. That is because Mr Billingsley has said that he will arrange litigation funding if security is ordered. The Sykes Parties submit that it is a short step to conclude that funding would also be procured if the plaintiffs were restrained from using Glassurn’s resources for the prosecution of this proceeding. The only possible detriment would arise in the event that security is ordered and Mr Billingsley is unable to use the plaintiffs’ cash on hand to fund an initial tranche of security while litigation funding is arranged. Any prejudice of that kind could readily be ameliorated by adjusting the due date for payment.

76    The Sykes Parties submit that in contrast they will suffer real prejudice if Glassurn’s resources continue to be depleted in the pursuit of this litigation. They contend that is so for two reasons: first, there is a real likelihood that, in the event of the plaintiffs’ claims failing (unless security is ordered), they will be unable to recover some or all of their legal costs; and secondly, there is an inherent circularity in that the funds in Glassurn are apparently being deployed in a fashion that is unlikely to produce a result that is in the best interests of Glassurn, or its creditors or members.

77    Based on the material before me I am not satisfied that an order in the form sought by the Sykes Parties should be made.

78    First, I am not satisfied that there is a sufficiently seriously arguable case of a threatened or actual contravention of s 181 of the Corporations Act by the plaintiffs. It is Mr Billingsley who is alleged to have contravened s 181 of the Corporations Act. He is not a party to the proceeding.

79    Putting that to one side, the Sykes Parties set out the basis for their contention that Mr Billingsley in pursuing this proceeding has breached (or will breach) s 181 of the Corporations Act in their defence commencing at [214]. In particular, the Sykes Parties allege at [218]-[230] that:

218.    At all material times, Glassurn, through the Liquidator:

(a)    has received payments from [Autosmart] totalling approximately $2,356,691 as at about September 2023;

(b)    alleges that approximately $2,017,326 remains owing by [Autosmart] under the Asset Sale Deed.

219.    From about 7 February 2019, being the date of the Liquidator's appointment, the Liquidator has estimated that the total realisations during the liquidation of Glassurn to be as follows:

(a)    for the period 7 February 2019 and 6 February 2020:- between $1,920,000 as a low value and $2,460,000 as a high value;

(b)    for the period 7 February 2020 and 6 February 2021:- between $2,080,000 as a low value and $11,120,000 as a high value;

(c)    for the period 7 February 2021 and 6 February 2022:- between $6,429,671 as a low value and $7,929,671 as a high value;

(d)    for the period 7 February 2022 and 6 February 2023:- between $5,000,399 as a low value and $9,000,399 as a high value.

Particulars

...

220.    It is implicit in the Liquidator's estimates of total realisations pleaded in paragraph 201 above, that the claims against [Autosmart] in respect of the unpaid amounts under the Asset Sale Deed are approximately $2 million with the result that as at about 6 February 2023 the estimated realisable claims against the First Defendant and Second Defendant are between $3,000,399 as a low value and $7,000,399 as a high value.

221.    At all relevant times, the only substantial realisable assets of Glassurn have been the claims against:

(a)    Sykes and Sykes Phoenix; and

(b)    [Autosmart] and Buckley.

222.    As at about 6 February 2023, the Liquidator has expended a total of $1,384,865.05 since 7 February 2019 comprising:

(a)    Legal fees and disbursements in the amount of $1,383,288.63 and

(b)    Bank fees, photocopying and stationery in the amount of $1,576.20.

223.    Further, as at about 6 February 2023:

(a)    The Liquidator's remuneration in respect of Glassurn's liquidation had not been determined;

(b)    The Liquidator had not received remuneration in respect of Glassurn's Liquidation;

(c)    The amount of cash at bank in Glassurn was $1,539,316.22.

224.    Also as at about 6 February 2023:

(a)    The amount of total receipts received by the Liquidator in respect of the Ceni Liquidation during the entirety of that liquidation was $10,138.07; and

(b)    The amount of the estimated total realisations estimated by the Liquidator in respect of the Ceni Liquidation was between $2,206,846 as a low value and $6,206,846 as a high value.

225.    During about May and September 2020, the Liquidator in his capacity as liquidator of Glassurn conducted examinations of various witnesses pursuant to section 596A and 596B of the Corporations Act whereby, inter alia:

(a)    Sykes was examined about the affairs of Ceni;

(b)    Mark Hamilton was examined about the affairs of Ceni.

226.    In the premises, it can be inferred that the Liquidator has used funds from Glassurn's liquidation to fund:

(a)    The examination of at least Sykes and Hamilton regarding the affairs of Ceni;

(b)    The preparation of the Statement of Claim in the present proceedings insofar as that pleading advances claims on behalf of Ceni.

227.    As at the date of this Defence, the Liquidator had insufficient funds to pursue the claims pleaded in the Statement of Claim against the First Defendant and Second Defendant and required the assistance of litigation funding.

228.    Further, as at the date of this Defence, the cost of prosecuting the claims the subject of Statement of Claim will require at least a further $1 million in legal fees and disbursements such that at the conclusion of any hearing of this matter:

(a)    the Liquidator would have expended a total amount of at least $2.4 million in legal fees to pursue claims against all defendants with an estimated total realisable value of between $1,920,000 and $9,000,399 as pleaded in paragraph 219 above;

(b)    the Liquidator would have expended a total amount of at least approximately $2.4 million to pursue claims against the First Defendant and Second Defendant the Liquidator estimates would yield between about $3,000,399 as a low value and $7,000,399 as a high value as pleaded in paragraph 219 above;

(c)    after applying and deducting the litigation funder's margin of approximately 30% of gross realisable recoveries, the Liquidator would have expended a total amount of at least approximately $2.4 million to pursue claims against the First Defendant and Second Defendant the Liquidator estimates would yield gross amounts of between about $2,100,279 as a low value and $4,900,279 as a high value;

(d)    after further applying the Liquidator's likely remuneration of at least approximately $1 million, the Liquidator would have expended a total amount of at least approximately $2.5 million to pursue claims against the First Defendant and Second Defendant and recover amounts of between about $1,100,279 as a low value and $3,900,279 as a high value.

229.    The cost to the First Defendant and Second Defendant in defending the claims in the Statement of Claim, will be at least approximately $1.8 million.

230.    Having regard to the ultimate shareholding of Ceni and Glassurn as pleaded in paragraph 2 above and in the event the Liquidator is successful in his claims again the First Defendant and Second Defendant (which is denied), the net effect of the prosecution of the said claims will be:

(a)    Fidler receiving between about nil dollars as a low value and approximately $1,499,142 as a high value but only after the Liquidator expending approximately at least $2.5 million in prosecuting the said claims;

(b)    Sykes being deprived of at least $1.8 million in legal costs.

80    That is, the Sykes Parties’ claim appears to turn upon the assertion that the proceeding is unlikely to result in any benefit to the plaintiffs (or at least their shareholders) based upon the calculations in their defence. Those calculations are unverified. Further:

(1)    they proceed on the premise that the past costs of investigating the plaintiffs’ affairs are to be viewed as costs of this proceeding. However, as Mr Billingsley explains those investigations were not limited to investigating the matters the subject of this proceeding and, to the extent they were, they are, to adopt Mr Billingsley’s description, “sunk costs”;

(2)    that being so the merits of pursuing the proceeding, in terms of cost benefit, can only be judged by the future costs as compared to future possible reward;

(3)    the estimate of $1 million for Mr Billingsley’s further remuneration in pursuing the proceeding is speculative. To date Mr Billingsley’s remuneration in both administrations since their commencement amounts to approximately $700,000;

(4)    that a percentage of recoveries may go to a litigation funder is not a matter that should count against the liquidator. It may be a necessary cost of bringing the proceeding;

(5)    while the plaintiffs will incur legal costs in pursuing the proceeding which may be considerable, they are likely to be less than the total recoverable amount if the plaintiffs are successful in the proceeding (in which case they will also likely be the beneficiaries of a costs order); and

(6)    there is always a risk that a plaintiff will be unsuccessful in litigation.

81    More critically the allegation of breach of s 181 of the Corporations Act seems to turn on a suggestion that a liquidator in the position of Mr Billingsley may not bring a proceeding in circumstances where the beneficiaries of the fruits of the litigation will be the shareholders, as opposed to creditors (who, the evidence shows, are likely to make full recovery). I do not accept that can be so. Further, in the present case, the companies were put into liquidation because of a dispute between shareholders and the liquidators were asked to investigate the companies’ affairs. Having done so, Mr Billingsley has commenced this proceeding.

82    Secondly, even if I am wrong, the balance of convenience does not favour the making of the order sought. I am satisfied that in this case damages (which may need to be sought against Mr Billingsley personally given he is the officer who is alleged to have breached his duty) is an adequate remedy. On the other hand, making the order sought by the Sykes Parties could cause irremediable harm to the plaintiffs as they will be unable to use the resources available to them to fund the proceeding in any way and will be entirely reliant on litigation funding.

83    Accordingly, I would refuse to make the order sought by the Sykes Parties pursuant to s 1324 of the Corporations Act. Paragraph 2 of their interlocutory application should be dismissed.

Conclusion

84    In relation to the Sykes Parties’ and the Buckley Parties’ applications for security for their costs, I will make the orders set out at [66]-[67] above. As they have been successful, those parties should have their costs of their respective applications for security for their costs.

85    I will dismiss para 2 of the Sykes Parties’ interlocutory application filed on 23 December 2023. As the Sykes Parties have been unsuccessful in that regard they should pay the plaintiffs’ costs of that part of the interlocutory application.

86    I will make orders accordingly.

Associate:

Dated:    1 August 2024

SCHEDULE OF PARTIES