FEDERAL COURT OF AUSTRALIA

Lawson Solutions Pty Limited v B & J Lloyd Pty Limited, in the matter of Trinity Quality Interiors Pty Ltd [2024] FCA 843

ORDERS

THE COURT ORDERS THAT:

1.    The amended interlocutory application filed by the defendants on 13 May 2024 be dismissed.

2.    The defendants are to pay the plaintiffs’ costs of the amended interlocutory application.

THE COURT NOTES THAT:

3.    The second plaintiff has provided an undertaking dated 13 May 2024 to be jointly and severally liable for the costs of the first plaintiff to the extent of overlapping issues of the first and second plaintiffs as determined by the Court.

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

REASONS FOR JUDGMENT

MARKOVIC J:

1    On 14 December 2023 Lawson Solutions Pty Limited and Kane William Taylor Lawson, as first and second plaintiffs respectively, commenced this proceeding. Mr Lawson is the sole director, company secretary and shareholder of Lawson Solutions. B & J Lloyd Pty Limited, Benjamin Lloyd, Trevor Lloyd, Kathleen Gay Lloyd and Trinity Quality Interiors are respectively the first, second, third, fourth and fifth defendants to the proceeding. For ease and without intending any disrespect I will refer to the second, third and fourth defendants by their first names, respectively Ben, Trevor and Kathleen.

2    By amended interlocutory application filed with leave on 13 May 2024 (Amended IA) the defendants seek orders, among others, that the plaintiffs, that is both Lawson Solutions and Mr Lawson, pay security for their costs of the proceeding in the sum of $663,616.40 and that the proceeding be stayed until such time as security is provided in accordance with the order sought. The defendants make their application pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) or, in the alternative, s 1335 of the Corporations Act 2001 (Cth).

BACKGROUND

The structure and business of Trinity

3    Trinity is a commercial fit-out and refurbishment business.

4    As presently constituted:

(1)    Lawson Solutions holds 31,850 A class shares and 2,058 ordinary shares in Trinity, effectively representing 49% of Trinity’s share capital;

(2)    as a result of events described below Mr Lawson is a former employee and director of Trinity;

(3)    B & J Lloyd holds 31,850 A class shares and 31,850 ordinary shares in Trinity, also effectively representing 49% of Trinity’s share capital;

(4)    Ben is a director of B & J Lloyd and Trinity; and

(5)    Trevor is the founder and a former director of Trinity, having been removed as a director on 31 July 2023. Kathleen is his wife. Together they hold 1,300 A class shares and 84 ordinary shares in Trinity which effectively represents 2% of its share capital.

Mr Lawson’s role with Trinity

5    On 30 September 2019 Mr Lawson and Trinity entered into an employment agreement which includes the following clauses:

(1)    clause 32 “Restraint of Trade”:

…

32.2    During the Restraint Period, the Employee must not, within the Restraint Areas:

(a)    prepare to be, or be involved in any competing business; or

(b)    canvass, solicit, induce or encourage any person who was an employee or contractor of the Company to leave the Company and join a competing business; or

(c)    canvass, solicit, approach or accept any approach from any person who was at any time an existing or prospective client or customer of the Company or a prospective client or customer of the Company; or any person who refers business to the Company on a regular or ongoing basis, with a view to obtaining custom or any business introduction from that person in a competing business; or

(d)    interfere in any way with the relationship between the Company and its employees, clients and customers (including prospective clients and customers), contractors or suppliers; or

(e)    act in any restricted way as defined above.

…

(2)    clause 33 “Definitions”:

…

“Restraint Area” means:

(a)    Within a 100km radius of the location in which the Company operates its business, unless that area is in the circumstances found to be unreasonable to be enforceable at law or in equity, in which case;

(b)    the area in which the Company operates its businesses.

“Restraint Period” means the period during employment and from the date of termination of employment for:

(a)    12 months, unless that period is in the circumstances found to be unreasonable to be enforceable at law or in equity, in which case;

(b)    6 months unless that period is in the circumstances found to be unreasonable to be enforceable at law or in equity, in which case;

(c)    3 months.

6    On 22 October 2019:

(1)    Trevor and Kathleen entered into a share sale agreement with B & J Lloyd and Lawson Solutions pursuant to the terms of which each of B & J Lloyd and Lawson Solutions acquired a 49% shareholding in Trinity;

(2)    Trevor and Kathleen entered into a loan agreement as lenders with Lawson Solutions as borrower and Mr Lawson as guarantor pursuant to the terms of which Trevor and Kathleen advanced $875,000 to Lawson Solutions for the purpose of its acquisition of the shares in Trinity. It was not in dispute that as at the date of the hearing of the Amended IA Lawson Solutions owed Trevor and Kathleen $690,000 pursuant to the loan agreement. The next instalment of $50,000 owing under the loan agreement is due on 1 July 2024; and

(3)    B & J Lloyd, Lawson Solutions and Trinity entered into a shareholder agreement.

7    The shareholder agreement includes:

(1)    at cl 5 “Directors and board decision-making”:

5.1    Each Shareholder shall be entitled to appoint one director to the Board, and each of them shall be directors at the commencement of this Agreement. They may also each appoint an equal number of non-executive directors, subject to their unanimous approval.

5.2    Any person nominated as a Director by a Shareholder pursuant to sub-clause 5.1 (other than any independent director which may appointed by the Board from time to time) shall be appointed, and may only be removed from such office, by the relevant party appointing them unless the Director shall become liable to be removed or disqualified by virtue of the Law or the Constitution. Such removal or disqualification shall not affect the right of appointment of the Shareholder in question.

(2)    at cl 8 “Transfer of Shares-Rights of Pre-Emption”:

8.1    Unless all Shareholders agree and subject to Clause 9 of this Agreement, no Transfer of Shares (other than any share transfers anticipated by the Share Sale Agreement between the Shareholders and Trevor John Lloyd and Kathleen Gay Lloyd) will be effective except in accordance with this Clause 8.

8.2    

(a)    Each Shareholder who wishes to Transfer its Shares (“Seller”) shall issue a written notice of intention to sell Shares to the Board, and the Board shall thereafter be the agent of the Seller in relation to the sale of the Seller’s Shares. The Board will notify the other Shareholders (“Purchaser”) that they may purchase a parcel of the Shares of the Seller, as nearly as possible in proportion to the existing shareholdings held by the Purchasers in the Company. The Purchasers will then have the option exercisable within 60 days following receipt of the notice to purchase that parcel of Shares of the Seller by giving written notice of exercise of that option to the Board.

(b)    The Shares of the Seller shall be offered at the price for those Shares (“Transfer Price”) which is either;

(i)    where there is no current genuine written offer by a third party for the Seller's Shares, determined in accordance with the following formula;

Transfer Price = 2 times normalised EBIT plus net asset position of the company, divided by proportion of shares held;

Where EBIT is the average of Earnings Before Income Tax for the Company for 3 years, being actual figures the previous 2 completed financial years as well as the budgeted figure for the current financial year, at the date on which the Transfer Price is calculated, and “normalised” means that non-recurring expenses or revenue have been removed;

(ii)    where there is a current genuine written offer by a third party for the Seller's Shares, at the price at which that offer has been made.

…

(3)    at cl 14 “Restraints Against Competition”:

14.1    It is agreed by each of the Shareholders and the Principals that each of them shall not within the Territory during the term of this Agreement or during the Restraint Period, do or permit any of the following without the prior written consent of the other Shareholders:-

(a)    either solely or jointly with or on behalf of any person directly or indirectly carry on or be engaged or interested (except as the·holder for investment of securities dealt with on a recognised stock exchange) in any business which deals with commercial fitout and refurbishment, or associated activities, or which in any way competes with the business of the Company or its Subsidiaries;

(b)    solicit the custom of any person or entity who is or has been at any time during the term of this Agreement a customer or business associate of the Company for the purpose of offering to such customer or business associate services in connection with commercial fitout and refurbishment, or associated activities, or which in any way competes with the business of the Company or its Subsidiaries;

…

14.2    In this clause 14, “Territory: means the whole of Australia, and also means each state and territory of Australia individually; and “Restraint Period” means each of the following periods;

(a)    Twenty Four (24) months from the date on which the Shareholder restrained, or the Shareholder of which the Principal restrained was a principal, ceases to own Shares;

(b)    Eighteen (18) months from the date on which the Shareholder restrained, or the Shareholder of which the Principal restrained was a principal, ceases to own Shares; and

(c)    Twelve (12) months from the date on which the Shareholder restrained, or the Shareholder of which the Principal restrained was a principal, ceases to own Shares.

…

(4)    at cl 15 “Dispute Resolution”:

15.1    If any dispute arises out of this Agreement, the parties agree that they will not commence any Court or arbitration proceedings (except where an injunction may be sought) unless the parties to the dispute have complied with the following paragraphs of this Clause.

15.2    A party to this Contract claiming that a dispute has arisen must given written notice to the other party specifying the nature of the dispute. The parties shall use their best endeavours to resolve the dispute by discussions within 14 days of the date of that notice.

15.3    If the dispute is not resolved within that 14 day period, the parties must submit to a formal mediation of the dispute before a Mediator agreed between the parties or failing agreement nominated by the President of the Law Society of New South Wales.

8    On 16 March 2020 Mr Lawson became a director of Trinity.

Events leading to Mr Lawson’s termination as an employee and director of Trinity

9    On 18 May 2023 Rowan Tabb, a manager with RSM Australia Pty Ltd, Trinity’s accountants, sent an email to Trevor which included (as written):

Thank for your patience on this matter. I understand you have spoken with Adam recently regarding our initial draft estimates of share valuation, based on the shareholders agreement. We have updated our workings based on this discussion, and in particular have removed accounting adjustments for accrued expenses (COGS) and any WIP adjustments to remain consistent with historical accounting treatment.

Or preliminary calculation yields an estimated enterprise value of approximately $5.3m, and a potential valuation of Kane's shares at $2.6m - see Option 1.

Valuation Methodology

We consider that this calculation warrants further discussion, particularly as a valuation of $5.3m perhaps does not reflect the actual market value of the business. In particular, the mechanism for the share valuation in the shareholders agreement is based on a multiple of earnings. Whilst this of itself is not uncommon, we note it is therefore based on historical records of earnings. As part of this exercise, we have identified that there is some large fluctuations in Trinity’s earnings and profit, which suggests that the accounting records may not be completely reliable for this particular exercise. We note that WIP accounting and accruals for expenditure have not always been taken up, which means that the accounting records may not wholly represent the financial results of the business.

In addition, regarding the methodology of valuation provided in the shareholders agreement, we have identified that there may be a combination of 2 valuation methods which may inflate the enterprise value. Those 2 methods include both an earnings-multiple, and book value methods. In our experience, these may often be combined to some degree, though we might see the extent that they be combined limited to include only the surplus net assets not ordinarily required in the usual operation of the business.

To demonstrate what we mean by the above, if we were to include a WIP asset for any earned but unbilled revenue, our entry to recognise this is to increase earnings equal to the value of unbilled revenue and increase asset balance on the balance sheet. In this example, this would increase both our valuation based on the earnings multiple, and our valuation of the net assets of the business. Conversely, if we were to include an accrual for COGS, we recognise an expense equal to the value of the costs incurred (but for which we have not yet received an invoice from the supplier) and increase our liability on the balance sheet. Similarly, this has a double effect, albeit decreasing our valuation based on a multiple or earnings, plus decreasing our net asset position.

…

10    On 18 May 2023 Trevor and Kathleen responded to Mr Tabb’s email set out in the preceding paragraph. Their email included (as written):

…

2.    Regarding the accounting methods adopted by our previous accountant, the accrual method of accounting was not undertaken. Hence any project that went from one financial year to the next, even if this project had only a minor cost to complete, the total income and costs of this project was carried over to the next financial year. This has been the practice since commencement of the company in 1995.

3.    When Kane was considering coming into ownership of 49% of the company, the accounts used to arrive at a possible buy in figure were the accounts that were prepared by the previous accountant. The company was very profitable but had taken a hit in the 2 years prior to the date when Kane came into the company. The figure that we looked at for 100% of the company was, from memory was 2.5m. However because of the delay in Kane coming on and the last couple of years, not being great years, the value of the company was arbitrarily agreed to be 1.75M. This figure for Kath and I was a reasonable figure which provided for a steady income for Kath and I as repayment of the vendors loan (interest free) was to take say 5 – 10 years. This figure we also felt was a reasonable figure for Ben and Kane to repay.

4.    The methodology of determining the value and method of transferring (selling) shares as described in share holders agreement Clause 8 was anticipated by Ben, Kane and the Solicitor.

5.    In regards the valuation of share owned by Kane we agree that the only method of being consistent with proposed valuation is to eliminate out of the accounts any accrual method both income and costs for that year.

6.    Hence please provide a succinct value, totally consistent with shareholders agreement and previous methods of accounting.

7.    With this understanding, this will allow Ben and I to have a better understanding of what may be the value of Kanes shares.

8.    Upon Bens return from New Zealand later this week I will discuss the figures with Ben. We will then come to your office to both discuss and finalise our position.

9.    Again we thankyou for giving us great advice...... we appreciate your assistance.

10.    We also confirm that we provided a vendors loan (no interest) to both Ben and Kane. We also provided 3 properties to back up Bank Guarantees.

11.    The value of loan repayment for Kane was $875,000 and still outstanding by Kane is $717,500. Hence the final value of shares less $717,500 is the amount to be paid to Kane.

11    On 22 May 2023 Mr Tabb sent a further email to Trevor which included (as written):

…

If I can summarise your email into the questions raised, is as follows:'

1. Provide a valuation of the shares, consistent with the shareholders agreement.

2. How best to structure the transaction.

In terms of the valuation, our draft valuation provided is consistent with the shareholders agreement, and what follows is a draft valuation of approximately $5,335,000 for 100% of the shares of the company, or $2,614,000 for Kane’s shares.

…

12    On 31 May 2023 Mr Tabb sent an email to Trevor which included:

…

Please see responses below in red. The adjustments have not had a significant effect on the valuation of the shares – note changes to valuations under Options 2 + 4.

My recommendation would be to review May figures when these are arrived at and to apply particular scrutiny to our asset position. We can firm up what the earnings adjustments are over our call on Thursday, including whether the salaries represent market salary, plus whether the notional charge for the guarantees is reasonable.

Mr Tabb’s responses in red were inserted into an email dated 30 May 2023 from Trevor. They included:

3.    For Options 1, 2 ,3, and 4 please show full calculations to arrive at purchase price.

These options have been provided for illustrative purposes only. Whilst the excel does contain formulas and workings I note that we are still due to prepare updated calculations based on the May 2023 figures as previously discussed. These workings will provide more detail around how amounts are arrived at. As the attached is for illustrative purposes only, we didn’t want to overcapitalise on our time costs, particularly if these are not to be relied upon in discussions with Kane. That being said we take the instruction on board and will address as part of the final workings.

13    On 22 June 2023 Mr Tabb sent an email to Trevor which included:

…

Thank you for your patience with the revised calculations on the valuation of the company. We have worked closely with Ben and Kane to get the accounting numbers to more accurately reflect the position, though we feel there is still some work to do to get these numbers to more accurately reflect the actual position of the company. Ben and Kane have committed to reviewing over the data coming out of Pro-Core for estimated costs of completion across their open jobs – though this will not be ready until we prepare the June 2023 monthly accounts.

The valuation in the attached has been revised from our prior workings, largely on account of accrued costs. However, we feel as though that this perhaps does not accurately reflect the market value of the company as at today’s date. However, with some greater scrutiny applied to the accrued costs, this will increase the valuation, perhaps closer to market value.

…

14    On 10 July 2023 Trevor sent an email to Mr Tabb and another employee of RSM, Adam Crowley, in which he wrote (as written):

I understand that the June 30 figures are all but finalised, except for a few incidentals . Would you therefore please provide a final summary of the valuation of shares of the company as per the shareholders agreement.

I also note that in our previous meeting I asked for 5 odd adjustments reflect more accurately the normalisation calculations.

We anticipate this will allow us to have a good discussion with Kane.

Please advise when this can be made available.

15    On 18 July 2023 Mr Tabb sent an email to Trevor in which he wrote:

Thanks for your patience on this. The management accounts were shared with Ben and Kane this morning for review and comments. Assuming that there are no further adjustments under consideration, the attached valuation calculation will remain current

We provide some overall comments on the preparation of these:

-    Net Profit before tax of $127,706.

-    We have provided an estimate for the provision for income tax, based on the June 2023 numbers and balances. Note that as the June accounts include an accrual for expenditure not yet incurred, the taxable profit exceeds the accounting profit by some margin.

-    We have included a notional dividend payment, credited to shareholders of $270,000, which is predominantly to 'repay' the drawings taken by Ben and Kane during the period.

-    Actual Dividend (including the current years notional dividend) included as an earnings adjustment as previously discussed.

-    For the purposes of this draft, we have maintained notional earnings adjustments for the director fee to you, as well as the notional charge for the use of the properties as security for the bank guarantees.

We believe that the result of the adjustments under the prescribed calculation method in the shareholders agreement produces an anomalous result. There may be several contentious earnings adjustments for which we may concede to get to a result which is more agreeable to all parties. However, we include the current workings for your review and comment.

As a next step, I suggest that we perhaps arrange a call to discuss the current valuation and we can discuss a way to progress the discussions with Kane.

16    By email sent on 19 July 2023 Mr Tabb provided Trevor with “revised workings” which included “3 alternate scenarios in relation to the earnings adjustments”.

17    On 20 July 2023 Trevor sent an email to Mr Crowley, copied to Mr Tabb in which he wrote:

We confirm that we are meeting with Kane and Ben at 9am on Friday the 21st July 2023. At the meeting we will pass over version 1 of the valuation only. We will not pass over Version 2 of the valuation at this meeting.

We will ask for his resignation in the meeting.

We are unsure of the outcome.

We will request that Kane takes the figures to his accountant for both checking and validation. Also we will invite Kane, to initiate a conversation between yourselves and his accountant. We appreciate the delicacy of this matter, and ask that your co-operation with Kane will be honest and professional.

Following the meeting with Kane we will update you as to the outcome.

18    On 20 July 2023 Trevor invited Mr Lawson to a meeting scheduled to take place the following day at his home.

19    On 21 July 2023 Mr Lawson went to Trevor’s home where he was met outside by Trevor who said words to the following effect:

This is not an ambush but there is a letter inside ready for your resignation and it’s better for you to resign that be terminated. Ben and Kathy are also inside.

20    The meeting on 21 July 2023 was also attended by Ben and Kathleen. During the course of the meeting Mr Lawson was provided with the following documents:

(1)    agreement for repayment of loan;

(2)    deed of termination;

(3)    unsigned resignation of Mr Lawson dated July 2023;

(4)    undated Australian standard transfer form;

(5)    undated minutes of a meeting of the board of directors of Trinity concerning Mr Lawson’s resignation as a director; and

(6)    Trinity share valuation prepared by RSM which gave a “total enterprise value” for Trinity of $213,933.58 and a value for Mr Lawson’s 49% shareholding of $104,827.45.

21    Mr Lawson left the meeting on 21 July 2023 without signing any of these documents.

22    On 24 and 25 July 2023 Mr Lawson sent dispute notices in accordance with cl 15.2 of the shareholder agreement to Ben and Trevor.

23    On 31 July 2023, at a meeting of directors of Trinity, a resolution was passed terminating Mr Lawson’s employment with, and removing him as a director of, Trinity. Mr Lawson did not attend that meeting.

Commencement of this proceeding

24    On 14 December 2023 the plaintiffs commenced this proceeding.

25    It appears from journal entries and an extract from the general ledgers of Trinity in evidence before me that both RSM’s fees and those of the defendants’ lawyers, Russell Kennedy, have been paid by Trinity.

Valuations of the shares in Trinity

26    The plaintiffs rely on a valuation prepared by Ngoc Anh Nguyen, chartered accountant and partner of KordaMentha, dated 28 March 2024 in which he calculated the “Transfer Price” of Lawson Solutions’ shares in Trinity in accordance with cl 8.2(b) of the shareholder agreement as at 1 July 2023 at $2,662,209 and valued all of the shares of Trinity as at 1 July 2023 at $5,715,119 (the mid-point between the high and low values).

27    On 18 May 2023 RSM provided a “preliminary calculation” of the estimated enterprise value of Trinity of approximately $5.3m and “a potential valuation” of Mr Lawson’s shares at $2.6m. That valuation was calculated based on the mechanism in the shareholder agreement although RSM raised some issues about the specified valuation method (see [9] above).

28    For the purposes of the meeting with Mr Lawson on 21 July 2023 the defendants relied on version 1 of the valuation of the shares in Trinity prepared by RSM (see [20] above) which provides for a “total enterprise value” for Trinity of $213,933.58 and a value for Mr Lawson’s 49% shareholding of $104,827.45.

29    As stated by Walter Mungo MacCallum, the defendants’ solicitor, as at 19 February 2024 the defendants valued Lawson Solutions’ 49% shareholding in Trinity “with a net value of $116,450”, being a valuation of $806,450 less the balance owing under the loan agreement of $690,000.

Mr Lawson’s and Lawson Solutions’ asset positions

30    Mr Lawson gave the following evidence about his asset position:

(1)    on 20 April 2023 he provided a personal guarantee of a business loan facility from the Commonwealth Bank of Australia (CBA) to Trinity in an amount of $2.53m. Through his lawyers he has sought a release from that liability. There was evidence before me that the CBA had indicated that it would release Mr Lawson from that obligation following Trinity’s annual review scheduled to be completed in April 2024. However, as at the date of the hearing the guarantee remained in place;

(2)    his only significant asset is the family home at Caringbah, New South Wales (Caringbah Property) which he owns jointly with his wife. As at 13 May 2024 there was an amount of $977,392,91 owing to Suncorp Bank on the loan secured by way of mortgage over the Caringbah Property. Mr Lawson estimated that the market value of the Caringbah Property is between $1.9m and $2.5m with a reasonable market value being the mid-point of $2.2m;

(3)    he has shared ownership with his wife of two vehicles – a Volkswagen Multivan with estimated value of $37,000 and a Nissan X-Trail with estimated value of $3,000;

(4)    his superannuation balance is $320,000; and

(5)    he received a termination payment of $13,686.12 following termination of the employment agreement which he asserts is deficient and not calculated based on the salary of $220,000 included in the employment agreement. There is evidence, albeit in some respects disputed by Mr Lawson, that during the COVID-19 pandemic his and Ben’s salaries were varied down and advances were made to them throughout the year and reconciled at year end with the balance of the salary payable pursuant to the employment agreement paid by way of dividend to each of their shareholding entities.

31    In addition to the loan secured over the Caringbah Property and the balance owing under the loan agreement, as at 13 May 2024 Mr Lawson’s liabilities comprise:

(1)    legal and expert accountant fees owing in relation to this proceeding of $76,691.38; and

(2)    a St George Bank credit card associated with a joint account with his wife with balance owing of $4,360.75, of which Mr Lawson’s share is $2,180.38.

32    Mr Lawson is the sole shareholder in Lawson Solutions. Lawson Solutions does not appear to trade and, according to searches undertaken by the solicitors for the defendants, holds no real property. Its only asset is the shareholding in Trinity which the plaintiffs value at $2,662,209 and the defendants value at $116,450, being a valuation of $806,450 less the amount owing to Trevor and Kathleen under the loan agreement.

33    Mr Lawson says that based on the plaintiffs’ valuation of Lawson Solutions’ shares in Trinity he has a net financial position of $2,873,159.78.

34    Mr Lawson is prepared to provide an undertaking to the Court that “in the event the Court makes an order for costs at the final hearing against [Lawson Solutions], [he] will subject [himself] to an order of the Court that [he] will be jointly and severally liable for the costs of [Lawson Solutions] to the extent of overlapping issues of [Lawson Solutions and himself] as determined by the Court”.

THE PROCEEDING

35    The proceeding concerns alleged conduct relating to Trinity. In summary in their statement of claim Mr Lawson and Lawson Solutions contend that:

(1)    by September 2019 Mr Lawson, Ben, Trevor and Kathleen entered into an agreement or understanding that:

(a)    Mr Lawson would purchase 49% of the shares in Trinity and be a director of Trinity;

(b)    Trevor and Kathleen would establish vendor finance arrangements to loan Mr Lawson the sum of $875,000 and Ben the sum of $787,500 to enable each of them to purchase 49% of the shares in Trinity, to later become 50%. The loans were to be repayable in 10 years;

(c)    the remaining 2% of shares in Trinity were to be retained by Trevor and Kathleen until such time as the loans to Mr Lawson and Ben were repaid in full. At that time Mr Lawson and Ben would each hold 50% of the shares in Trinity through Lawson Solutions and B & J Lloyd respectively;

(d)    Mr Lawson was to receive a gross salary of $220,000 including superannuation per annum, a company car and payment of all associated employment costs; and

(e)    this commitment was to be a lifelong commitment by Mr Lawson of at least 20 years,

(collectively the Agreement or Understanding);

(2)    in reliance on the Agreement or Understanding in October 2019 Mr Lawson resigned from his then employment with Lendlease;

(3)    it was an implied term of the employment agreement that each of Mr Lawson and Trinity would:

(a)    act in good faith in the performance of the employment agreement and the Agreement or Understanding by co-operating with each other to achieve the objects of the employment agreement and the Agreement or Understanding; and

(b)    not undertake any act or omission which would prevent the other from performing the employment agreement and the Agreement or Understanding;

(4)    resolutions passed at a meeting of directors of Trinity which took place on 31 July 2023 for Mr Lawson’s removal as a director of, and termination of his employment with, Lawson Solutions were void;

(5)    the termination of Mr Lawson’s employment and his removal as a director, among other things:

(a)    constituted conduct by Trinity which was in all the circumstances oppressive to, unfairly prejudicial to, or unfairly discriminatory against, Lawson Solutions;

(b)    a breach by Trinity of the implied term of the employment agreement; and

(c)    were a failure by Ben, Trevor, Kathleen, B & J Lloyd and Trinity to act in good faith and in undertaking the conduct complained of they adopted unfair tactics; and

(6)    the restraints of trade in cl 32.2 of the employment agreement and cl 14 of the shareholders agreement as regards their application against Mr Lawson are against public policy and invalid or valid only to the extent that the Court thinks fit.

36    In their originating application Lawson Solutions and Mr Lawson seek relief consequent on the allegations pleaded in the statement of claim including:

(1)    insofar as Mr Lawson is concerned, declarations that his termination of employment constituted an irremediable breach of the shareholders agreement, that his termination of employment was invalid, void and of no effect, that his removal as a director was invalid and that the conduct of Trinity’s affairs or actual acts of Trinity are oppressive to, unfairly prejudicial to or unfairly discriminatory against Mr Lawson as a member, and orders that the resolution of directors removing him as a director of Trinity was void, for his reinstatement as a director of Trinity and as an employee of Trinity and orders in relation to validity of the restraint of trade clauses in the employment agreement and the shareholders agreement;

(2)    insofar as Lawson Solutions and Mr Lawson are concerned, orders that the loan agreement and the general security deed entered into pursuant to its terms be declared void or that enforcement of its terms be refused and for the refund of payments made pursuant to the loan agreement to Lawson Solutions; and

(3)    in the alternative to the other relief sought, an order that Ben, Trevor, Kathleen and B & J Lloyd buy Lawson Solutions’ shares in Trinity or an order that Trinity be wound up.

STATUTORY FRAMEWORK AND RELEVANT PRINCIPLES

37    Section 56 of the FCA Act relevantly provides that a Judge may order an applicant in a proceeding to give security for the payment of costs that may be awarded against the applicant in such amount, at such time and in such manner and form, as the Judge directs.

38    Section 1335 of the Corporations Act relevantly provides that where a corporation is a plaintiff in any proceeding, the court 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 may stay all proceedings until the security is given.

39    The principles that apply to an application for security for costs pursuant to s 56 of the FCA Act and/or s 1335 of the Corporations Act are settled.

40    The discretion conferred by s 56 of the FCA Act is broad and the only fetter on it is that it must be exercised judicially: Mecrus Pty Ltd v Industrial Energy Pty Ltd (2015) 327 ALR 523 at [18].

41    For s 1335 of the Corporations Act, there is an initial jurisdictional question, namely whether it appears by credible testimony that there is reason to believe that the company will be unable to pay the defendant’s costs if it is successful in its defence of the proceeding. If jurisdiction is enlivened, there is an unlimited discretion. As to the jurisdictional question, there must be a rational basis for a belief as to what the position will be when the time comes to pay costs if the defendant is successful. This has been described as a low threshold: see A1 for Maintenance Pty Ltd v Lehal Pty Ltd [2018] FCA 1476 at [23].

42    The Court’s discretion should be exercised having regard to all of the circumstances of the case: All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Limited [2020] FCA 840 at [43]. There are a number of factors that have been identified which the Court may take into account when considering an application or security: see for example Mecrus at [19]-[21]; All Class at [43]. However, they are not a “checklist of matters to be brought into account as part of the balancing exercise in every case”, rather the significance and weight of any particular factor will depend upon the circumstances of each case: A1 for Maintenance at [26].

43    The factors include: whether the application for security for costs has been brought promptly; the strength and bona fides of the plaintiff’s case. As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success; whether the applicant’s impecuniosity was caused by the respondent’s conduct the subject of the claim; whether the applicant’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: KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 197–198.

SHOULD THERE BE AN ORDER FOR SECURITY FOR COSTS?

44    Originally the defendants sought security against Lawson Solutions. It was only at the hearing that they sought leave to file the Amended IA seeking security for their costs of the proceeding from both Lawson Solutions and Mr Lawson. Given the lateness of their change in approach, the defendants’ written submissions do not address their application as presently framed.

45    That said, the defendants make two principal submissions in support of the Amended IA: first, they submit that, on the evidence, there is a rational basis to believe that Lawson Solutions will be unable to pay their costs if successful in their defence and, similarly, Mr Lawson will be unable to pay their costs if they are successful in the proceeding; and secondly, they submit that the claims made by Lawson Solutions and Mr Lawson are weak or hopeless.

46    The plaintiffs submit that, insofar as Lawson Solutions is concerned the jurisdictional threshold under s 1335 of the Corporations Act is not met and the Court has valuations before it which would comfortably satisfy it of the value of Lawson Solutions’ shares in Trinity which exceeds the defendants’ estimated legal costs. Alternatively, if the Court is satisfied that the jurisdictional threshold under s 1335 of the Corporations Act is met and that Mr Lawson is unable to pay the defendants’ costs, the plaintiffs submit that the Court would exercise its discretion to decline to make any order for payment of security of the defendants’ costs because: the plaintiffs are in their present financial circumstances because of the defendants’ conduct; the principle in Street v Luna Park Pty Ltd [2006] NSWSC 1317 applies; and the application for security is oppressive and would deny impecunious plaintiffs the right to litigate.

47    I address the parties’ submissions below.

The plaintiffs’ ability to meet a costs order

48    The first question is whether it appears by credible testimony that there is reason to believe that Lawson Solutions will be unable to pay the defendants’ costs if they are successful in their defence of the proceeding and whether Mr Lawson will similarly be unable to pay the defendants’ costs.

49    I turn first to Lawson Solutions. It does not carry on any trading and is a vehicle to hold the shares in Trinity. As at the date of the hearing of the Amended IA, it owed $690,000 to Trevor and Kathleen under the loan agreement, of which $50,000 is next due on 1 July 2024 and it does not own any real property in Australia.

50    Thus, Lawson Solutions’ ability to pay the defendants’ costs depends on the value of its shares in Trinity. The defendants say that even if I was to take the value of Lawson Solutions’ shareholding at the value at which it acquired its shares in 2019, $875,000, that would be sufficient to meet the low jurisdictional threshold in s 1335 of the Corporations Act. That is because once the amount owing to Trevor and Kathleen pursuant to the loan agreement is taken into account, Lawson Solutions will have insufficient funds to meet the amount which they claim as security.

51    That may be so. However, there is competing evidence before me about the enterprise value of Trinity and the value of Lawson Solutions’ shareholding. There is a significant difference between the parties in relation to the applicable value. As I understand it, the defendants contend that the difference is based on preliminary estimates made by RSM on the one hand and a calculation by Mr Nguyen based on a series of assumptions on the other. The defendants submit that Mr Nguyen’s valuation cannot be relied upon because some of the assumptions provided by Mr Lawson to, and relied on by, Mr Nguyen are flawed.

52    The defendants refer to the draft budget prepared by Mr Lawson for the 2023-24 financial year and the cost of sales accrual figures for 2022-23 also prepared by Mr Lawson. As to the latter the defendants say that Mr Lawson adjusted RSM’s figures for the financial year ended 30 June 2023 by “adding back” about $1.8m which, in turn, means that Mr Nguyen applied a higher gross profit margin (20%) than RSM (14.8%) which impacts the budget for the financial year ended 30 June 2024. The defendants say that these two assumptions largely explain the difference in RSM’s and Mr Nguyen’s values of Trinity.

53    The assumptions that underpin Mr Nguyen’s report may very well be inaccurate or flawed. I accept that they differ from those relied on by RSM, which may explain the disparity in the respective valuations. However, the defendants have not put any evidence before me to explain why the assumptions adopted by Mr Nguyen are flawed, what the correct assumptions should be and why RSM’s calculation is more accurate. They have not called anyone from RSM to explain how they arrived at their figures or why the assumptions adopted by Mr Nguyen are inaccurate and did not call evidence from any other expert accountant. The only evidence of the method adopted by RSM was comprised in email exchanges principally between Mr Tabb and Trevor and evidence given by Mr MacCallum on information and belief from Mr Cowley explaining why certain figures were used and assumptions adopted by RSM in their calculations. It is not necessary to set out that evidence for present purposes.

54    The question of the valuation of Trinity in accordance with cl 8.2(b) of the shareholder agreement is not one to be resolved on this application. It is a question for final hearing. In the meantime, there is no basis either to reject or discount Mr Nguyen’s calculation or to prefer that carried out by RSM over it. Indeed, before it entered into discussions with Trevor about the valuation methodology in the shareholder agreement, RSM came to similar views about the enterprise value of, and thus Lawson Solutions’ 49% holding in, Trinity.

55    The defendants raise a second matter in the path of Lawson Solutions, namely the terms of cl 8.2(b) of the shareholder agreement. That clause (see [7(2)] above) provides that the other shareholder has the right to buy at a price calculated in accordance with cl 8.2(b); if it does not take up that option the first shareholder is entitled to go to market; if a market price is struck with a third party purchaser, the other shareholder has a first right of refusal at that price. The defendants submit that there is no evidence as to what the market will pay for Lawson Solutions’ shares in Trinity, a closely held proprietary company, and thus there is no reason to suppose that the realisable value in a forced sale to meet an adverse costs order would reflect a desktop analysis of the value by an accountant or valuer. That is so, however, the defendants do not explain the necessity for this evidence on this application. The procedure under cl 8.2(b) provides a formula for calculation of the Transfer Price “where there is no current genuine offer by a third party for the Seller’s Shares”. That is the calculation carried out by Mr Nguyen and about which the parties are at odds.

56    For the purposes of this application and in the absence of any evidence which seeks to undermine Mr Nguyen’s calculation I would accept it as the valuation to be applied to Lawson Solutions’ shareholding in Trinity. On that basis, there is no reason to believe that Lawson Solutions will be unable to pay the defendants’ costs if they succeed in the proceeding.

57    I turn to Mr Lawson. His principal asset is his half share in the Caringbah Property which on his estimate of value is approximately $600,000. In addition, he is the sole shareholder in Lawson Solutions and, having regard to the valuation undertaken by Mr Nguyen, he has sufficient assets to meet a costs order should the defendants be successful. Indeed, even absent the shareholding in Lawson Solutions, based on Mr Lawson’s evidence, he has assets in an amount that approximates the amount sought by way of security.

58    It follows from the above that, in relation to Lawson Solutions, I am not satisfied that the jurisdictional threshold has been met under s 1335 of the Corporations Act and in relation to Mr Lawson the question of inability to pay is an important consideration in the exercise of the Court’s discretion. In this case it is a factor that counts against making an order for security.

59    For completeness I consider below the other discretionary factors relied upon by the parties.

The strength of the plaintiffs’ claims

60    The principal discretionary reason relied on by the defendants is their contention that the claims are hopeless. The defendants submit that the considerations are akin to those on a summary dismissal application and that if there are no facts seriously in dispute that would impact on the question which the Court ultimately needs to decide then the Court can come to a view about whether the claims are strong or weak. In doing so the defendants concede that it is rare for the Court to assess the strength of a case on an application such as this but contend that in this case there are clear legal answers to each of the propositions put forward by the plaintiffs.

61    The defendants divide the plaintiffs’ claims into those brought by Lawson Solutions, those brought by Mr Lawson and those brought by both Lawson Solutions and Mr Lawson. They make a number of submissions including that:

(1)    there is an inconsistency between the claims brought by Lawson Solutions in relation to breach of the shareholders agreement and the claims brought by Mr Lawson that his removal as a director and the termination of his employment were ineffective. They say that both sets of claims cannot succeed;

(2)    the claims bought by Lawson Solutions for irremediable breach of the shareholder agreement are misconceived in law. For example:

(a)    Lawson Solutions alleges that removal and termination of Mr Lawson was an irremediable breach by B & J Lloyd of cll 4.1(a), 5.1 and/or 5.2 of the shareholder agreement and on that basis it is deemed to have given notice of its transfer of shares under cll 8.2(a), 10.4 and 13.1 of the shareholder agreement. However, the board of Trinity terminated Mr Lawson’s employment and removed him as a director, not B & J Lloyd as a shareholder, and the termination or removal did not require any decision by Trinity in general meeting. Thus, the conduct could not amount to an irremediable breach by B & J Lloyd within cl 13.1(b) of the shareholder agreement and, as B & J Lloyd could not be in default under that clause, it could not be deemed by cl 10.4 to have given a notice of transfer of its shares under cl 8.2(a) of the shareholder agreement; and

(b)    the claim by Mr Lawson for breach of the employment agreement relies on the breach of an implied term of good faith but cl 27.1 of the employment agreement gives a power to terminate the employee’s employment for any reason by giving written notice and such a power is not qualified by any implied term of good faith, relying on Smith v Ventia Ltd [2023] NSWSC 517 at [49]-[50];

(3)    the claim that there was no resolution passed by the directors of Trinity to remove Mr Lawson as a director is wrong based on the objective evidence having regard to the minutes of a meeting of directors of Trinity which took place on 2 August 2023 attended by Ben and Trevor at which such a resolution was passed;

(4)    the claims brought by Lawson Solutions and Mr Lawson that Mr Lawson’s removal as a director and termination as an employee was unconscionable conduct contrary to s 21 of the Australian Consumer Law, being Sch 2 to the Competition and Consumer Act 2010 (Cth), even if made out, cannot justify the relief sought in relation to avoiding or refusing to enforce cl 14 of the shareholders agreement or avoiding or refusing to enforce the loan agreement and related general security deed; and

(5)    the claims brought by Lawson Solutions and Mr Lawson for a declaration under s 4 of the Restraints of Trade Act 1976 (NSW) in relation to the validity of cl 14 of the shareholder agreement is in the nature of a restraint to protect goodwill after transfer of an interest in a business rather than as between employer and employee and “there is abundant authority recognising the legitimate interests that may be protected by a restraint in cases of the former kind and applying a less stringent approach to reasonableness than employee cases”.

62    The defendants do not contend that the plaintiffs’ claims are not bona fide or that they are not regularly made. The only attack is on the strength of those claims. Where the claims in a proceeding are prima facie regular and disclose a cause of action the Court may assume the case has reasonable prospects of success: see KP Cable at 197. I can thus proceed on the assumption that the plaintiffs’ case has reasonable prospects of success.

63    In Mecrus Murphy J said at [42]:

The authorities show that the Court is not obliged to assess the merits of the claims at length as to do so would ordinarily be a waste of resources: Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440 at 441 per Pincus JA. Some authorities indicate that the Court should not go into the merits of a claim in detail unless it can be clearly demonstrated that there is a high degree of probability of success or failure: Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All ER 534 at 540 per Gibson LJ; Porzelack KG v Porzelack (UK) Ltd [1987] 1 WLR 420 at 423; [1987] 1 All ER 1074 at 1077 per Sir Nicholas Browne-Wilkinson V-C; Harrop Engineering at [8].

64    Notwithstanding that, in Mecrus Murphy J considered the strength of the applicants’ case, noting that whether an attempt should be made to assess strength “may well depend upon the complexity of the case” but that it was common for the court to undertake a preliminary assessment. Notably in Mecrus Murphy J had the benefit of the pleaded claim and the respondent’s “Fast Track Response” or defence.

65    This is not a case where it is appropriate for me to undertake a preliminary assessment of the strength of the case. First, this is essentially an oppression suit and a claim for breach of contract. The plaintiffs have filed a statement of claim, but it became apparent in the course of argument, and it seems as a result of material produced by third parties in response to subpoenas that they intend to amend their claim. Secondly, the defendants have not filed a defence. Thirdly, some of the assertions made by the defendants may have some attraction when seen in isolation. But they cannot be viewed that way. Each of the detailed assertions must be considered having regard to the pleaded case, the facts relied upon, the defence (yet to be filed) and, where applicable, the relevant law. Such an assessment is not appropriate in the context of the Amended IA. Finally, the defendants approached this task likening it to an application for summary dismissal. But that is not the task. Rather it is one of preliminary assessment of the strength of claims as a discretionary factor to be taken into account in determining whether an order for security should be made.

Have the defendants’ actions caused the plaintiffs’ impecuniosity?

Is the application for security oppressive?

66    To the extent there is any issue as to Lawson Solutions’ and Mr Lawson’s ability to meet an order for costs, a question arises as to whether their current financial situation is caused by the defendants’ conduct.

67    The defendants terminated Mr Lawsons’s employment and his role as a director with Trinity without providing any reason and with very little notice. That brought to an end Mr Lawson’s source of income and brought into effect, subject to the challenge made in this proceeding, at least the restraint in the employment agreement. Lawson Solutions is a shareholder in Trinity. Mr Lawson’s termination as a director triggered the buyout clause for his shares but, because of the parties’ differing opinions on value, that process has reached an impasse, it seems until the conclusion of this proceeding. In the meantime, Mr Lawson is effectively locked out of Trinity yet he continues as a guarantor of its obligations under the guarantee provided to the CBA (see [30(1)] above).

68    The defendants seek security for their costs in these circumstances and in the knowledge that Mr Lawson’s source of income has been cut off and yet his liability for the company remains on foot. Viewed through that prism the application may be seen as oppressive and indeed, if the orders sought are made, they will almost certainly stultify the proceeding.

The principle in Luna Park

69    The plaintiffs submit that in this case Mr Lawson is a co-plaintiff and his case overlaps with that of Lawson Solutions, a matter about which there was no dispute. In fact, the defendants estimate that the overlap is as to 85% of the claims. Adopting that estimate, the plaintiffs submit that Mr Lawson will be jointly and severally liable for costs to the extent of the overlapping issues and, on the defendants’ analysis, for at least 85% of those costs.

70    In Luna Park Brereton J said at [27]-[28]:

27    It is undoubtedly relevant to the exercise of the discretion to order security that there is one or more individual co-plaintiffs against whom an order for security could not or would not be made [Pearson v Naydler [1977] 1 WLR 899; Interwest Ltd v Tricontinental Corporation Ltd & Anor (1991) 5 ACSR 621, 635 (Ormiston J); Fiduciary Ltd & Ors v Morningstar Research Pty Ltd & Ors (2004) 208 ALR 564]. This appears to have originated with cases in which there was a plaintiff outside the jurisdiction (against whom security might be ordered) but also a plaintiff, albeit an impecunious one, within the jurisdiction. The view was taken that the defendant's position should not be improved by the mere circumstance that there was an additional plaintiff. In other words, as the defendant would not have been able to get an order for security against the impecunious plaintiff in the jurisdiction, it should be no better off by reason of the circumstance that a plaintiff outside the jurisdiction was also joined [Sykes v Sykes (1869) LR 4 CP 645; D'Hormusgee & Co v Grey (1882) 10 QBD 13]. The rationale of these cases was examined in this court by Studdert J in Maples v Hughes [2002] NSWSC 617, in the course of which his Honour referred to Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523; (1984) 8 ACLR 835, a decision of the Queensland Full Court in which a natural person was joined with three companies as plaintiffs. The leading judgment was given by Connolly J who (at 841) having posed the question "What is the rule when there is more than one plaintiff", proceeded:

The “two plaintiff” cases start with the situation in which one is out of the jurisdiction. Prima facie he ought to be ordered to provide security but his co-plaintiff is within the jurisdiction. In such a case it was considered that there was no ground for ordering security. See Sykes v Sykes (1869) 4 LR CP 645 at 648 per Byles J and Montague Smith J. This principle was held to apply even where the plaintiff within the jurisdiction was insolvent. I take the underlying reason to be that the defendant was really in no worse position than if he had been sued by a single plaintiff resident within the jurisdiction and insolvent. As Brett J remarked at 650, the cases show that, unless there is ground for making an order for security against all the plaintiffs, it cannot be made against any.

28    However, this is not an absolute rule, as appears from the judgment of Plowman J in John Bishop (Caterers) Ltd v The National Union Bank Ltd [1973] 1 All ER 707; see also Fiduciary Ltd v Morning Star Research. Where there is a complete identity between the corporate plaintiff and the individual plaintiff, so that all plaintiffs are suing in relation to one and the same defendant, and all plaintiffs must succeed or fail together, security will not ordinarily be ordered against only one of them [Bishop , 709-710]. But where the various plaintiffs’ claims have different elements and aspects, so that they will not all necessarily succeed or fail together, although the existence of individual plaintiffs is a factor that diminishes the defendant's claim to be entitled to security against the corporate plaintiff, it does not extinguish it [Interwest Ltd v Tricontinental]. And where the degree of overlap between the claim of the individual and corporate plaintiffs is comparatively small, such that separate orders for costs might be made in respect of each of the plaintiffs, it is usually appropriate that an order for security be made [Bishop, 716; Fiduciary v Morning Star, 33-36].

See too Lee v Parker (No 2) [2022] FCA 582 at [79]-[86].

71    Given that the defendants now seek security against both Lawson Solutions and Mr Lawson this factor may well be less significant or fall away. But, to the extent it has not and the causes of action brought by Lawson Solutions and Mr Lawson significantly overlap and rely on the same facts, I would not make an order against Lawson Solutions where an order is not made against Mr Lawson. As I have already observed, on the defendants’ analysis that overlap is as to 85% of the claims with only 15% of the claims (and thus the costs) being attributable to claims made by Mr Lawson alone where the facts involved do not overlap with facts relevant to Lawson Solutions’ claims.

Undertaking proffered by Mr Lawson

72    Finally, Mr Lawson has given an undertaking to the Court in the event the defendants are successful and obtain a costs order to be jointly and severally liable for Lawson Solutions’ costs liability to the defendants to the extent there are overlapping issues between him and Lawson Solutions. While this is not an undertaking to meet all of Lawson Solutions’ costs, on the defendants’ analysis there is an overlap in respect of 85% of the claims. If that is correct then the undertaking, which should be accepted and recorded, is of value and goes a significant way to providing comfort to the defendants.

CONCLUSION

73    Having regard to all of the circumstances I would not make the orders sought in the Amended IA.

74    Based on the evidence currently available, the defendants have not satisfied the jurisdictional threshold in s 1335 of the Corporations Act in relation to Lawson Solutions nor have they satisfied me that Mr Lawson would be unable to meet a costs order.

75    Added to that, there are a number of other reasons why in the exercise of my discretion I would refuse in the circumstances of this case to make an order that the plaintiffs pay security for the defendants’ costs. The proceeding has been regularly brought, the plaintiffs find themselves in the present predicament as a result of the defendants’ alleged conduct, at the heart of the proceeding is the question of valuation of the shares in Trinity, a question which can only be resolved at trial and about which there is disagreement, the plaintiffs should not be locked out of pursuing the proceeding in circumstances where the very conduct they complain of at the hands of the defendants is the cause of their current financial circumstances and finally, the defendants will have the benefit of Mr Lawson’s undertaking in the terms described above.

76    Mr Lawson’s undertaking to the Court will be noted, the Amended IA should be dismissed and, as they have been unsuccessful, the defendants should pay the plaintiffs’ costs of the Amended IA. I will make the notation and orders accordingly.

Associate:

Dated:    1 August 2024

SCHEDULE OF PARTIES