By my judgment delivered on 25 May 2021 ([2021] NSWSC 586) ("Primary Judgment"), I made orders in favour of Australian International Yacht Club Pty Limited ("Company") against several Defendants in derivative proceedings brought by one of the Plaintiffs, Ms Lin, by leave granted under s 237 of the Corporations Act 2001 (Cth). Those Defendants were a director and shareholder of the Company, Mr Zong, his wife, Ms Tang and a company associated with Ms Tang, J&G Holding Group Pty Ltd ("J&G"). Ms Lin and her husband, Mr Su, were unsuccessful in a range of other claims brought against the Defendants, including claims for misleading and deceptive conduct.
I observed (at Primary Judgment [139]-[140]) that:
"Orders will need to be made to give effect to this judgment. My preliminary view is that there should be an order that Mr Zong, Ms Tang and J&G pay 50% of the Plaintiffs' costs of the proceedings. Although the Plaintiffs have succeeded in establishing claims for breach of directors' duties and oppression, which could likely have been determined within two days at most, the hearing has been substantially extended to a hearing of four days by additional claims, inter alia, for misleading and deceptive conduct, all of which have failed, and most of which have failed at several levels. However, I will hear the parties as to costs.
I direct the parties to bring in agreed short minutes of order, including as to costs, within 7 days or, if there is no agreement, their respective draft short minutes of order and short submissions as to the differences between them."
The parties have agreed aspects of the orders that should now be made, in respect of the money judgments in favour of the Company and against the several Defendants, and in respect of the removal of Mr Zong as a director of the Company and the transfer of his shares in the Company to Ms Lin. A dispute remains as to the question of costs.
[3]
Costs
The Plaintiffs, rightly, propose an order for costs that makes clear that costs are not payable by the Company, where it has the benefit of a judgment in its favour, although it was named as a Defendant in the proceedings. They seek an order that Mr Zong pay all of the Plaintiffs' costs of and incidental to the proceedings on the indemnity basis from 16 March 2021, relying on an offer of compromise ("Offer") made by the Plaintiffs under r 20.26 of the Uniform Civil Procedure Rules ("UCPR") on 16 March 2021. The Plaintiffs accept that the Second and Third Defendants should pay 50% of those costs on the ordinary basis, consistent with the preliminary view that I expressed in the Primary Judgment. The First and Second Defendants support the preliminary view that I expressed in the Primary Judgment, that they should pay 50% of the Plaintiffs' costs of and incidental to the proceedings, and submit that those costs should be assessed on an ordinary basis.
The first issue in dispute is therefore whether the Offer made by the Plaintiffs justifies an order that Mr Zong pay all of the Plaintiffs' costs of and incidental to the proceedings on the indemnity basis from 16 March 2021. Rule 20.26 of the UCPR provides for offers of compromise and r 42.14 of the UCPR provides that, if a plaintiff makes an offer of compromise under r 20.26 which is not accepted by the defendant and the plaintiff obtains an order or judgment no less favourable than the terms of the offer, the defendant is to pay the plaintiff's costs on the ordinary basis up to and including the day of the offer and thereafter on an indemnity basis, unless the Court orders otherwise. In Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344, the Court of Appeal identified the public policy objectives of special costs orders in respect of offers of compromise. Basten JA (with whom McColl and Campbell JJA agreed) there referred to Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 where the Court of Appeal (Kirby P, Mahoney JA and Samuels AJA) identified the objects of the court rules then in force as including:
"1. To encourage the saving of private costs and the avoidance of the inherent risks, delays and uncertainties of litigation by promoting early offers of compromise by defendants which amount to a realistic assessment of the plaintiff's real claim which can be placed before its opponent without risk that its "bottom line" will be revealed to the court;
2. To save the public costs which are necessarily incurred in litigation which events demonstrate to have been unnecessary, having regard to an earlier (and, as found, reasonable) offer of compromise made by a plaintiff to a defendant; and
3. To indemnify the plaintiff who has made the offer of compromise, later found to have been reasonable, against the costs thereafter incurred. This is deemed appropriate because, from the time of the rejection or deemed rejection of the compromise offer, notionally the real cause and occasion of the litigation is the attitude adopted by the defendant which has rejected the compromise. In such circumstances, that party should ordinarily bear the costs of litigation."
The Plaintiffs point out that the amount of the judgment against Mr Zong, in the amount of $309,535 exceeded (I interpolate, marginally) the compromise of $300,000 proposed in the Offer. The Plaintiffs also submit that the Offer could constitute an offer of compromise, although it provided that there would be no order as to costs, relying on Jojeni Investment Pty Ltd v Mosman Municipal Council (No 2) [2015] NSWCA 208. It is not necessary to address that question given the conclusion that I reach on other grounds.
Mr Young, who appears for Mr Zong, submits that the Offer required that Ms Tang accept a judgment against her in a sum that significantly exceeded the amount ultimately recovered against her, but I need not address that matter given the conclusion that I have reached on other grounds. Mr Young also submits that the Offer contemplated that "Mr Zong's 4,500 shares in the [Company] be void ab initio", and submits that order was nonsensical, was not phrased as a declaration and would not have been meaningful, and the Offer was not capable of acceptance by any defendant on that basis. The Plaintiffs respond that the Company has no income and has generated no profit, there have been no dividends to shareholders and "the effect of setting aside the shares is substantially the same as that of transferring the shares to [Ms Lin]". I do not accept that submission. The Offer was not capable of acceptance by Mr Zong, because it was not possible to achieve, by agreement between the parties, the result that the issue of the shares to Mr Zong would be "void ab initio". Second, there is no basis now to compare the outcome of a different order which could be implemented, as to the transfer of shares of Mr Zong to Ms Lin, with the then proposed order that could not be implemented. For these reasons, I am not satisfied that the offer of compromise was an offer under r 20.26 of the Uniform Civil Procedure Rules and I am not satisfied that UCPR r 42.14 applies.
The Plaintiffs alternatively submit that, if the Offer was not an offer of compromise under UCPR r 20.26, then it should be treated as a Calderbank offer, and that the Court can make an indemnity costs order against Mr Zong if he acted unreasonably in not accepting that offer: Miwa Pty Ltd v Siantan Properties Pty Ltd (No 2) above at [8]. The principles arising from the decision in Calderbank v Calderbank [1975] 3 All ER 333 were summarised by Ward J (as her Honour then was) in Nu Line Construction Group Pty Ltd v Fowler (aka Grippaudo) [2012] NSWSC 816 at [9]-[15] and, in Re Alsafe Security Products Pty Ltd atf the Alsafe Trust (in liq) [2016] NSWSC 575 at [8], I summarised those principles as follows:
"[T]he fact that a party ultimately achieves a worse result than he or she would have achieved if he or she had accepted a Calderbank offer does not itself establish that the other party should be awarded indemnity costs, unless it can be said that it was unreasonable for the first party not to accept that offer, so as to warrant a departure from the general rule as to costs: Nu Line Construction Group Pty Ltd v Fowler (aka Grippaudo) [above] at [9]-[15]; Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268 at [14] , [16] . In Lawrence v Gunner; Gunner v Lawrence [2015] NSWSC 1229 at [26], Stevenson J observed that:
"If a Calderbank offer is made, but not accepted, the court's discretion to make a special order is enlivened. The court's discretion is an open one, but is commonly enlivened if (a) the party that made the offer achieves a better result than the amount offered, (b) the offer was a genuine offer of compromise, and (c) it was unreasonable of the offeree not to accept: for example Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [7] -[8]."
I am not persuaded that Mr Zong acted unreasonably in not accepting the Offer, where he could not have complied with the term requiring that the issue of the shares in the Company to him be treated as void ab initio, and that conclusion does not depend on the amount of the compensation proposed in that offer. I note, however, that that amount also did not involve any significant discount to the amount that was properly recoverable by the Company, so as to reflect the inherent risks of litigation or amount to any real compromise on the Plaintiffs' part.
The Plaintiffs also submit that indemnity costs should be awarded for all of the costs incurred by the Plaintiffs after 16 March under UCPR r 42.14(2) or alternatively under the Calderbank principle. Had I had found that UCPR 42.14 was engaged or that the Calderbank principle applied, I would not have not found that indemnity costs would be ordered for all of those costs. The Plaintiffs also submit that the result of their misrepresentation case could not be identified until after the cross-examination of Ms Lin and Mr Zong. I do not accept that submission, where the difficulties in that case partly reflected issues as to the way in which the Plaintiffs' evidence had been prepared, which should have been known to the Plaintiffs and their legal representatives, and also reflected the terms of the Shareholders Agreement which was known to them. The Plaintiffs also point to other matters which they submit contributed to the length of the hearing, but I continue to hold the view that the hearing would have been substantially shorter, by at least the period indicated in my Primary Judgment, had the Plaintiffs not pursued their misrepresentation case and other unsuccessful claims.
Mr Young responds that even if the Offer was an offer of compromise and the Court did not "otherwise order" under UCPR 42.14, that rule would only have the effect of entitling the Plaintiffs to an assessment of costs on an indemnity rather than a party/party basis and would not have the additional effect that the Defendants had to pay all rather than 50% of the Plaintiffs' costs, where it did not displace the issue to which I referred in paragraph 139 of the Principal Judgment. I accept that submission, although little turns on it, where that matter would be reason to otherwise order under UCPR r 42.14 if the offer had been an offer of compromise.
Mr Young also submits that the costs order identified in paragraph 139 of the Primary Judgment, that the Defendants (implicitly, excluding the Company) should pay 50% of the Plaintiffs' costs proposed in the Primary Judgment is appropriate in the circumstances set out in that paragraph, and also supports that order on the additional basis that the Second Plaintiff, Mr Su, was unsuccessful in his claims, where he was joined as an additional plaintiff only for the purposes of seeking damages in relation to the misleading and deceptive conduct claims, as to which he failed. I accept that that matter also supports the order identified in paragraph 139 of the Principal Judgment.
[4]
Stay application
Mr Young notes that the Defendants seek a stay of the orders for 28 days, other than as to Mr Zong's removal as a director of the Company, and submits that Mr Zong "is likely to appeal the decision and wishes a 28 day stay of the orders to facilitate preparation and lodgement of the appeal". The solicitors for the Second and Third Defendants advise that they intended to appeal against the Primary Judgment and adopted the orders proposed and the submissions made by Mr Zong. The Plaintiffs do not consent to a stay and point to the fact that, in order to obtain a stay, the Defendants must demonstrate that there is a reason for a grant of a stay or that matter is an appropriate case for a stay: Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 ("Alexander") at 694. Here, the Defendants have not brought an application for a stay but merely proposed an order to which the Plaintiffs do not consent: compare United Muslims New South Wales Incorporated v Australian Federation of Islamic Councils [2021] NSWSC 421.
I recognise that the overriding principle to apply when determining an application for a stay is to ask what the interests of justice require, and special or exceptional circumstances need not be made out to grant a stay; it is sufficient that the Defendants demonstrate a reason or appropriate case to warrant the exercise of discretion in their favour; and it is relevant whether there are reasonably arguable grounds for an appeal: Alexander at 694-695; NSW Bar Association v Stevens [2003] NSWCA 95 at [83]. The Court must make a preliminary assessment about whether an arguable case exists, requiring that there be reasonably arguable questions for the determination of the appellate court: Alexander at 695; Kalifair Pty Ltd v Digi-Tech (Australia) Ltd (2002) 55 NSWLR 737; [2002] NSWCA 383 at [18]; Aquaqueen International Pty Ltd v Titan National Pty Ltd [2015] NSWCA 9 per McColl JA at [46]. It is relevant, in considering a stay application, that an appeal would be rendered nugatory if a stay were not granted: Kalifair at [18]. However, as McColl JA noted in Aquaqueen above, it is not sufficient to order a stay that otherwise the appeal would be rendered nugatory, and it is first necessary that the appellant demonstrates that the appeal raises serious issues for the determination of the appellate court: Aquaqueen at [48].
While Mr Young and the solicitors for the Second and Third Defendants indicate that those parties will or may bring an appeal from the Court's orders, they do not identify any basis for that appeal so as to allow me to make any assessment whether an arguable case exists, so as to meet the requirements for a stay noted above. I will not order a stay, where no application was brought for it, the merits of that application have not been established and the Plaintiffs do not consent to it.
[5]
Orders
Accordingly, I make the following orders:
1. Judgment for the Fourth Defendant against the First, Second and Third Defendants jointly and severally in the sum of $254,535.
2. Further judgment for the Fourth Defendant against the First Defendant in the sum of $55,000.
3. Order that the First Defendant be removed as a director of the Fourth Defendant.
4. Order that the First Defendant transfer his 4,500 shares in the Fourth Defendant to the First Plaintiff, within 7 days.
5. Order that the First, Second and Third Defendants pay 50% of the Plaintiffs' costs (including any costs incurred by them on behalf of the Fourth Defendant) of and incidental to these proceedings as agreed or as assessed.
[6]
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Decision last updated: 08 June 2021