Australian Securities and Investments Commission v ABC Funds Managers Ltd [2021] NSWSC 1693 | Case summary

Australian Securities and Investments Commission v ABC Funds Managers Ltd [2021] NSWSC 1693 | Case summary | Zoe

Judgment - ex tempore (Revised 20 December 2021)

By Further Amended Originating Process filed on 29 November 2021, Ms Jennifer Hardy sought a range of relief in respect of Hardy Bros Equipment Pty Ltd ("Company"), including an order that the Company be wound up on just and equitable grounds under s 461(1)(k) of the Corporations Act 2001 (Cth), or alternatively under s 233 of the Corporations Act, in respect of oppression. She also initially sought orders that Ms Lynette Hardy, the Second Defendant, and a company associated with Ms Lynette Hardy, Hardy Mining Pty Ltd ("Hardy Mining"), pay compensation to the Company including an account of profits, and brought an application, under the oppression provisions under ss 232-233 of the Act or for leave to bring a derivative action in the name of the Company against Ms Lynette Hardy under s 237 of the Act, and sought a range of other relief.
By a Fourth Interlocutory Process filed on 30 November 2021, Ms Lynette Hardy in turn sought an order under the oppression provisions under ss 232-233 of the Act authorising her to institute proceedings to seek recovery in the Company's name from Ms Jennifer Hardy, Mr Matthew Hardy and an entity associated with them, Makekadi Mining Services Pty Ltd, and also sought an order for the Company to purchase Ms Jennifer Hardy's shares in the Company with an appropriate reduction of its capital.
The parties filed voluminous evidence in respect of the applications. Mr Williams, with whom Ms Cameron appears for Ms Jennifer Hardy, narrowed the relief that she sought at the commencement of the hearing to bring only a winding up application and read some but not all of the evidence she had filed in support of that relief. Mr Neggo, who appears for the Defendants, in turn indicated at the close of Ms Jennifer Hardy's evidence that the Defendants no longer resist a winding up application, and no longer press for an order that the Company buy out Ms Jennifer Hardy's shares. A winding up order accordingly can be made by consent of the parties, although the Court must nonetheless be satisfied that the basis for making it is established.
It seems to me that the approach now adopted by the parties is well advised. There was no doubt that the proceedings were otherwise going to be lengthy, involving scrutiny of numerous transactions, which are largely not well documented and some of which involve small amounts of money, although the aggregate value of those transactions would be larger. There were also significant difficulties with the admissibility of evidence in both parties' claims, possibly reflecting the number of transactions with which the legal practitioners had sought to engage, and possibly reflecting difficulties with the production of documents. A suggestion was raised that some documents had been produced late, although the attempt to obtain the production of those documents may also have been made relatively late. There is a real prospect that, but for the wise choice made by the parties and their legal representatives, this matter would have continued for several days, but reached the same outcome as the parties have now reached more cost effectively, namely a winding up order.
The reasons that result may have occurred include both the evidentiary difficulties with the claims which each party seeks to bring against each other, to which I have referred above, and the fact that the Court might well not have been prepared to make a buy-out order, where there is uncertainty as to the value which should be attributed to the shares, given the claims that the Company may have against each of the shareholders (or at least that each shareholder contends that the Company has against the other shareholder), and the absence of evidence to establish that either the Company has the financial capacity to buy-out Ms Jennifer Hardy's shares, at least at the higher values which she contends should be attributed to those shares. A winding up order might well have been made, and a buy-out order withheld, for the reasons noted in Snell v Glatis (No 2) [2020] NSWCA 166 and Re Crow Inn Pty Limited (No 2) [2020] NSWSC 1749.
The "just and equitable" ground for winding up a company in s 461(1)(k) of the Corporations Act is not limited by particular categories, as I noted in Re CNPR Limited [2018] NSWSC 989 and Re Spitfire Q Pty Ltd [2021] NSWSC 866. I should add to the observations in my ex tempore judgment that, at least where a company was established on a basis of relationships of mutual confidence, a winding up order may be made on the just and equitable ground under s 461(1)(k) of the Corporations Act where irreconcilable differences emerge between its members: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672; [2001] NSWCA 97 at [89]; Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; [2009] NSWSC 342 at [97]-[98]. The circumstances in which the Court may make a winding up order under s 461(1)(k) of the Act also include circumstances where the substratum of the company has failed: Re Catombal Investments Pty Ltd [2012] NSWSC 775. Also expanding on my ex tempore judgment, the Court can also make a winding up order under s 461(1)(k) on the just and equitable ground by reason of, inter alia, lack of confidence in the conduct and management of a company's affairs or where the company has failed to comply with the requirements of the Corporations Act with respect to financial records and reports: Australian Securities and Investments Commission v ABC Funds Managers Ltd (2001) 39 ACSR 443; [2001] VSC 383 at [119]; Australian Securities and Investments Commission v Kingsley Brown Properties Pty Ltd [2005] VSC 506; Australian Securities and Investments Commission v Stone Assets Management Pty Ltd (2012) 90 ACSR 523; [2012] FCA 630 at [46]; Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) [2013] FCA 234 at [19]ff.
In summary, an order to wind up the Company on just and equitable grounds is properly made here given the failure of cooperation between the Company's directors and shareholders; the failure of the substratum of the business because of the liquidation of associated companies; the use of the Company's assets in a manner that, at best, has occurred without proper corporate approval of the transactions and, at worst, involves a diversion of corporate assets to the users of those assets; and the issues as to the accuracy of the Company's financial records.
Expanding on these matters, it is plain enough that there has been a complete collapse of any workable business or family relationship between Ms Jennifer Hardy and Ms Lynette Hardy and members of their respective families, in what appears to have originated as a family company. Second, the substratum of the Company appears to have have failed, at least so far as a number of associated companies to which it previously made equipment available are now in liquidation.
Third, the evidence led by the Plaintiffs establishes that assets of the Company have been used by Ms Lynette Hardy and Hardy Mining in their separate business, in a manner which was not approved by the Company's directors or by its shareholders and did not have the unanimous consent of shareholders. It is not necessary to decide for present purposes, although a liquidator will plainly need to investigate, whether the use of those assets in that manner involved a breach of director's duties, or caused loss to the Company, beyond the fact that it plainly was not authorised in accordance with proper corporate procedures. I recognise that Ms Lynnette Hardy in turn contends that there has been corresponding improper use of the Company's assets by Ms Jennifer Hardy and persons associated with her, although that, of course, would be more rather than less reason then to wind up the Company on the just and equitable ground. Fourth, the evidence indicates that there is, to say the least, a substantial issue as to the integrity of the Company's accounts, and the extent to which entries in those accounts have been included for convenience, and having regard to the litigation, rather than because they accurately reflect underlying transactions. That too supports a winding up order on the just and equitable grounds.
The parties have today reached a degree of consensus that Mr Strawbridge of FTI should be appointed as liquidator of the Company, where he is independent of both directors and shareholders. It has not yet been possible for them to obtain Mr Strawbridge's consent to appointment although there is no reason to think that that would not be forthcoming. This can be addressed by staying the order for the winding up, for a short period, to allow that consent to be obtained. If any difficulty arises in respect of that consent, then the matter can be restored and another liquidator can be appointed.
For these reasons, I order that:
Hardy Bros Equipment Pty Ltd be wound up under s 461(1)(k) of the Corporations Act and that Mr Vaughan Strawbridge of FTI be appointed as its liquidator.
This order be stayed to 8pm today, for the purposes of allowing an opportunity to obtain Mr Strawbridge's consent to act as liquidator.
Liberty to apply on one business hours' notice in the event of any difficulty arising in respect of Mr Strawbridge's consent to appointment as liquidator.

[3]

Costs

Turning now to the question of costs, I have made a winding up order in respect of the Company. Ms Jennifer Hardy ultimately did not pursue ancillary relief by way of a derivative action, or a claim for compensation for the Company against Ms Lynette Hardy and others, rightly recognising that that matter was best left to be investigated and, if appropriate, pursued by a liquidator appointed to the Company. Ms Lynette Hardy in turn did not pursue a cross-claim, which similarly sought relief in respect of oppression, or orders in respect of causes of action which the Company was said to have against Jennifer Hardy and persons associated with her, which will also be left to a liquidator. Although a substantial amount of evidence was read by Ms Jennifer Hardy, the winding up order that I have made is significantly narrower than the relief that the parties had sought, and it is plain that some evidence, including evidence of quantification, is of distant relevance to it.
The applicable principles as to costs are well established. Under s 98 of the Civil Procedure Act 2005 (NSW), costs are in the discretion of the Court and the Court has full power to determine by whom, to whom and to what extent costs are to be paid, and may order that costs be awarded on the ordinary basis or an indemnity basis. No question of indemnity costs orders arose here. That power is to be exercised judicially, so that the discretion that the Court must exercise is a judicial discretion, to be exercised having regard to the relevant facts and circumstances.
The general rule is that a successful party has a reasonable expectation of being awarded costs against an unsuccessful party, unless there is a good reason for the presumption to be displaced. However, as Hodgson JA (which whom Mason P agreed) observed in Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121]: "Underlying both the general rule that costs follow the event, and the qualifications to that rule, is the idea that costs should be paid in a way that is fair, having regard to what the Court considers to be the responsibility of each party for the incurring of the costs." That observation has subsequently been cited with apparent approval by the Court of Appeal in Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [98] and applied in many first instance decisions.
Mr Williams submits that the proper order as to costs is that Ms Lynette Hardy pay the Plaintiffs' costs of the proceedings, save insofar as those costs are attributable solely to the claims made in Section B of the Plaintiffs' Further Amended Points of Claim filed on 29 November 2021. Section B of those Points of Claim relate to the claims sought to be brought by Ms Jennifer Hardy on the Company's behalf against Ms Lynette Hardy and others. Mr Williams in turn submits that the Cross-Claimant, Ms Lynette Hardy, should in turn pay the costs of the Cross-Defendants of the Cross-Claim.
That proposed order would require Ms Lynette Hardy to pay all of Ms Jennifer Hardy's costs of the proceedings, with the exclusion applying only to costs that are attributable solely to the claims made in Section B of the Amended Points of Claim, namely those costs which relate to the claims in the Company's name against Ms Lynette Hardy and Hardy Mining. That in turn means that costs would fall to be paid by Ms Lynette Hardy if they have a connection with the winding up, although they may not be primarily attributable to the winding up. That connection has plainly not escaped Mr Williams' attention. I raised an alternative approach with Mr Williams in the course of submissions, that Ms Lynette Hardy pay Ms Jennifer Hardy's costs of the winding up, which would require that an inquiry be made by a costs assessor as to whether the costs are properly costs of the winding up, without regard to the claims made in Section B of the Amended Points of Claim. Mr Williams submits that that would be a more difficult inquiry for a costs assessor, although it is not apparent to me that that would be so. It seems to me that it would be a less expansive order, since there may be costs that are not fairly treated as costs of the winding up, although they equally could not be said to be attributable solely to the claims made in Section B of the Plaintiffs' Amended Points of Claim, because they have, for example, some attenuated connection with the winding up order. On balance, if an order of the kind proposed by Ms Jennifer Hardy rather than that proposed by Ms Lynette Hardy is to be made, it seems to me that the order that should be directed to the costs of the winding up application, leaving a costs assessor to reach an assessment as to whether, in truth, costs have that character, rather than ordering all costs by paid by Ms Lynette Hardy with the more limited exclusion.
Second, Ms Jennifer Hardy's proposed order operates on the basis that Ms Lynette Hardy should pay the costs determined in that manner, rather than that they be costs in the winding up. That was not contested by Ms Lynette Hardy and it seems to me that is plainly a proper order, where this is winding up application on the just and equitable ground; it reflects a dispute between the Company's shareholders; and it would not do justice between the parties to order that those costs be paid out of the Company's assets, so that they were in effect shared between Ms Jennifer Hardy and Ms Lynette Hardy and their respective interests, irrespective of the outcome.
Third, Ms Jennifer Hardy seeks an order that Ms Lynette Hardy pay the costs of the Cross-Claim. That order seems to be put on two bases. The first is that the proceeding commenced as a winding up order, and Ms Lynette Hardy's Cross-Claim then drew Ms Jennifer Hardy into seeking corresponding relief, by way of herself seeking to bring a derivative action in her primary case. It is possible that that explains the historical genesis of events, by which the case grew beyond a winding up application to include complex relief sought by both parties, supported by voluminous, but partly or substantially inadmissible evidence, in respect of those wider claims. However, it seems to me that there is limited force in that historical explanation, because it would have been open to Ms Jennifer Hardy at any time to take the approach that she has sensibly taken today, that, whatever the approach taken by Ms Lynette Hardy, she sought only a winding up order, leaving it to a liquidator to bring any claims against the respective parties, which would then be assessed independently and brought by a person exercising independent judgment. That course was not taken, and I do not say that critically, and that is a significant cause of the costs which both parties have incurred in respect of their wider claims.
Mr Williams adds that there was previously a significant prospect of a buy-out order, rather than a winding up order until issues arose in respect of the Company's financial position. It is by no means apparent to me that there was ever a significant prospect of a buy-out order, or at least that there was a significant prospect of such an order after the Court of Appeal had delivered its judgment in Snell v Glatis above. In any event, it does not seem to me that the prospect of an order, if it existed and has since been displaced, much affects the position as to whether Ms Lynette Hardy should pay the costs of the Cross-Defendants of the Cross-Claim.
It seems to me that the position here is that Ms Lynette Hardy sought to bring a very wide case in the Company's name against Ms Jennifer Hardy and persons associated with her, which would have faced difficulty, and Ms Jennifer Hardy brought a correspondingly wide case in the Company's name against Ms Lynette Hardy and persons associated with her, which would have equally faced difficulty, and both cases have now not been pressed. In those circumstances, it seems to me that the proper result is that there be no order as to costs of those claims, rather than an order which treats those parties differentially, based upon an inquiry, as to who started the range of widening claims in which both parties ultimately participated. I have not neglected Mr Williams' submission that claims are brought against third parties here, but those third parties are associated with Ms Jennifer Hardy on the one hand and Ms Lynette Hardy on the other. In those circumstances, it does not seem to me that the fact that one party has brought a claim against interests associated with the other provides any differentiating feature between the two parties.
Mr Neggo in turn formulates a costs order in a somewhat different way, accepting that Ms Lynette Hardy must pay a portion of Ms Jennifer Hardy's costs of the proceedings, but seeking to define that order by way of a percentage, 60%, of Ms Jennifer Hardy's costs of the application to wind up the Company, by reference to particular prayers of the Further Amended Originating Process filed on 29 November 2021. It seems to me that the fundamental difficulty with that approach is that the Court has no proper basis on which to determine the 60% figure, as distinct from some other figure, whether 50%, 70% or 80%, and that can only ultimately be determined by a costs assessment, linking costs to the winding up application on which Ms Jennifer Hardy was successful, where that application was opposed by Ms Lynette Hardy, who instead propounded a buy-out order for substantially the whole of the proceedings.
Mr Neggo in turn submits that there should be no order as to Ms Jennifer Hardy's applications under s 233(1)(g) or 237 of the Corporations Act, but it seems to me that that result would be achieved by limiting a costs order so that it is a costs order in respect of the costs of the winding up application. Mr Neggo submits that, in respect of the Cross-Claim, there should be no order as to costs with the intention that the parties bear their own costs referable to the Cross-Claim. It seems to me that that order is appropriate, where I have noted above that Ms Jennifer Hardy's claims, in respect of the derivative claims to be brought on behalf of the Company against Ms Lynette Hardy and associated parties, and Ms Lynette Hardy's claims in respect of the similar claims to be brought by the Company against Ms Jennifer Hardy and associated parties are of a similar character, and, having regard to the difficulties in the evidence and the lack of a merits determination, the Court cannot reach a view as to their respective merits. In these circumstances, it seems to me that the proper order as to costs is that set out below, which will leave an assessor to make an assessment of the costs that are properly recoverable by Ms Jennifer Hardy as costs of the winding up, unless, contrary to past history, the parties can act sensibly and reach agreement as to the costs attributable to that claim, avoiding the additional costs which will be incurred in an assessment process.
I make the following additional orders as to costs:
The Second Defendant, Ms Lynette Hardy, pay the Plaintiffs' costs that are properly attributable to the application to wind up the First Defendant, Hardy Bros Equipment Pty Ltd, excluding those costs attributable in substance to the claims made in section B of the Plaintiffs' Further Amended Points of Claim filed 29 November 2021, as agreed or as assessed.
There be no order as to the costs of the Cross-Claim.
I also order that the exhibits be returned.

Australian Securities and Investments Commission v ABC Funds Managers Ltd

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