Solicitors:
H & H Lawyers (Plaintiff)
Zhang Partners (Defendant)
File Number(s): 2021/48445
[2]
Background and affidavit evidence
By an Originating Process filed on 19 February 2021, the Plaintiffs, Yuans Sunshine Pty Ltd ("Yuans") sought orders under s 1324 of the Corporations Act 2001 (Cth) requiring the preparation of a financial report and directors' report in respect of the Defendant, Cabramatta King Tea Pty Ltd ("CKT"), pursuant to ss 292-293 of the Corporations Act and the audit of that financial report. By an Interlocutory Process dated 7 February 2022, Yuans sought an order that it be granted leave to discontinue the proceedings and that CKT pay its costs of the proceedings and that Interlocutory Process. CKT in turn indicated that it sought an order that Yuans pay its costs of the proceedings, pursuant to s 98 of the Civil Procedure Act 2005 (NSW) and r 42.19(2) of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"). On 9 February 2022, I made orders at the request of the parties vacating a listing of these proceedings in the Corporations Motions List on 14 February 2022 and directing the parties to serve their evidence and submissions in respect of the question of costs.
Yuans relies, in its costs application on the affidavit dated 14 March 2022 of its solicitor, Mr An. Mr An's evidence is that Yuans holds 30 of the 100 fully paid ordinary shares issued by CKT, and 69 shares are held by Dan Tea Pty Ltd ("Dan Tea") and one share by Mr Yan. He observes that Mr Yan is presently the sole director of CKT and has been the sole director and majority shareholder of Dan Tea, and that CKT operates the Cabramatta franchise of a business known as "King Tea" which is a retailer of iced tea and other beverages. He refers to an alleged breakdown of the relationship between Mr Yan and the principle of CKT, Mr Yao, about June 2020 and to certain concerns of Mr Yao. He provides a lengthy account of correspondence in respect of the proceedings and refers to the issue of a subpoena to CKT's auditor and an order for general access to documents produced on subpoena which I made on 13 September 2021. He also refers to CKT's supplementary financial report dated 6 August 2021 purported to amend its original financial statements for the year ended 30 June 2020, to the service of an expert report by Yuans and to an expert's report in response. Mr An attributes the discontinuance of the proceedings to the receipt of CKT's audited accounts, the audited directors' statement of remuneration, amended versions of those documents and Yuan's evidence in reply, which now indicated that the financial reports, as amended, complied with relevant statutory requirements.
CKT in turn relies on an affidavit dated 14 March 2022 of Mr Yan, its sole director, which refers to some six previous affidavits filed in the substantive proceedings in support of CKT's position as to costs. Mr Yan's evidence is that CKT's delay in supplying an audited financial report and audited statement of directors' remuneration was due to the removal of $28,000 from CKT's bank account by Yuans. His evidence is that, without the return of those funds and against the background of COVID-19, CKT did not have the financial resources to obtain an audited financial report in compliance with a shareholder's directions, and that CKT had been operating at a marginal loss since its commencement of trading in December 2018. He in turn refers to issues arising in the conduct of the proceedings and to offers made in respect of the resolution of the proceedings. It is not possible to reach any assessment as to the cogency of that evidence, where the matter did not go to a substantive hearing and that evidence has not been tested.
Yuans in turn relies on an affidavit dated 4 April 2022 of Mr An in reply, who referred to correspondence and contended that the availability of financial resources to CKT, implicitly including the impact of Yuans' unauthorised withdrawal from its account, would not impact on its complying with the shareholder direction for the financial year ending 2020. He addressed CKT's suggested delay in providing draft financial reports, a suggested non-responsiveness to an auditor's requests and delay in finalising the audit process. The fundamental difficulty with this evidence is that it was directed to seeking to establish, on the merits, matters which the Court cannot now determine on the merits, because Yuans have discontinued the proceedings.
[3]
Applicable principles
The Court's powers with respect to costs arise under s 98 of the Civil Procedure Act. In Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121], Hodgson JA (with whom Mason P agreed) observed that:
"… 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 was cited, with apparent approval, by the Court of Appeal in Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [98]. Here, however, there has been no determination of the proceedings on their merits.
Rule 42.19 of the UCPR in turn deals with the position where proceedings are discontinued in accordance with UCPR r 12.1 and relevantly provides that:
"Unless the Court orders otherwise or the notice referred to in rule 12.1(2) otherwise provides, the plaintiff must pay such of the defendant's costs as, at the date on which the notice of discontinuance was filed, have been incurred by the defendant in relation to such claim in respect of which the proceedings have been discontinued."
In Fordyce v Fordham (2006) 67 NSWLR 497; [2006] NSWCA 274 ("Fordyce"), McColl JA (with whom Beazley JA agreed) observed that the "default order" in the similar provision in UCPR r 42.20 does not establish a presumption that costs will be ordered against the plaintiff upon the dismissal of the proceedings, and other relevant considerations included those identified in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624-625; (1997) 143 ALR 1; [1997] HCA 6 ("Lai Qin"). Santow JA there agreed with that observation and also noted that the onus is on a discontinuing party to justify such an order by reference to the normal costs outcome in such an event. An order contrary to the "default" order will involve an exercise of discretion to depart from that position contemplated by the rule, where "some sound positive ground or good reason for departing from the ordinary course" is established: Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [10], [54]; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32 ("Bitannia") at [54]. The fact that parties were justified or acted reasonably in commencing or defending the proceedings may but will not necessarily support a departure from the "default order" under that rule: Australiawide Airlines at [64].
In Metro Hotel Sydney Pty Ltd v Kol Tov Pty Ltd [2010] NSWSC 1195, where proceedings were compromised by the parties after they became otiose, following the sale of a hotel which brought the management agreement that was in issue to an end, Hamilton AJ noted that the similar provision in UCPR r 42.20 extends, on appellate authority, to dismissals by consent as well as dismissals after a hearing and to that extent intrudes upon the approach laid down in Lai Qin . His Honour there held that there should be no order as to costs as between the parties, where the occurrence of that supervening event had led to a compromise of the proceedings and there had been no unreasonable conduct on the part of the defendants.
In McNamara v San [2010] NSWSC 809 at [12], Hallen AsJ (as his Honour then was) summarised the principles applicable to the similar provision in UCPR r 42.20 as follows:
"The following principles may be regarded as relevant in determining who is to bear the burden of costs in a case where the proceedings are dismissed before a final hearing:
(a) Costs discretions are truly discretionary: see Oshlack v Richmond River Council (1998) 193 CLR 72 at 84 and there are no absolute rules;
(b) The purpose of a costs order is to compensate, or indemnify, the person in whose favour it is made, not to punish the person against whom it is made: Ohn v Walton (1995) 36 NSWLR 77 at 79 per Gleeson CJ;
(c) Rule 42.20 of the UCPR does not give rise to a presumption that costs will be ordered against the Plaintiff: Fordyce v Fordham [2006] NSWCA 274; (2006) 67 NSWLR 497; Foukkare v Angreb Pty Limited [2006] NSWCA 335 at [65]; Pentroth Pty Ltd v Kirschild Pty Ltd (2006) 96 SASR 129; Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [53]; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32. However, the rule does create a starting point by requiring "… the plaintiff must pay the defendant's costs of the proceedings …" unless that outcome is displaced by a discretionary decision ("unless the court otherwise orders");
(d) Generally, there must be some proper justification, sound positive ground, or a good reason, for departing from the ordinary position: Fordyce v Fordham at [2] per Santow JA; Australiawide at [54] per Bryson JA; circumstances in which it has been held appropriate to depart from the ordinary position include where the proceedings have been rendered unnecessary by circumstances beyond the plaintiff's control; where the plaintiff achieved practical success in the proceedings, or where costs have been significantly increased by the unreasonable conduct of the defendant.
(e) The Plaintiff should be the moving party on an application for an alternative costs order: Bitannia at [70] per Basten JA. If facts are to be relied upon to found the court making a different order, the Plaintiff will bear the onus of proving the relevant facts;
(f) Where the proceedings are dismissed prior to any hearing on the merits, "the Court cannot try a hypothetical action between the parties" to determine the question of costs: Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201; Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 at 624; Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2007] NSWSC 1120 at [35];
(g) It may be necessary to analyse the whole of the proceedings to determine the appropriate costs order: Fordyce at [67] per McColl JA. A relevant consideration is whether the Plaintiff acted reasonably in commencing the proceedings and whether the defendant acted reasonably in defending them: Australian Securities Commission v Aust-Home Investments Ltd at 201 (cited with approval in Foukkare); all the relevant circumstances, and not just the fact of dismissal, should be considered;
(h) It is also important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event, or settlement, so removes, or modifies, the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the court's discretion otherwise than by an award of costs by the successful party. It is the latter type of case that usually creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs: One.Tel Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548 at 553; cited with approval in Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 per Davies AJA (with whom Mason P and Meagher JA agreed) at [5];
(i) The distinction between the two categories referred to above is often helpful in exercising the costs discretion, notwithstanding that neither category can be precisely defined, the boundary between them is unclear and other factors may be relevant: Bitannia per Basten JA at [79]-[81]; Perre v State of New South Wales [2009] NSWLEC 51 at [49];
(j) The rule requires the court to make such order as it thinks just in the particular circumstances of the case."
That summary was cited with apparent approval by Kunc J in Spatt v Benson [2019] NSWSC 1195 at [64] and I followed it in Parlby v Blair [2013] NSWSC 100 at [11]ff, Re Myao Travel Pty Ltd [2020] NSWSC 1672 at [6]ff, Australian Unity Funds Management Ltd v NorthWest Healthcare Australia RE Ltd [2021] NSWSC 1039 ("Australian Unity") at [9]ff, and in Davis v Certain Lloyds Underwriters [2022] NSWSC 131 at [9] on which I have partly drawn for these observations as to the case law.
[4]
Parties' submissions
By submissions filed on 14 March 2022, Mr Riordan, who appears for Yuans, set out a lengthy account of the steps taken in the proceedings and referred to the access given to documents produced on subpoena and CKT's issue of an amended audited financial report on 30 September 2021 and a supplement to the audited accounts on 5 October 2021, and addressed the expert evidence which had been led between the parties, and the view formed by Yuan's expert that the amended accounts were compliant. Plainly, those submissions must be understood in the context that the Court will not have an opportunity to determine the factual matters in issue in the proceedings, or whether Yuans would in fact have been entitled to the relief that it sought where Yuans has now discontinued the proceedings.
Mr Riordan points to the Court's discretion as to costs under s 98 of the Civil Procedure Act and to UCPR r 42.19, to which I referred above. He rightly notes that r 42.19 does not create a rebuttable presumption in favour of the Defendant, although some proper justification, sound positive ground or good reason for departing from the usual position would need to be shown, referring to Fordyce and Bitannia. He also recognises the application of the principle in Lai Qin, where there has been no trial on the merits, and refers to my summary of the relevant principles in Australian Unity to which I referred above. Mr Riordan also refers to the decision in Garwolin Nominees Pty Ltd v Statewide Building Society [1984] VR 469 at 472, where a plaintiff sought leave to discontinue proceedings, where the relief claimed had become otiose, and Kaye J observed that a plaintiff should not be denied his costs incurred "in achieving the relief he sought by the commencement of his action", and should not be forced to continue to trial in order to obtain orders for costs. Mr Riordan also refers to the similar position in cases including Scott v Tuff-Kote (Australia) Pty Ltd [1975] 1 NSWLR 537 and Champagne View Pty Ltd v Sehearwater Resort Management Pty Ltd [2000] VSC 214 and to subsequent caselaw. Mr Riordan submits Yuans was justified in commencing proceedings to vindicate rights that were not recognised by CKT, in respect of its entitlement to receive audited accounts and that it has in substance obtained what it claimed when it brought these proceedings.
Mr Gemmell, who appears for CKT, also outlines the background facts to the proceedings, but places emphasis on an unauthorised transfer of $28,000 from CKT to Yuans, which had left CKT with a small amount in its bank account, and to Yuans' refusal to return the amount withdrawn while its application for an audited financial report and an audited statement of directors' remuneration were on foot. He refers to a contest in the expert evidence as to the nature of suggested deficiencies in CKT's audited financial report and audited statement of directors' remuneration for the year ended 30 June 2020, which had been provided on 3 March 2021 in compliance or purported compliance with the direction given by Yuan. Mr Gemmell submits that whether Yuans' conduct in commencing the proceedings was reasonable must be determined in the context of its withdrawal $28,000 from CKT's account, which he suggests put CKT "on the brink of insolvency", with the only justification being Yuan's claimed "suspicion" as to the management and handling of CKT's accounts and whether there were missing or undistributed profits. He also refers to an offer made by CKT to permit access to its books and records, subject to the return of the $28,000 withdrawn by Yuan and the payment of photocopying costs. He submits that the continuance of proceedings by Yuans was unreasonable, and refers to offers to resolve the dispute made by Yuans which included several attempts to have its shares in CKT bought out. He also addresses the substance of questions raised as to CKT's accounts and CKT's response to them, which the Court will not have the opportunity to determine on the merits where the proceedings were discontinued.
In reply, Mr Riordan seeks to minimise any impact of the withdrawal by Yuans of the amount of $28,000 from CKT's trading account, which one would ordinarily expect to be substantial, and to advance a submission that CKT delayed in obtaining audited financial statements and he also responds to criticisms made by CKT of Yuans' continuance of the proceedings after it obtained audited accounts. He submits that the case is on all fours with Garwolin, Scott and Champagne View. I do not accept that submission, where none of those cases involved a position that a plaintiff had withdrawn a very substantial amount from a company's account, without proper authority to do so. In reply, Mr Gemmell in turn responded to Yuans' submissions and contested the extent of deficiencies in CKT's account, which is once again a matter that the Court cannot determine where there has been no hearing on the merits. Mr Gemmell repeats the proposition that the cause of the delay in preparing the financial accounts was a lack of financial resources, by reason of the withdrawal of $28,000 by Yuans from the Company, or against the background of COVID. Although that proposition is plausible, it is impossible to determine its truth, where the matter will not now be heard to permit a determination on its merits.
[5]
Determination
It seems to me that there is reason to depart from the usual position here, so that there will be no order as to the costs of the proceedings. On the face of it, Yuans appear to have had reason for complaint as to the delay in preparation of CKT's financial reports, and as to the terms of the financial reports, until they were amended, and CKT plainly had reason for complaint as to the adverse impact of the unauthorised withdrawal of $28,000 from its account, including on its ability to prepare or fund the preparation of audited accounts. In those circumstances, it seems to me that I should not order costs against Yuans where it appears to have obtained the practical equivalent of at least some of the relief sought, by the preparation and subsequent amendment of those accounts, and its discontinuance of the proceedings reflects that position. However, I could not find that Yuans' conduct of the proceedings was reasonable, where its withdrawal of substantial funds from CKT's account, based on unproved "suspicions" as to the treatment of CKT's revenue, would likely have impacted on CKT's ability to fund the preparation of the accounts.
For these reasons, I grant leave to the Plaintiff to discontinue the proceedings, to the extent that has not previously been granted, on terms that there will be no order as to the costs of the proceedings.
[6]
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Decision last updated: 06 May 2022