In these proceedings, the Court has made orders on the application of the plaintiff (Mr Yu) that the first defendant (L&B Seafood) be wound up under s 461(1)(k) of the Corporations Act 2001 (Cth) (Corporations Act) on the just and equitable ground and that a liquidator be appointed: In the matter of L&B Seafood Pty Ltd [2022] NSWSC 100 (Judgment).
These reasons deal with the costs of Mr Yu's successful winding up application and the costs of the second defendant's (Mr Ding) cross-summons. The cross-summons, which was dismissed by the Court, had sought an order for Mr Yu to sell his shares to Mr Ding on the grounds that Mr Ding had engaged in conduct that was oppressive, unfairly prejudicial or unfairly discriminatory to Mr Ding. The reasons assume familiarity with and adopt the same terms as those used the Judgment.
In accordance with directions made by the Court, Mr Yu and Mr Ding have provided written submissions on the issue of costs which is to be dealt with on the papers.
It is common ground that Mr Ding should pay his own costs of Mr Yu's summons seeking a winding up order and Mr Ding's cross-summons. The dispute relates to Mr Yu's costs.
Cellarit Pty Ltd v Cawarrah Holdings Pty Ltd [2022] NSWSC 242 | Case summary | Zoe
Mr Yu seeks orders that Mr Ding pay Mr Yu's costs on the basis that Mr Yu was successful on both the summons seeking the winding up order and Mr Ding's cross-summons .
Mr Ding seeks orders that Mr Yu's costs of both applications be paid by L&B Seafood in circumstances where the disputes arose out of a quasi-partnership and the breakdown of the party's relationship was due to fault on both sides.
The principles applicable to the making of an order for costs are well established. The starting point is that the award of costs in these proceedings is a matter within the Court's discretion: Civil Procedure Act 2005 (NSW) (CPA), s 98(1); Corporations Act, s 1335(2). While the Court's discretion is broad, it must be exercised judicially and consistently with the overriding mandate provided for in ss 56-60 of the CPA.
The usual rule is that costs follow the event unless it appears that some other order should be made as to part or all of the costs: Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 42.1
Underlying both the general rule that costs follow the event and the qualification to that rule is the "reasonable expectation" of a successful party of being awarded costs and the principle 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 costs that are incurred: In the matter of Hillsea Pty Limited [2019] NSWSC 1309 (Hillsea) at [12] (Black J); Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11 at [44], [134]; Cellarit Pty Ltd v Cawarrah Holdings Pty Ltd (No 2) [2018] NSWCA 266 at [9].
Also relevant to this application are ss 466(2) and 556(1)(b) of the Corporations Act. Pursuant to 466(2), the liquidator of L&B Seafood must, unless the Court orders otherwise, reimburse Mr Yu out of the property of L&B Seafood the taxed costs he incurred in bringing the winding up proceedings. In accordance with s 556(1)(b), such reimbursement shall be in priority to other unsecured debts and claims but after payment of certain expenses incurred in preserving, realising or getting in L&B Seafood's property or carrying on its business.
In relation to the winding up application, Mr Yu's submissions acknowledge that s 466 of the Corporations Act provides that the property of L&B Seafood may be used to reimburse Mr Yu for his taxed costs incurred in applying for the winding up order. However, he submits that Mr Ding, as contradictor, ought to pay the costs of the winding up order without recourse to the assets of L&B Seafood as Mr Ding's opposition was unreasonable in circumstances where it was clear there was a deadlock between Mr Yu and Mr Ding. Mr Yu also submits that it is possible that L&B Seafood no longer has any assets from which to reimburse Mr Yu his costs and, even if it does have assets, it would be unfair to Mr Yu as it would have the effect of reducing the assets available to meet the significant liability owed to Mr Yu by L&B Seafood. Pausing here, I understand Mr Yu's reference to the "significant liability" owed to him to be a reference to the initial capital contribution of $225,000 that Mr Yu provided to L&B Seafood by way of a director's loan when the Business was first established.
In relation to the cross-summons, Mr Yu submits that costs should simply follow the event.
Mr Ding submits that the Court should not order him to pay Mr Yu's costs as it was entirely reasonable for Mr Ding to seek relief which would allow L&B Seafood, through one of its quasi-partners, to continue trading and because court intervention was unavoidable. He submits that the proceedings are analogous to those which might be brought to wind up a partnership as the litigants were partners trying to unwind their failed joint endeavour. He submits that the partners in dispute could not have allowed the business to simply continue to trade in a dysfunctional relationship given their statutory obligations.
Mr Ding's submissions refer to Old v McInnes & Hodgkinson [2011] NSWCA 410 (Old), and the guiding principle that where a relationship between quasi-partners breaks down through no fault on either side, the costs would be paid out of the partnership assets, that is, borne in equal shares by the partners: Old at [59], [109]-[111], [119]. It is submitted that the exception to that principle, where one partner is guilty of relevant misconduct (Old at [109]), is not analogous to the current facts as the Court held there was "fault on both sides": Judgment at [175].
Mr Ding also submits that as Mr Yu's success was against L&B Seafood, rather than against Mr Ding (as his business partner), Mr Yu should have those costs paid from L&B Seafood's assets in accordance with the usual order, with the appropriate priority under s 556(1)(b) of the Corporations Act.
As to the costs of the cross-summons, Mr Ding submits that Mr Yu's costs should either be paid by L&B Seafood or should be shared equally by Mr Yu and himself because it was part of the "quasi‐partnership" suit.
In this case, Mr Ding accepted that the Business was set up as a quasi-partnership, the proper functioning of L&B Seafood depended on the working relationship between himself and Mr Yu, their relationship had irretrievably broken down and that those circumstances were sufficient to enliven the Court's power under s 461(1)(k) of the Corporations Act. However, Mr Ding actively opposed the making of a winding up order, including on the grounds of oppression, and contended that Mr Yu (rather than Mr Ding) was responsible for the relationship breakdown.
The allegations of oppression were determined on their merits with the Court concluding that the evidence did not establish that the complaints made about Mr Yu's conduct (in relation to the deliveries of seafood purchases and the payments and statements to suppliers) rose to the level of oppression or unfairly prejudicial or unfairly discriminatory conduct within the meaning of s 232 of the Corporations Act: Judgment at [94]-[111] and [112]-[125]. The Court also concluded that, even if Mr Ding's oppression claim had been made out, the expert report relied on by Mr Ding in support of the buy-out order should be rejected as it did not provide a proper evidentiary foundation on which the Court could determine a fair value of Mr Yu's shares: at [133]-[139].
The fact that Mr Ding's oppression claim and buy-out order was pursued in the context of a dispute between quasi-partners and to enable Mr Ding to buy-out Mr Yu's shares and for L&B Seafood to continue to trade does not, in my view, warrant the Court exercising its discretion and making an order in relation to the cross-summons otherwise that in accordance with the usual rule that costs follow the event. As Mr Yu submits, Mr Ding was the moving party on the cross-summons and was unsuccessful.
The effect of the relevant provisions of the Corporations Act is that Mr Yu has a statutory entitlement to an indemnity for his taxed costs from L&B Seafood's assets in respect of his winding up application. However, the Court retains the power to make such other costs order as it sees fit: Corporations Act, s 466(2).
Recently, in In the matter of Gearhouse BSI Pty Ltd (No 2) [2021] NSWSC 136, Williams J made a different order in respect of a contested winding up application in circumstances where the joint venture company was wound up due to a deadlock between the two equal shareholder companies. Her Honour held that the costs should be paid by the defendant shareholder because its conduct was the main factor that brought about the circumstances in which it was just and equitable to wind up the company, having earlier noted that the effect of an order that the applicant's costs of the winding up application be paid out of the company's assets would be that the applicant would effectively bear 50 per cent of its own costs: at [4], [10] and [11].
As to who was the cause of the relationship breakdown in this case, the Court found that there were aspects of the conduct of each of Mr Yu and Mr Ding that had contributed to the decline in their relationship and the loss of trust and confidence in the management of L&B Seafood's affairs. As was put in the Judgment, "there has been fault on both sides", although not at the level of oppression in respect of the complaints made about Mr Yu's conduct: at [175].
That said, Mr Ding's conduct was a significant factor that brought about the circumstances that led to the Court concluding that it was just and equitable to wind up L&B Seafood. As noted in the Judgment, Mr Ding had refused to provide sale records to prospective purchasers, failed to provide records of daily cash transactions to the accountant and in response to requests from Mr Yu's solicitors and had failed to ensure that third-party loans were properly documented and included in L&B Seafood's financial statements: at [159], [163]. That conduct led to legitimate and continuing concerns about the management of the financial affairs of L&B Seafood and also some doubts as to the company's ongoing solvency: Judgment [169].
Mr Ding had also opposed the winding up order by contending that the Court should leave the parties in their existing relationship, relying on In the matter of Bicher & Son Pty Ltd [2020] NSWSC 711. The Court declined to do so as the position in this case was different to that in Bicher & Son, including as L&B Seafood was in the nature of a quasi-partnership: Judgment at [178].
The Court was also satisfied that it was not unreasonable for Mr Yu to pursue a winding up order in the circumstances of this case. Mr Ding and Mr Yu could not agree on a buy-out figure and were in an intractable dispute. In practical terms, there was no other remedy available to Mr Yu and no alternative was proposed by Mr Ding: Judgment at [180] and [181].
In that context, there is some force to Mr Yu's submission that, if applying general partnership principles and having been put on notice that Mr Yu wished to dissolve the "quasi-partnership", Mr Ding ought to have accepted that Mr Yu no longer wished to be part of the relationship and not refused to consent to the appointment of a liquidator. The necessity for the proceedings and the costs incurred might have been avoided if Mr Ding had agreed to a voluntary winding up.
Irrespective of his motives in opposing the winding up, and even accepting that there was some fault on both sides for the relationship breakdown, the proceedings were essentially an adversarial contest between Mr Yu and Mr Ding, with Mr Ding unsuccessfully resisting the winding up of L&B Seafood and making his own claims of oppression. Mr Ding's opposition inevitably led to increased costs being incurred by Mr Yu and Mr Ding was on notice that a costs order might be sought against him if he did not consent to the winding up of the company
For these reasons, and in circumstances where leaving Mr Yu's costs to be paid out of L&B Seafood's assets would mean, in practical terms, that Mr Yu would bear at least 50 per cent of his own costs (or more if there are insufficient assets to pay them), I consider this to be a case where Mr Ding, as the defendant shareholder who unsuccessfully opposed the winding up relief sought, should be ordered to pay Mr Yu's costs of both the originating summons and the cross-summons.
Accordingly, I make the following order:
1. The Second Defendant is to pay the Plaintiff's costs of the Plaintiff's Originating Process and the Second Defendant's Cross-Summons on the ordinary basis as agreed or assessed.
[2]
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Decision last updated: 09 March 2022