Chen v Fang

Reasons: Costs orders sought against Mr Chen by Ms Jiali and Mr Sha

1. There were in substance two cases prosecuted within these proceedings.
2. By the originating process filed on 12 June 2020 and the statement of claim filed on 17 August 2020, Mr Chen and Matrix sought orders requiring Ms Jiali and Mr Sha to account to Matrix for money allegedly withdrawn from its bank account in breach of their duties as directors and orders for compensation under s 1317H of the Corporations Act or equitable compensation in respect of those alleged breaches. It is convenient to refer to this component of the proceedings as Mr Chen's case to distinguish it from the claims for relief made by Ms Jiali and Mr Sha in their interlocutory process. Ms Jiali and Mr Sha sought: 1. orders for the appointment of a provisional liquidator or payment of Matrix's funds into court; 2. declaratory relief relating to the identity of the directors of Matrix, the invalidity of resolutions passed or purportedly passed in relation to the commencement of these proceedings, the adoption of a constitution for Matrix and the transfer of Matrix's funds into an account controlled by Mr Chen; 3. a stay of the proceedings on the basis that Matrix had not properly resolved to commence that proceeding; 4. an order that no funds or assets of Matrix be used to fund the proceedings; 5. an order for access to Matrix's books and records; and 6. an order for the winding up of Matrix on various grounds, including the just and equitable ground.
3. As Ms Jiali and Mr Sha submitted, the discontinuance of Mr Chen's case attracts the operation of r 42.19 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR). The effect of UCPR r 42.19(2) is that, unless the Court otherwise orders, Mr Chen must pay such of the defendants' costs as had been incurred by them in relation to the claims for relief in the originating process and statement of claim as at the date of discontinuance on 30 November 2020. In this case, Mr Chen has not shown "some positive ground or good reason for departing from the ordinary course" of awarding the costs of the discontinued claims in accordance with r 42.19(2): see Chen v Fang [2019] NSWSC 960 at [53]-[54] and the authorities there referred to. A plaintiff who discontinues proceedings is required to do more than merely assert that the defendants filed irrelevant material in order to demonstrate grounds for departing from the ordinary course. I therefore accept Ms Jiali's and Mr Sha's submission that Mr Chen should pay their costs of the proceedings insofar as they concerned the claims for relief in the originating process and statement of claim.
4. Ms Jiali and Mr Sha submit that Mr Chen should pay their costs of Mr Chen's case on an indemnity basis because Mr Chen's conduct referred to at [22] above prior to and during the proceedings, was egregious and amounted to an abuse of process. They contend that this included non-compliance with Court orders, misleading the Court, using the Court's process to prevent payment to Matrix's creditors and hindering a transparent and orderly winding up process. As will become apparent below, Mr Chen's non‑compliance with the order made on 30 November 2020 for payment of Matrix's funds into court occurred after he had discontinued his claims in the originating process and statement of claim. That non-compliance is therefore a matter that affects the costs orders to be made in relation to the interlocutory process. It is not relevant to the costs of Mr Chen's case. The remaining matters raised by Ms Jiali and Mr Sha in support of their application for their costs of Mr Chen's case to be paid on an indemnity basis would require the Court to make findings of fact on the basis of the 17 affidavits they rely on, solely for the purpose of determining that application for indemnity costs. That exercise would amount to or come very close to a hypothetical trial of substantive issues that do not otherwise need to be determined. The Court will not engage in such satellite litigation in relation to costs: see Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin, supra, at 624 per McHugh J; see also Furnish & Finish Pty Ltd v Hollands [2020] NSWSC 1593 at [28]‑[37] and the authorities there referred to.
5. For those reasons, the order that Ms Jiali and Mr Sha's costs of Mr Chen's case be paid by Mr Chen will be an order for payment of those costs on the ordinary basis, not on an indemnity basis.
6. In circumstances where the claims in the originating process and statement of claim were discontinued by Mr Chen on 30 November 2020, and Matrix's claims were dismissed with the consent of the liquidator on 29 March 2021, it is not necessary to consider the submissions of Ms Jiali and Mr Sha concerning whether the proceedings should be dismissed for want of prosecution, or as an abuse of process on the grounds that Matrix allegedly did not authorise the commencement of the proceedings. The originating process and statement of claim have already been discontinued by Mr Chen and otherwise dismissed.
7. In relation to the interlocutory process, Ms Jiali and Mr Sha pursued only the applications for Matrix's funds to be paid into court, the application for the appointment of a provisional liquidator, and the application for winding up. All other claims in the interlocutory process were dismissed by consent on 29 March 2021, with the exception of the claim for costs.
8. The question is whether Mr Chen should be ordered to pay the costs of the interlocutory process, even though he did not actively oppose the claims for relief that were ultimately pressed by Ms Jiali and Mr Sha.
9. The application for payment of funds into Court was resolved by consent and the Court declined to make an order for costs in favour of any party at that time. I see no reason to revisit the exercise of the costs discretion on that occasion, although Mr Chen's subsequent failure to comply with those orders has costs consequences in relation to the immediate next stage of the proceedings involving the interlocutory process.
10. In my opinion, it is appropriate to order Mr Chen to pay the costs of the application for the appointment of a provisional liquidator to Matrix. Ms Jiali and Mr Sha were effectively forced to press that application following Mr Chen's failure to comply with the consent orders requiring Matrix's funds to be paid into court. His failure to comply with those orders, for which no explanation has been offered, is unreasonable conduct of the kind that warrants an order that Mr Chen should pay those costs on an indemnity basis.
11. In circumstances where Mr Chen did not appear at the hearing to oppose Ms Jiali's and Mr Sha's application for an order winding up Matrix, I am not persuaded that he should be ordered to pay their costs of that application. The winding up application was required to be determined by the Court in circumstances where there had been a complete breakdown in the relationship between Mr Chen, Ms Jiali and Mr Sha as the shareholders of Matrix and there was a dispute between them as to who were the directors of the company. It was in those circumstances that Mr Chen caused the contentious transfer of Matrix's funds to another account. The allegations of Mr Chen on the one hand and Ms Jiali and Mr Sha on the other hand concerning their respective dealings with Company funds have not been determined by the Court as a result of Mr Chen's discontinuance of his case and the particular basis on which the winding up order was made pursuant to s 461(1)(k) of the Corporations Act. One thing that is clear is that all three of them contributed to the circumstances that created room for dispute about the identity of the directors of the company and the authority to make decisions concerning its funds: see the previous judgment at [15]-[21]. For all of those reasons, I decline to order Mr Chen to pay the costs of Ms Jiali and Mr Sha of the winding up application.
12. However, Ms Jiali and Mr Sha are entitled to have their costs of the winding up proceedings reimbursed out of the assets of Matrix in priority to all other unsecured debts and claims, save for expenses incurred by the liquidator and provisional liquidator in preserving, realising or getting in those assets: Corporations Act, ss 466(2), 556(1)(b). I accept Ms Jiali and Mr Sha's submission that the costs for which they are entitled to be reimbursed under those sections include the costs of the application for the appointment of a provisional liquidator, but only if and to the extent that Ms Jiali and Mr Sha do not succeed in recovering those costs from Mr Chen. Black J ordered the appointment of the provisional liquidator upon being satisfied that there was a reasonable prospect that Ms Jiali and Mr Sha would succeed in obtaining an order for winding up and because Matrix had lost control of its funds in the context of the breakdown in the relationship between its shareholders and directors. Accordingly, the costs of the application for the appointment of the provisional liquidator are costs that are properly referable to the winding up: see In the matter of bCode Pty Ltd [2012] NSWSC 1530 at [8]-[9].
13. Ms Jiali and Mr Sha seek an order that their costs to be reimbursed out of the assets of Matrix pursuant to s 466(2) of the Corporations Act be assessed on an indemnity basis. I accept their submission that the Court has power to make such an order. However, in determining whether to make such an order it is important to bear in mind that such costs will be afforded the priority provided for in s 556(1)(b) and this will have an impact on the distributions to other creditors in the winding up of Matrix: Hooke v Bux Global Limited (No. 8) [2019] FCA 671 at [5]-[17] and the authorities there refered to.
14. Ms Jiali and Mr Sha submit that, in this case, an order that their costs to be reimbursed under s 466(2) be assessed on an indemnity basis is appropriate for four reasons. First, the amount of costs recovered by them should not differ according to whether they recover the costs directly from Mr Chen or whether they are reimbursed for their costs out of the assets of Matrix (in circumstances where Matrix has no assets unless the liquidator recovers assets, and Mr Chen is said to be the most likely source of recovery). Second, Ms Jiali and Mr Sha are substantial creditors of Matrix so that the priority afforded to them for their costs under s 556(1)(b) is "likely to be at their own expense as creditors anyway". Third, any adverse effect on other creditors is justified by the efforts of Ms Jiali and Mr Sha in winding up Matrix in difficult circumstances. Fourth, an order that the costs to be reimbursed pursuant to s 466(2) be assessed on an indemnity basis avoids the need for an assessment to be undertaken on two bases (on the indemnity basis for the purpose of enforcing a costs order against Mr Chen and on the ordinary basis for the purpose of reimbursement pursuant to s 466(2)).
15. I reject those submissions for the following reasons. The first and fourth reasons above assume that Ms Jiali and Mr Sha are entitled to recover all of their costs of the winding up proceedings against Mr Chen in addition to being reimbursed pursuant to s 466(2). That is not the case. For the reasons already explained, there will be an order that Mr Chen pay their costs of the application for the appointment of a provisional liquidator on an indemnity basis, but there will be no order that he pay their costs of the application for the winding up order. If Ms Jiali and Mr Sha wish to pursue both avenues of recovering their costs of the application to appoint the provisional liquidator, they will need to have the costs assessed on both bases so as to be in a position to enforce the costs order against Mr Chen to then be reimbursed under s 466(2) if their enforcement against Mr Chen is unsuccessful. The second reason above treats the interests of other creditors as irrelevant or unimportant. That is not the case. As to the third reason, the efforts of Ms Jiali and Mr Sha are the reason why their costs are afforded priority under s 556(1)(b). Their efforts are not a reason to impose on other creditors the burden of those costs being assessed and payable out of Matrix's assets on an indemnity basis. In any event, the circumstances of the winding up application were not particularly difficult. As I have already mentioned, the application was not opposed.
16. Ms Jiali and Mr Sha also sought an order permitting Matrix to recover from Mr Chen (and Ms Shao) the amount of any costs reimbursed to Ms Jiali and Mr Sha under s 466(2) of the Corporations Act. I decline to make that order. The appropriate applicant for such an order is Matrix or its liquidator. No such application was made by them. If and when the liquidator has reimbursed Ms Jiali and Mr Sha under s 466(2), it will be open to the liquidator to pursue any claim that the liquidator considers Matrix has against Mr Chen arising out of the circumstances giving rise to the application for the appointment of a provisional liquidator and the application for winding up. My reasons for rejecting Ms Jiali and Mr Sha's claims for costs orders against Ms Shao and their claims for a costs order against Mr Chen in respect of the winding up application (as opposed to the appointment of the provisional liquidator) are further reasons why such an order would not be appropriate.
17. In my opinion, there is no reason why Mr Chen should pay the costs of Ms Jiali and Mr Sha in respect of those aspects of the interlocutory process, that were dismissed by consent on 29 March 2021 without a hearing on the merits.

Reasons: Mr Chen's costs

1. Mr Chen did not seek an order that any other party pay his costs. For the avoidance of doubt, an order will be made that he bear his own costs of the proceedings.

Reasons: Costs orders sought against Ms Shao by Ms Jiali and Mr Sha

1. As I have already mentioned, Ms Shao was not a party to Mr Chen's case. Ms Jiali and Mr Sha nevertheless seek a costs order against her that would cover their costs of Mr Chen's case in the period from 11 August 2020.
2. Ms Jiali and Mr Sha submit that such a costs order should be made because: 1. together with Mr Chen, Ms Shao purported to authorise the Company's commencement of the proceedings in circumstances where Ms Jiali and Mr Sha contend that she was not a director of the Company and that she subsequently admitted in forms lodged with ASIC that she had not been a director of the Company; and 2. Ms Shao acted as "Mr Chen's accomplice", including co-operating with him in the transfer of Matrix's funds to another account.
3. I reject that submission for the following reasons.
4. First, no findings have been made in these proceedings as to whether or not Ms Shao remained a director of the Company as at 11 August 2020. As recorded in my previous judgment, there is evidence that Ms Shao had indicated an intention to resign, but no evidence that she had in fact done so. The fact that ASIC was notified after 11 August 2020 that Ms Shao had resigned as a director in July 2020 does not, without more, establish that the corporate steps necessary to give effect to her resignation or removal had been taken in July 2020: see [2021] NSWSC 80 at [11]-[37] and [42]. In her submissions filed in relation to costs, Ms Shao contends that the July 2020 date stated in the notification to ASIC was an error. It is not appropriate for the Court to embark on a process of hearing and determining factual allegations concerning whether or not Ms Shao was a director of the Company as at 11 August 2020 solely for the purpose of determining the costs orders to be made in these proceedings.
5. Second, the proceedings were commenced some two months before the resolution passed or purportedly passed on 11 August 2020 in any event. The submissions of Ms Jiali and Mr Sha did not point to any evidence to suggest that Ms Shao was involved or purportedly involved in the decision to commence the proceedings in June 2020.
6. Third, no findings of fact have been made concerning Ms Shao's alleged role in the transfer of Matrix's funds (save for her participation in a meeting on 27 October 2020) or whether any such action on her part was wrongful having regard to the information available to her at the time.
7. For those reasons, I decline to make an order requiring Ms Shao to pay any part of Ms Jiali's and Mr Sha's costs of Mr Chen's case.
8. Ms Shao did not oppose the claims for relief in the interlocutory process that were pursued by Ms Jiali and Mr Sha. The claims for the appointment of a provisional liquidator and for winding up orders were matters that were required to be determined by the Court. The hearings in relation to these matters could not have been avoided by Ms Shao actively consenting to the appointment of a provisional liquidator and the winding up of Matrix, rather than not opposing those orders. On Ms Jiali's and Mr Sha's case, Ms Shao had no standing to consent to such orders as she is no longer a shareholder or director of Matrix. For those reasons, I decline to make an order requiring Ms Shao to pay any part of the costs incurred by Ms Jiali and Mr Sha in relation to the interlocutory process.

Reasons: Costs orders sought by Ms Shao

1. As referred to at [16] above, Ms Shao seeks: 1. an order that Mr Chen pay her costs of and incidental to the proceedings on an indemnity basis (or alternatively on the ordinary basis); and 2. an order that Ms Jiali and Mr Sha pay her costs up to 26 March 2021 on an ordinary basis and on an indemnity basis subsequent to that date, relying on a Calderbank offer dated 26 March 2021 that was referred to in Ms Shao's submissions but was not in evidence.
2. Ms Shao also submitted that those costs should be a paid in a gross sum. She relied on an affidavit of her solicitor annexing various invoices said to have been issued to and paid by Ms Shao in respect of her costs of these proceedings. With the exception of two invoices issued by solicitors and counsel who were not representing Ms Shao at the time of the costs applications and which do not appear on the face of them to relate to these proceedings at all, all of the invoices relate to fees invoiced in connection with the costs applications.
3. In the absence of any evidence that Ms Shao incurred any costs in relation to Mr Chen's case, I decline to make any order against Mr Chen in respect of her costs.
4. Having regard to the evidence referred to at [57] above, Ms Shao's application for an order that Ms Jiali and Mr Sha pay her costs of the proceedings boils down to an application for her costs of resisting their application for costs orders against her. Ms Shao's approach to the costs application involved the same error as Ms Jiali and Mr Sha's approach, in that evidence and submissions were directed to factual matters about which the Court had not made findings and in respect of which it would be inappropriate for the Court to conduct a trial solely for the purpose of determining costs. Ms Shao also sought an order for indemnity costs on the basis of her claim that she made a Calderbank offer on 26 March 2021, but she adduced no evidence of that offer. Ms Shao's evidence in support of a gross sum costs order was limited to invoices which did not identify these proceedings as the matter in respect of which the fees were invoiced. Whilst some of the line items could be identified as prima facie relating to these proceedings, many other line items could not.
5. In short, Ms Shao's costs of resisting Ms Jiali and Mr Sha's application for costs orders against her were inflated by her own unreasonable approach to resisting that application, her evidence of the costs incurred is inadequate to enable the Court to fix a gross sum for those costs in a logical, fair and reasonable manner and it would be disproportionately costly, inefficient and contrary to s 56 of the Civil Procedure Act 2005 (NSW) to send the parties off to assessment in relation to the costs of the costs application. In the circumstances, I consider that the appropriate exercise of the costs discretion under s 98 of the Civil Procedure Act is to leave the costs relating to the costs application to lie where they fall as between Ms Jiali and Mr Sha on the one hand and Ms Shao on the other hand. For the avoidance of doubt, there will be an order that Ms Shao is to pay her own costs of the proceedings.

Orders

1. For those reasons, I make the following orders: 1. Order that the first plaintiff (Mr Yikai Chen) is to pay the costs of the first defendant (Ms XXX Jiali) and the third defendant (Mr Tuo Sha) of the proceedings to the extent that those costs relate to the claims for relief in the originating process and statement of claim up to and including the first plaintiff's discontinuance of the proceedings with leave on 30 November 2020, such costs to be paid on the ordinary basis in an amount agreed or assessed. 2. Order that the first respondent to the further amended interlocutory process filed on 26 November 2020 (Mr Yikai Chen) is to pay the costs of the applicants (Ms XXX Jiali and Mr Tuo Sha) of the claim for the appointment of a provisional liquidator to the second plaintiff, such costs to be paid on an indemnity basis in an amount agreed or assessed. 3. Order that the applicants on the further amended interlocutory process filed on 26 November 2020 (Ms XXX Jiali and Mr Tuo Sha) are otherwise to pay their own costs of that interlocutory process, subject to their right under s 466(2) of the Corporations Act 2001 (NSW) to be reimbursed out of the property of the second plaintiff for their costs assessed on the ordinary basis of: 1. the application for the appointment of a provisional liquidator to the second plaintiff (if and to the extent that those costs are not recovered from Mr Yikai Chen pursuant to order 2 above); and 2. the application for an order for the winding up of the second plaintiff. 1. Order that the first plaintiff and first respondent to the further amended interlocutory process filed on 26 November 2020 (Mr Yikai Chen) is to pay his own costs of the proceedings. 2. Order that the second respondent to the further amended interlocutory process filed on 26 November 2020 (Ms Mingxia Shao) is to pay her own costs of the proceedings.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 September 2021