Chief Disruption Officer Pty Ltd as Trustee for the McDonald Family Trust v Michel, in the matter of Laava ID Pty Ltd

Federal Court of Australia|2023-04-06|Before: Goodman J

Counsel for the Plaintiffs: Mr D Delaney

Solicitor for the Plaintiffs: Webb Henderson

Counsel for the First, Second, Third and Fourth Defendants: Mr D W Rayment SC and Mr M A Collins

Counsel for the Fifth Defendant: Mr G Sirtes SC and Mr A Smorchevsky

Solicitor for the Fifth Defendant: Kardos Scanlan

ORDERS NSD 1153 of 2021 IN THE MATTER OF LAAVA ID PTY LTD ACN 617 775 578 BETWEEN: CHIEF DISRUPTION OFFICER PTY LTD AS TRUSTEE FOR THE MCDONALD FAMILY TRUST ACN 609 702 776 First Plaintiff

IAIN JAMES MCDONALD Second Plaintiff

AND: PATRICK MICHEL First Defendant

ANTHONY SURTEES Second Defendant

WILEMICH PTY LTD AS TRUSTEE FOR THE PATH FAMILY TRUST ACN 160 437 730 (and others named in the Schedule) Third Defendant

order made by: GOODMAN J DATE OF ORDER: 6 april 2023

The plaintiffs pay 95 per cent of the first to fourth defendants' costs of the proceeding on a party and party basis, as agreed or taxed.
The plaintiffs pay the fifth defendant's costs of the proceeding on a party and party basis, as agreed or taxed.
Further to order 2 made on 2 March 2022, the plaintiffs are: (a) responsible for all of Mr Potter's costs; and (b) to reimburse the defendants for all contributions made by the defendants towards Mr Potter's costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 On 3 November 2022, I delivered the primary reasons for judgment in this proceeding: Chief Disruption Officer Pty Ltd as Trustee for the McDonald Family Trust v Michel, in the matter of Laava ID Pty Ltd (No 3) [2022] FCA 1302 (CDO No 3). Some familiarity with the terminology used in CDO No 3 is assumed in the reasons for judgment which follow. 2 At [324] of CDO No 3, I concluded that the affairs of the fifth defendant, Laava had been conducted in a manner that was unfairly prejudicial to, or discriminatory against the first plaintiff, CDO, with respect to the issue of: (1) 3,524 shares to Wilemich and 3,527 shares to MCA in June 2020; and (2) 2,500 shares to Wilemich and 500 shares to MCA in July 2021, (together, the contravening share issues), but not otherwise. I also concluded that the Majority Interests had otherwise failed in their claims in the proceeding. 3 On 30 January 2023, I made a declaration that the affairs of Laava had been conducted in a manner that was unfairly prejudicial to, or discriminatory against CDO, with respect to the issue by Laava of the contravening share issues: Chief Disruption Officer Pty Ltd as Trustee for the McDonald Family Trust v Michel, in the matter of Laava ID Pty Ltd (No 4) [2023] FCA 25 (CDO No 4), but otherwise made no order for relief favourable to the Minority Interests. 4 These reasons for judgment deal with the question of costs between the Minority Interests and (1) the Majority Interests; and (2) Laava. It is common ground that the Court's discretion with respect to costs is broad and that the Majority Interests and Laava were the successful parties. The issues for determination are: (1) whether the costs payable by the Minority Interests should be reduced because of: (a) the Minority Interests' success in obtaining a declaration against the Majority Interests; or (b) disentitling conduct by Laava; and (2) the consequences, if any, of the Minority Interests not having accepted either of two offers of settlement made in early 2022.

Should the costs payable by the Minority Interests to the Majority Interests be discounted? 5 The aspect of the proceeding upon which CDO was successful was, as described above, the obtaining of a declaration that the affairs of Laava had been conducted in a manner that was unfairly prejudicial to, or discriminatory against CDO within the meaning of s 232 of the Corporations Act 2001 (Cth) with respect to the contravening share issues. 6 The Minority Interests contend that CDO's success in this regard should result in a reduction in their liability for costs and that the Court should order that the Minority Interests pay 70 per cent of the Majority Interests' costs. The Majority Interests contend that the success of the Minority Interests was so slight that there should be no reduction and that the Court should order that the Minority Interests pay all of the Majority Interests' costs. 7 I have concluded that the appropriate order is that the Minority Interests pay 95 per cent of the Majority Interests' costs, for the following reasons. 8 First, the Majority Interests were the overwhelmingly successful parties in circumstances where: (1) the Minority Interests sought various remedies based upon myriad instances of alleged conduct by the Majority Interests that the Minority Interests contended: (a) satisfied s 232(e) of the Corporations Act; (b) satisfied s 12CB(1) of the Australian Securities and Investments Commission Act 2001 (Cth); (c) constituted a breach of the Shareholders' Deed entered into by the Minority Interests and the Majority Interests; or (d) amounted to the issuance of shares for an improper purpose and constituted a fraud on the power to issue shares; (2) the first plaintiff, CDO: (e) established that two instances of conduct satisfied s 232(e) of the Corporations Act but otherwise failed to establish any of the causes of action propounded by it; (f) obtained relief only in the form of a declaration; and (3) the second plaintiff, Mr McDonald, failed completely in the causes of action propounded by him. 9 Secondly, whilst the Majority Interests were overwhelmingly successful, the Minority Interests did enjoy a small measure of success in respect of the declaration made with respect to the contravening share issues. 10 Thirdly, it is appropriate to undertake a broad evaluative judgment of what justice requires: Gray v Richards (No 2) [2014] HCA 47; (2014) 89 ALJR 113 at 113 to 114 [2] (French CJ, Hayne, Bell, Gageler and Keane JJ). Taking such an approach, I have formed the view that whilst the Minority Interests did enjoy some success, that success was meagre in the context of the entire contest between the Minority Interests and the Majority Interests and the balance is best reflected in an order that the Minority Interests pay 95 per cent of the Majority Interests' costs.

Should the costs payable by the Minority Interests to Laava be discounted? 11 The Minority Interests submitted that they should be required to pay 60 per cent of the costs incurred by Laava, calculated as a further reduction of 10 per cent from the 70 per cent which they submitted was appropriate for the costs order as between the Minority Interests and the Majority Interests. Laava contends that there should be no reduction and that the Court should order that the Minority Interests pay all of Laava's costs. 12 The Minority Interests made two submissions in support of the contention that the costs payable by them to Laava should be discounted to 60 per cent. 13 The first submission was that there should be a discount because of conduct by Laava prior to and immediately following the commencement of the proceeding, which the Minority Interests described as "stonewalling" and which was allegedly a refusal to provide in any timely manner information sought by the Minority Interests. I do not accept this submission, for the following reasons. 14 First, it is conduct allegedly engaged in from 25 October 2021 until shortly after 9 November 2021 (that is, it commenced prior to the commencement of the proceeding on 5 November 2021 and ceased shortly after such commencement). Secondly, the Minority Interests have made no submissions as to the significance of this conduct save to submit that there was a short delay in the provision of documents which ultimately formed part of the case concerning the contravening share issues. This is of little to no moment in the consideration of whether there ought to be a discount in the costs payable by the Minority Interests to Laava. 15 The second submission was that Laava, in its conduct of the proceeding, went beyond the protection of its own interests and actively sided with the Majority Interests. I do not accept this submission, for the following reasons. 16 First, Laava was entitled to defend its discrete interests. In this regard, the Minority Interests and the Majority Interests were not the only shareholders of Laava, and the proceeding was unusual in that the allegations made and the relief sought - and in particular the recognition of the Foundational Understanding as a means of regulating the relationship between the shareholders of Laava and the making of orders reconstituting Laava's members register - had the potential to directly affect Laava in circumstances where Laava as a start-up company had an interest in raising funds by the issue of further shares and where some such funds had been raised and shares issued to shareholders on a basis that did not recognise the Foundational Understanding or a reconstitution of its members register. 17 Secondly, there is no direct evidence that Laava's conduct of the proceeding travelled beyond what was necessary to protect its interests. The Minority Interests submitted that "at least up until the security for costs application determined 25 February 2022" there was "some doubt" as to whether the work undertaken on behalf of Laava to that date was limited to the protection of Laava's discrete interests. Such "doubt" is said to arise from an estimate prepared for the security for costs application and which included work on a "case theory analysis" and provided an estimate of the costs of two solicitors and senior and junior counsel attending for each day of the trial. The Minority Interests submitted that this was excessive and that the Court recognised it as such in an earlier judgment which included consideration of an application for security for costs: Chief Disruption Officer Pty Ltd as Trustee for the McDonald Family Trust v Michel, in the matter of Laava ID Pty Ltd [2022] FCA 148 at [65]. However, it does not follow from the expression of the view that an estimate of costs seemed excessive for the purpose of a security for costs application that costs were incurred in furtherance of the interests of the Majority Interests rather than the discrete interests of Laava. Further, it says nothing about the position subsequent to the application for security for costs. 18 In their subsequent submissions, the Minority Interests pointed to submissions made by Laava during the substantive hearing concerning the Foundational Understanding, which the Minority Interests submitted were unnecessary because the real contest as to the existence of such an understanding was between the Minority Interests and the Majority Interests. This submission overlooks the separate interests of Laava which it was entitled to defend and that there was some commonality between the interests of Laava and the interests of the Majority Interests. It may be that as part of the assessment process arguments are available to the Minority Interests with respect to particular matters (for example, the duplication of submissions that might have been adopted), however that is a matter for the assessment process. 19 For the reasons set out above, I am not satisfied that there should be a discount in the costs payable by the Minority Interests to Laava. For completeness, I note that I do not accept the premise in the Minority Interests' submissions that the starting point from which any reduction to be made is the level of costs payable by the Minority Interests to the Majority Interests.

The consequences, if any, of the Minority Interests not having accepted the early 2022 offers of settlement 20 The Majority Interests and Laava each seek an order that the Minority Interests pay their costs on an indemnity basis. Laava does so upon the basis of letters sent by the solicitors for the Majority Interests, with the consent of Laava, to the solicitors for the Minority Interests on 11 January 2022 and 17 February 2022. The Majority Interests rely only upon the 17 February 2022 letter. 21 By the 11 January 2022 letter, the Majority Interests offered to: (1) convert the debt of $44,000 owed by Laava to Mr McDonald into 1,037 shares to be issued to CDO or Mr McDonald at a price of $42.43 per share ($44,000/1,037); (2) provide an opportunity for CDO to sell those 1,037 shares, together with CDO's existing holding of 31,287 shares (a total of 32,324 shares) at $42.43 per share (a total of $1,371,507.32) with: (g) the Majority Interests to: (i) purchase 25 per cent of those shares; (ii) use their best endeavours to procure the purchase of the remaining 75 per cent of the shares by a third-party buyer; (h) the purchase price to be increased if the whole of Laava's share capital or business were to be acquired within 12 months, from $42.43 to the per share price paid for that acquisition; and (3) procure the issue of 14,083 options in favour of CDO or Mr McDonald, with an exercise price of $42.43 per option. 22 The 11 January 2022 letter contained an assertion that the Majority Interests were "not in a financial position to purchase all of CDO's shares themselves, but that the same result, or as nearly as possible, is achieved through a third-party investor, which the [Majority Interests] are confident they can achieve". 23 By the 17 February 2022 letter the Majority Interests offered to take the following steps in settlement of the plaintiff's claims: (1) to purchase CDO's 31,287 shares in Laava at a price of $50.34 per share ($1,575,000); (2) alternatively, to purchase CDO's shares in Laava at a price to be determined by an independent valuer on the basis of the following assumptions: i. the valuation will be as at the date of acceptance of this offer; ii. for the purposes of the valuation, the following transactions (or proposed transactions) are taken not to have occurred, been entered into, or to be in contemplation: 1. the 60,701 shares or options issued, or proposed to be issued, to the first to fourth defendants pleaded in [47(a)], [61], [68], [75] and [84] of the Amended Points of Claim; 2. any accrual of interest or other entitlement, besides the obligation to repay the principal amount (only) of the two cash loans of $93,333 each advanced by Wilemich and MCA respectively to the Company in 2021, pleaded in [42], [52] and [53] of the Amended Points of Claim; and 3. any accrual of remuneration to any of the first to fourth defendants as a loan owed to them by the Company, referred to in [46] of the Amended Points of Claim, (together, the Impugned Michel/Surtees Transactions); iii. for the purposes of the valuation, all transactions impugned by the plaintiffs in their Amended Pleadings other than the Impugned Michel/Surtees Transactions will be taken to have validly occurred, entered into, or in contemplation, and not disputed by the plaintiffs; … ; (3) with the purchase price to be increased if the whole of Laava's share capital or business were to be acquired within 12 months, to the per share price paid for that acquisition; and (4) to use their best endeavours to cause Laava to repay Laava's debt to Mr McDonald. The Majority Interests also offered that if Laava did not repay that debt within 90 days, then the Majority Interests would purchase that debt from Mr McDonald. 24 The 17 February 2022 letter contained an assertion that the Majority Interests were in a financial position to perform the offer contained in that letter. 25 Both letters expressed reliance upon the principles in Calderbank v Calderbank [1976] Fam 93 and foreshadowed reliance upon those principles if necessary upon the question of costs. 26 It is well-established that the mere making of a Calderbank offer, its non-acceptance, and the subsequent achievement of a result more favourable to the offeror, is insufficient to warrant an order that the offeree pay costs on an indemnity basis and that it is necessary for the offeror to establish that the conduct of the offeree in failing to accept the offer was unreasonable: Black v Lipovac [1998] FCA 699; (1998) 217 ALR 386 at 432 [217] (Miles, Heerey and Madgwick JJ); CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173 at [75] (Moore, Finn and Jessup JJ). The conduct of the offence is assessed by reference to the circumstances which existed at the time at which the offer was capable of acceptance: Black at 432 [218]; CGU at [75]. Such circumstances include the status of the proceeding and the relative strengths and weaknesses of the parties' positions. The circumstances may also include the extent to which the offeror has explained why the offer is a result that the offeree will not likely better at trial, however, there is no inflexible rule that such an explanation must be given: Hardingham v RP Data Pty Ltd (No 2) [2021] FCAFC 175 at [22] (Greenwood, Rares and Jackson JJ). 27 In considering whether the Minority Interests should be required to pay indemnity costs, I have had regard to the following matters. 28 First, the offers were open from 11 January 2022 until 8 February 2022 and from 17 February 2022 until 3 March 2022, respectively. 29 Secondly, during those periods: (1) the pleadings had not closed. The Minority Interests' Amended Points of Claim were filed on 15 February 2022 and the Majority Interests' Points of Defence were filed on 3 March 2022 (being the date of expiry of the 17 February 2022 offer); and (2) the evidence to be relied upon by each of the parties was yet to be, or had only just been, completed. In particular, the principal affidavit evidence relied upon by the Majority Interests (being an affidavit of Mr Michel of 258 paragraphs accompanied by an exhibit of 1,446 pages; and an affidavit of Mr Surtees of 150 paragraphs accompanied by an exhibit of 153 pages) was filed on 2 March 2023, after the expiry of the 11 January 2022 offer and at a time so proximate to the expiry of the 17 February 2022 offer as to prevent any meaningful consideration of evidence of such volume prior to the expiry of that offer. 30 Thirdly, neither letter of offer explained in any detail the nature of the Majority Interests' evidence or its case. 31 Finally, the proceeding was complicated. It was far removed from a vanilla scenario in which damages are sought; an offer to pay a particular sum is made and not accepted; and the offer is not bettered following a hearing. Instead, there was complexity in the array of factual questions to be decided, the various causes of action deployed and the various forms of relief pursued. The relief sought by the Minority Interests was various and set out in the Amended Originating Process filed on 14 February 2022, by which the Minority Interests sought, inter alia, various declarations; the rescission or setting aside of various transactions; an order transferring a particular number of shares from the Majority Interests to the Minority Interests; in the alternative to earlier forms of relief, an order that the Majority Interests purchase CDO's shares in Laava; and in the further alternative, an order for the winding up of Laava. 32 Against this background, it is overly simplistic to suggest that the 17 February 2022 offer provided the Minority Interests with the relief that they sought, namely the purchase of CDO's shares. The relief sought by the Minority Interests was not so limited. Further, the fact that the Minority Interests ultimately sought an order for the purchase of their shares, following the primary judgment (see CDO No 4 at [3]), is of little moment when the question of the reasonableness of the Minority Interests' conduct falls to be assessed as at the time of the currency of the offers and there is no basis for concluding that as at that time a buy-out order was the only remedy that could reasonably have been pursued. As Hely J noted in Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) [2004] FCA 1437; (2004) 212 ALR 281 at 289 to 290 [46], in a passage cited with apparent approval by the Full Court in Hardingham at [27], while "the policy of the law favours the sensible compromise of disputes … there is also a policy against deterring parties from pursuing claims to which they reasonably believe themselves entitled". 33 In summary, in circumstances where as at the expiry of the 17 February 2022 offer: the pleadings had closed on the same day; the Minority Interests had not had an opportunity to absorb the voluminous principal evidence upon which the Majority Interests proposed to rely and which had been filed the previous day; the offers contained no detailed explanation of the Majority Interests' evidence or its defence; and the nature of the case being pursued by the Minority Interests was multi-faceted and complex, the conduct of the Minority Interests in not accepting the offers contained in the 11 January 2022 and 17 February 2022 letters was not unreasonable and the Minority Interests should not be required to pay costs on an indemnity basis. 34 Further, in so far as Laava relies upon the 11 January 2022 offer, that offer was for one-quarter of CDO's shares at the price issued for the Series A capital raising accompanied by a promise by the Majority Interests to endeavour to find a purchaser for the remaining three-quarters of CDO's shares in circumstances where the Majority Interests were not in a position themselves to purchase those shares. The uncertainty inherent in such an offer is obvious. In particular, the acceptance of such an offer may or may not have resulted in CDO being able to complete a sale of all of its shares in Laava.

Costs of Mr Potter 35 The parties are agreed that the Minority Interests should pay all of the costs referable to the engagement of Mr Potter, an expert witness.

Conclusion 36 For the reasons set out above, the Minority Interests should: pay 95 per cent of the costs of the Majority Interests on a party and party basis; pay all of Laava's costs on a party and party basis; and be responsible for Mr Potter's costs (including reimbursing any defendant who has contributed to the payment of such costs to date). I will make orders accordingly. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Goodman.

SCHEDULE OF PARTIES NSD 1153 of 2021 Defendants Fourth Defendant: MORTGAGE COMPANY OF AUSTRALIA PTY LIMITED AS TRUSTEE FOR THE SURTEES FAMILY TRUST ACN 062 471 096 Fifth Defendant: LAAVA ID PTY LTD ACN 617 775 578 Sixth Defendant: GAVIN GER Seventh Defendant: WYARGINE GROUP PTY LTD ACN 124 126 987 Eighth Defendant: LUFRAPA PTY LTD AS TRUSTEE FOR THE LUCETTE MICHAEL FAMILY TRUST ACN 161 701 195 Ninth Defendant: ROBERT FITZPATRICK

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Judgment (20 paragraphs)

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Cases Cited (11)