Cody v Live Board Holdings Ltd [2015] NSWSC 1790 | Case summary

Supreme Court of NSW|2014-11-19|Before: Robb J

cross defendant) Representation: Counsel: P Menzies QC/G Preston (cross claimant) B Kremer (first, second, fourth, fifth, sixth cross defendants) D Weinberger (third, seventh cross defendants) J Shepard/V Cha (eighth, ninth cross defendants)

Solicitors: Rhodes Legal (cross claimant) Whittens & McKeough (first, second, fourth, fifth, sixth cross defendants) Deutsch Partners (third, seventh cross defendants) DLA Piper (eighth, ninth cross defendants) File Number(s): 2013/359378 Publication restriction: None

Introduction

These proceedings have had a chequered procedural history, which complicates an explanation of the issues that were before the court. Some of these issues remained contentious at the end of the parties' submissions, while others had substantially been resolved by agreement.
At the outset, the court was concerned with the consequences of a failed application to further amend an amended cross claim, costs orders in relation to the abandonment of versions of a draft further amended cross claim, the terms upon which some of the cross claimants should be permitted to discontinue their cross claims, the effect of the remaining cross claimant agreeing to the discontinuance or dismissal of its cross claim against a number of cross defendants, yet another application for leave to file a further amended cross claim, and whether an order should be made against the remaining cross claimant that it provide security for costs in favour of the remaining cross defendants.
The cross claim that was in effect at the time when the notices of motion that are now relevant were filed, was an amended cross claim filed on 21 August 2014.
There were initially three sets of cross defendants. They all filed notices of motion on 15 September 2014. All cross defendants sought orders that the cross claimants provide security for their costs and, in default of the provision of that security, that the amended cross claim be stayed. Two of the notices of motion also sought orders that the amended cross claim either be struck out pursuant to UCPR r 14.28, or that the amended cross claim be summarily dismissed pursuant to UCPR r 13.4. In the events which happened, all of the cross defendants submitted that the amended cross claim should be struck out or dismissed.
The cross defendants' notices of motion came on for hearing before me on 18 November 2014. During the course of that hearing, the cross claimants abandoned their amended cross claim in the face of the cross defendants' attack on the adequacy of the pleading of that document. The cross claimants acknowledged that it would be necessary for them to re-plead their amended cross claim.
On 19 November 2014, I made a direction that required the cross claimants to serve any draft further amended cross claim on the cross defendants by 28 November 2014.
The matter came back before me for directions on 1 December 2014. I granted leave to the second, third and fourth cross claimants to discontinue their proceedings on the amended cross claim. I ordered those cross claimants to pay the costs of the proceedings brought by those cross claimants.
I reserved the issue of the terms upon which the second, third and fourth cross claimants would be given leave to discontinue (in relation to whether, and if so on what terms, they will be permitted to bring any proceedings claiming the same or similar relief or involving the same or similar causes of action).
I also reserved the issue of when the second, third and fourth cross claimants would be required to pay the costs of the proceedings.
The two reserved issues of the terms of the discontinuance and when the second, third and fourth cross claimants should be required to pay the costs of the proceedings on their cross claims, were the first two issues that required resolution.
On 11 December 2014, the remaining cross claimant filed a notice of motion in which it sought leave to file a further amended cross claim in the form of the document that was annexed to the notice of motion.
The proceedings came on again before me on 7 July 2015, for hearing of the remaining cross claimant's notice of motion. Following argument on that date, the remaining cross claimant again abandoned its application for leave to file the further amended cross claim in its then draft form.
Consequently, it will be necessary to make an order for the dismissal of the remaining cross claimant's 11 December 2014 notice of motion. An order will be made that the remaining cross claimant pay the costs of its notice of motion, and the only outstanding issue is the terms upon which those costs should be paid. In particular, the question is whether the cross claimant should be required to pay the costs of its notice of motion before it is permitted to take any further steps in these proceedings.
This is the third issue that is now before the court.
On 8 July 2015, orders were made by consent that had the effect that the remaining cross claimant discontinued its cross claim against one set of cross defendants, and its cross claim against a second set of cross defendants was dismissed. The orders that were made dealt finally with the cross claims against those cross defendants, so that aspect of the cross claim does not require further determination.
While the amended cross claim and the various draft further amended cross claims were suffering the fates that I have outlined above, the parties made submissions on the cross defendants' applications for security for costs on both occasions that the proceedings were before me.
On 7 August 2015, after the completion of the hearing to which these reasons for judgment relate, the remaining cross claimant filed a further notice of motion, in which it sought leave to file a further amended cross claim in the form of a new draft annexed to the notice of motion. At a subsequent directions hearing, I ruled that I would not deal with that notice of motion until after I had considered all of the other outstanding issues that were before the court.
As a consequence of these events, there is an extant application for security for costs by the remaining cross defendants against the remaining cross claimant. That application has been fully argued, save in relation to the consequences of the cross claimant's latest application for leave to file a new further amended cross claim. The fate of the remaining cross claimant's application in its 7 August 2015 notice of motion is not known. If that application is rejected, and the cross claimant is not permitted to make any further application for leave, that will finally put an end to the cross claim. If leave is given, then the entitlement of the remaining cross defendants to security for costs should take into account the terms of the further amended cross claim that is ultimately filed.
The determination of the remaining cross defendants' application for security for costs is the fourth issue that is now before the court. It will be necessary for the court to consider whether, and if so to what extent, the application for security for costs should be dealt with before the remaining cross claimant's outstanding application for leave to file a further amended cross claim is determined.

History of proceedings

It will now be appropriate to go back to the beginning of the relevant events to describe how the present dispute arose, and to set out the history of the proceedings in so far as they are relevant to the issues that remain in dispute. The history is important to the issues of the terms upon which costs orders should be made, and whether, and if so on what terms, the remaining cross claimant should be ordered to provide security for costs to the remaining cross defendants.
It is not necessary for the court to decide any contentious issues of fact for the purpose of resolving the issues that are now before the court. The following description of relevant events should be understood only to be a general statement taken from relevant sources, and it may not be complete or entirely uncontentious.
The first, and only remaining, cross claimant is Live Board Holdings Ltd (LBH). LBH was incorporated in January 2006. It was the registered owner of a patent issued on 21 January 2010 in respect of an invention for a digital real estate signboard. LBH was also an applicant for a patent for a related invention.
The second cross claimant is a company called Pacific Region Technology Pty Ltd (PRT), which was alleged to be a company associated with LBH, and which acted as an operating entity to design, research, develop and manufacture the digital signboard technology for LBH. PRT's interest in these proceedings is obscure.
The third cross claimant, Pier Blue Pty Ltd (Pier Blue), was originally the majority shareholder in LBH.
Mr Costa Koulis, the fourth cross claimant, has at all material times been the sole director of Pier Blue. Mr Koulis is the named inventor in the patent and in the subsequent patent application. Essentially, Mr Koulis is the person who is primarily interested in the business affairs of the other cross claimants. He holds his interests in LBH through Pier Blue. LBH was intended to be the corporate vehicle by which Mr Koulis would exploit the digital real estate signboard technology that was the subject of the patent and the patent application that was invented by Mr Koulis.
It will now be convenient briefly to relate the events that led to the commencement of the proceedings, which then led the cross claimants to file their initial cross claim.
It is not necessary to go into the history in detail, but it appears that for some years LBH was unable to raise the funds necessary for the effective exploitation of the invention the subject of the patent. LBH relied upon funds provided by Mr Koulis and parties associated with him from time to time.
LBH embarked upon a course of trying to raise the capital necessary to enable it to exploit the inventions the subject of the patent and the patent application.
It appointed additional directors who had experience that was relevant to the fund raising project, and as an inducement issued shares in LBH to those new directors, or an associated company of those new directors. The new directors, and the dates of their appointment were Mr Pierce Patrick Cody, the fourth cross defendant (22 October 2012), Mr Richard Charles Ochojski, the sixth cross defendant (25 August 2008), and Ms Finola Anne Burke, the fifth cross defendant (21 January 2013). Ms Burke was appointed as an executive director. Two and a half percent of the shares in LBH were issued to Mr Ochojski. One percent of the shares were issued to Ms Burke. Thirty percent of the shares in LBH were issued to Cody Investments Pty Ltd (Cody Investments), the second cross defendant, which is a company controlled by Mr Cody. Service agreements were entered into between LBH and the new directors, or their associated company, which had the effect that, if LBH issued additional shares to new investors, a proportionate number of additional shares would be issued to the new directors, or their associated company, to prevent their shareholding in LBH being diluted.
The first cross defendant, Cody Live Pty Ltd (Cody Live), was incorporated on 4 March 2014. The directors of Cody Live are Mr Cody, Ms Burke and Mr Ochojski. Cody Live's involvement in the proceedings stems from the fact that, on 25 March 2014, Cody Live purchased the assets of LBH from the administrators of that company for a price of $305,000 inclusive of GST. As I understand it, those assets include the patent and the patent application. It has been necessary to refer to Cody Live out of historical sequence. I will say more about the involvement of Cody Live below.
It will be appropriate to summarise the position concerning the cross defendants who have been mentioned to this point. Mr Cody, Ms Burke and Mr Ochojski were appointed directors of LBH. They have since resigned, and the parties have found it convenient to refer to them as the "former directors". One of the former directors, Mr Cody, arranged for his shares in LBH to be issued to Cody Investments. Later, the former directors caused LBH's assets to be purchased from the administrators by Cody Live. All of these cross defendants have been represented by the same legal representatives, and for convenience the description of the "former directors" has been extended to cover the two companies as well. Where the context indicates that reference is being made to the three former directors, the term "former directors" will be confined to those persons.
The present position is that the only continuing cross claimant is LBH, and the only continuing cross defendants are the former directors, using the extended meaning of that term.
In about December 2012, LBH and each of its shareholders executed a shareholders agreement. The shareholders agreement contained a term that acknowledged that LBH may wish to acquire further capital for the achievement of its business objectives, and that that might occur by the issue of shares. The shareholders agreement contemplated LBH entering into an agreement with a financier to raise at least $1 million in capital for the company by 1 April 2013.
On 9 January 2013, Bligh Capital was appointed by a circular resolution of all directors to conduct the capital raising.
On 19 April 2013, Mr Koulis signed an acknowledgement that he had agreed, as a director of Pier Blue, to the issue of securities and shares to an incoming investor, and any resultant reconstruction of the share capital of LBH in accordance with an indicative term sheet, and that the board of LBH may finalise the detailed terms of any proposal without further consent of the shareholders, provided that the terms were consistent with the indicative term sheet. The indicative term sheet contemplated an issue of redeemable notes, convertible into options to acquire shares. On 31 July 2013, Mr Koulis' solicitors sought to withdraw that consent. On 29 August 2013, at an LBH board meeting, Mr Koulis expressed disagreement with legal advice obtained by the chairman of the LBH board that they had authority from all existing shareholders to proceed with the capital raising, and that the shareholders had already accepted the terms of the capital raising in the shareholders' agreement.
On 29 August 2013, the board of LBH, comprising Mr Koulis, Mr Cody, Ms Burke and Mr Ochojski, resolved to proceed with a capital raising. Mr Koulis dissented from the decision.
On 3 September 2013, LBH issued 5,226,550 preference shares to new shareholders in exchange for funds subscribed. In addition, 3,323,324 ordinary shares were issued to the existing shareholders, other than Pier Blue. Those shares were issued pursuant to the anti-dilution provisions in the contracts between the shareholders and LBH.
Pier Blue did not have the benefit of such an anti-dilution clause, and was not therefore issued any additional shares. These events had the consequence that Pier Blue's shareholding in LBH was reduced from slightly less than 60% to less than 50%, so Pier Blue lost automatic control over LBH.
LBH raised approximately $1 million from this issue.
Mr Koulis was removed as a director of LBH by a unanimous shareholder vote at a general meeting held on 26 November 2013. Pier Blue did not attend the meeting to vote against the resolution.
The present proceedings were commenced by summons filed on 28 November 2013 by Mr Cody, Ms Burke and Mr Ochojski. There were 15 defendants, including LBH, Pier Blue, Cody Investment, and all of the other shareholders in LBH.
The following final relief was claimed in the summons: A declaration that, upon the proper construction of the Company's Constitution and clause 7.1 of the Shareholders Agreement dated 12 December 2012, the Board of Live Board Holdings Ltd: (a) had power and authority to issue the 3,323,324 ordinary and 5,226,550 preference shares in the company issued 3 September 2013; (b) has power and authority to issue further shares in the company to raise capital for the company, including but not limited to such shares as are necessary to raise a further $5M in capital.
On 6 December 2013, Pier Blue and Mr Koulis commenced what was in effect a cross claim, by filing an interlocutory process in these proceedings. The respondents to the interlocutory process were LBH, the three continuing directors of that company, being Mr Cody, Mr Burke and Mr Ochojski, and all of the other shareholders in the company.
The interlocutory process sought declarations that the board of directors of LBH did not have power or authority to issue the shares that were issued by LBH on 3 September 2013, a declaration that the share issue was invalid and of no effect, and a declaration that all resolutions passed by the board of directors of LBH on and after 3 September 2013 were invalid and of no effect.
The interlocutory process also sought orders cancelling all shares issued pursuant to the 3 September share issue, and that LBH repay all subscription monies paid by any respondent in relation to the 3 September share issue, and "to the extent that LBHL is unable to repay any of those subscription monies, the subscription monies be repaid jointly and severally by [Mr Cody, Mr Burke and Mr Ochojski]".
Additionally, declarations were sought that LBH had wrongly terminated Mr Koulis' employment as an executive, and that Mr Koulis had wrongly been removed as a director of LBH. Other substantive relief was sought concerning the affairs of LBH, but it is not necessary to set out that relief in detail.
On 18 December 2013, Brereton J heard the claim for declaratory relief in par 1(a) of the summons, based upon the construction of the constitution and the shareholders' agreement. His Honour did not deal with the claim for the other declaratory relief in the summons, or the claims in the interlocutory process.
Brereton J gave judgment on 17 February 2014 in Cody v Live Board Holdings Ltd [2014] NSWSC 78; (2014) 97 ACSR 606. His Honour held at [26]: It follows that I am unable to accept the plaintiffs' submission that upon the proper construction of the constitution and the shareholders' agreement, the board had power and authority to make the 3 September share issue. It follows that the plaintiffs are not entitled to the relief claimed in para 1(a) of the summons.
Brereton J declined to make a declaration based on s 124(1)(a) of the Corporations Act 2001 (Cth) that LBH had power to issue the shares and the preference shares, saying: [27] However, the fact that the company is empowered to issue shares, including preference shares, does not mean that there was a valid and effective exercise of those powers in this case, having regard to the provisions of the Constitution and the shareholders' agreement. To declare in the abstract that there was power to make the 3 September share issue, without adverting to whether the power was exercised validly in the instant case, would be pointless, and potentially mischievous. [28] Moreover, the declaration sought, if made, would quell only part of the dispute. Were the plaintiffs to succeed, the declaration would resolve the question of legal power and authority to issue the shares, but would leave open the application to set aside the issue on the ground that it was not made bona fides for the purposes of the company, or was oppressive…
The court therefore decided that LBH's constitution and the shareholders' agreement did not authorise the issue by the company of the ordinary shares and the preference shares in accordance with the 3 September 2013 resolution of the board. It left open the possibility that there may be a basis for an order being made to validate the share issue, which is a matter that Brereton J declined to entertain until the claim made in the interlocutory process could also be dealt with.
The directors of LBH placed the company into administration the day after Brereton J delivered judgment on 17 February 2014. Mr Justin Holzman and Mr Manfred Holzman (the administrators) were appointed administrators. They were subsequently joined to these proceedings as the eighth and ninth cross defendants. By consent orders made on 8 July 2015, the cross claimants were given leave to discontinue their proceedings against the administrators.
The administrators ascertained that there remained on foot a cross claim by Mr Koulis for declarations that all board resolutions on or after 3 September 2013 were invalid and of no effect, and that his removal as a director on 26 November 2013 was invalid. They were concerned that their appointment might be questionable, and on 24 February 2014 the administrators sought relief pursuant to ss 447A, 447C, 447D and 1322 of the Corporations Act to resolve any doubt about the validity of their appointment.
On 28 February 2014, when the application was returnable before Brereton J, Mr Koulis and Pier Blue appeared to oppose the relief sought.
Brereton J dealt with the application by reasons for judgment published on 3 March 2014: Re Live Board Holdings Ltd (administrators appointed) [2014] NSWSC 161.
It is relevant for present purposes that at [1], Brereton J noted that he had been informed at the earlier hearing, on 18 December 2013, that of the $1 million of capital raised by the issue of shares on 3 September 2013, approximately $748,000 remained in LBH's bank account as at 18 December 2013.
Brereton J found, at [8] and [9], that Mr Koulis' removal as a director at the general meeting on 26 November 2013 was valid, and that the directors' resolution to appoint the administrators was not invalid by reason of the exclusion of Mr Koulis from the board.
Brereton J made the following findings concerning the solvency of LBH, at [10]: [10] The evidence indicates, for present purposes, that as at 31 January 2014, the company had total assets of $1,089,835 (of which about $463,000 were current, including $451,000 cash at bank, presumably being the remaining proceeds of the 3 September share issue; while about $400,000 were intangibles); and liabilities of $265,480 (of which about $100,000 are current, $138,000 is Pier Blue's investment, and $10,000 Mr Cody's). This left equity of $824,355. However, by the time of the administrators' appointment, cash at bank had reduced to $320,000. And in addition to the liabilities referred to above, the consequence of the invalidity of the 3 September share issue would be an obligation to reimburse the subscription moneys, of about $1,000,000. On that footing, there was a deficiency of funds, and the administrators are of the opinion that the company is insolvent.
His Honour also recorded, at [19], that Mr Koulis wished to regain control of LBH because its assets were primarily in the nature of patents of inventions developed by him, which he wished to be able to market. He noted that, because of his earlier decision that the share issue was not valid, there was a very real prospect that Mr Koulis could succeed in regaining control. Mr Koulis and Pier Blue contended, in relation to the administrators' proposal to market and sell the assets of LBH, that the administrators were managing the affairs of the company in a manner that was prejudicial to their interests, in that the proposed sale of the assets of the company would deprive them of the fruits of success should the cross claim in these proceedings succeed. Mr Koulis and Pier Blue sought orders under s 447D of the Corporations Act to prevent the administrators from selling the assets of the company, and from engaging consultants to assist them in implementing that purpose.
Brereton J held in respect of this aspect of the application: [22] In my view, the section is concerned with conduct of an administrator that is contrary to the interests of the administration as a whole, or unfairly prejudicial to one or more creditors. It is not concerned with acts which, while proper steps in the interests of the administration as whole, operate adversely to one or more creditors or members. Administrations, like liquidations, may often result in the interruption, deferral or diminution of the rights of creditors or members, but that does not make them prejudicial. [23] There is nothing unfairly prejudicial to Mr Koulis or Pier Blue in the proposed conduct of the administrators. The proposal to sell the assets, and to retain consultants to assist in the process, is likely to be a necessary step in maximising the return for creditors; at least, that is a matter for the commercial judgment of the administrators. As such, it prefers the interests of creditors in an expeditious realisation of assets to those of members in retaining and exploiting them, but in this context the interests of creditors prevails. To the extent that members have an interest, it affects them equally and is not prejudicial to Pier Blue. As was submitted on behalf of the administrators, the potential frustration of Mr Koulis' objective of regaining control of the assets is in reality attributable not to any act, omission or conduct of the administrators, but to the fact that there is an administration at all.
His Honour, therefore, declined to prevent the administrators exercising their powers under Part 5.3A of the Corporations Act to sell LBH's assets for the benefit of its creditors, including the patent and the patent application.
A deed of company arrangement was proposed, pursuant to which a deed fund would be established. The deed fund would include the sale proceeds of LBH's assets. The creditors of LBH voted to accept the proposal on 17 March 2014.
There was a public sale process, and two parties made competitive offers to purchase the relevant assets. One of those parties was Cody Live. There is evidence that Mr Koulis was aware of the auction process, and was entitled to make an offer to purchase LBH's assets. Neither Mr Koulis nor Pier Blue made a bid. Ultimately, Cody Live offered to pay $305,000 for the assets. The other interested party declined to better that offer. The administrators then sold the assets to Cody Live, and the price was received on 27 March 2014 and formed part of the deed fund.
The deed of company arrangement was executed on 1 April 2014. At the same time, documents were executed under which the parties who purchased preference shares in LBH on 3 September 2013 (who have been called the "share subscription creditors" for the purposes of these proceedings) agreed to defer their claims.
The administrators received certain other moneys as well as the purchase price paid by Cody Live, and on 26 June 2014 they issued dividends from the deed fund to all of LBH's creditors other than the share subscription creditors, whose claims had been deferred by the deed. That included a payment of $138,629.16 to Pier Blue in respect of a debt owed by LBH to that company. That left a surplus in the deed fund.
On 26 May 2014, Brereton J ordered that the interlocutory process continue on pleadings as a cross claim, and that the applicants to the interlocutory process file a statement of cross claim by 23 June 2014. The position at this stage was that Brereton J had declined to make the declaration sought in par 1(a) of the summons that the directors had power to issue, and had validly issued, the ordinary and the preference shares that were issued on 3 September 2013, but he did not positively declare that the issue of the shares was invalid, or decide any of the other issues raised by the summons and the interlocutory process.
A cross claim was filed on 15 August 2014. That cross claim was then amended, without leave, by a further cross claim filed electronically on 21 August 2014.
It must be said for completeness that the cross claim joined two additional parties, being a company called Brain Beyond Pty Ltd (Brain Beyond), the third cross defendant, and Mr Mark Reay, the seventh cross defendant. Mr Reay is Mrs Burke's husband, and the sole director and shareholder of Brain Beyond. As of 25 March 2014, Brain Beyond owned one third of the shares in Cody Live. Principally, the cross claimants alleged that, from about 4 March 2014, Cody Live, Cody Investments, Brain Beyond and Mr Reay joined an unlawful means conspiracy to injure the cross claimants. The cross claimants alleged that the original unlawful means conspiracy had been entered into by Mr Cody, Ms Burke and Mr Ochojski. It appears that Mr Reay was joined as a cross defendant because Brain Beyond had joined the conspiracy for his benefit and at his direction.
On 8 July 2015, the cross claimants agreed with Brain Beyond and Mr Reay that the cross claims against them should be dismissed.

The pleading of the cross claim

As I have said above, the cross claimants abandoned their amended cross claim filed on 15 August 2014, and also the draft further amended cross claim that they propounded before the hearing on 7 July 2015, in the face of attacks on those documents made by all of the cross defendants.
In my opinion, the cross claimants' abandonment of the documents was the proper course for them to take. The documents were entirely unsustainable on the basis of the rules that govern proper pleadings. The documents should not have been filed or propounded in the first place.
It will be sufficient for me to repeat, with respect, the following wise words of Bryson J (as his Honour then was) in Northam v Favelle Favco Holdings Pty Ltd, unreported, 7 March 1995 BC9504276 at 3 to 5: It is common for cases to go to trial on pleadings which are very inadequate. It is for parties to calculate the advantages and disadvantages of allowing this to happen and the risks in which they are involved and to set them against the expense and trouble of pursuing interlocutory applications, and it is obvious enough that many defendants decide to go to trial on the basis of what they regard as a reasonable understanding of what the issues will be, even though pleadings leave them unclear. I do not expect or require parties to make these judgments or accept these risks and parties must have justice in accordance with the rules of Court if they ask for it, as with decreasing frequency they do. The procedural hazard for defendants is that a plaintiff may at the hearing persuade the Court either to allow amendments or to determine the proceedings without amendments on issues which are not pleaded on the basis that some allusion in a pleading, affidavit or correspondence has shown that some allegation or cause of action was relied on and that the defendant has had a fair opportunity to prepare to meet it. The risk is that any deficiency in a defendant's preparedness to meet a case raised by an amendment or newly introduced may be attributed to the defendant's own inattention. Defendants should not have to incur this risk if they do not wish to and make a timely application. … The claim was that the Amended Statement of Claim has a tendency to cause prejudice, embarrassment or delay in the proceedings, most particularly embarrassment; see Pt15 R26(1)(b). Put shortly, the embarrassment claimed is that the Amended Statement of Claim does not with sufficient clarity show what are alleged to be the facts material to claims against the fifth defendant, in terms which truly enable the allegations to be understood, the causes of action relied on to be recognised, and preparations to be made to allege and prove facts in answer to them, with the evidence of the fifth defendant himself and other relevant evidence including accounting experts. A pleading may be embarrassing even though it does contain allegations of material facts sufficient to constitute a cause of action, if the material facts alleged are couched in expressions which leave difficulties or doubts about recognising or piecing together what is referred to, or if imprecise or slang words are used with unduly broad ranges of possible meanings or without clear meanings. What is referred to must be clearly stated showing, as appropriate, when and where an event happened, who participated, what was said, what was the relevant effect of any document and so forth. It is not fair to require a defendant to flesh out general expressions or indirect allusions by piecing together information in other documents such as affidavits or experts' reports. He might get it wrong, and the greater the complexities are, the more probable it is that he will understand what is alleged in some different way to what the plaintiffs will rely on. Procedural justice can be upset just as much by opportunistic advocacy exploiting a choice among several possibilities as by an ambush from complete concealment. In the world of practicalities a defendant is unlikely to receive much protection when evidence is tendered which is an available meaning of a pleading if he has not attacked the pleading at an interlocutory stage.
As the cross claimants have not sought to support either document in which they have attempted to plead the basis of their cross claim, it is not necessary for the court to examine the deficiencies in the documents in detail. However, it will be appropriate for the court to comment in broad terms on the deficiencies in the documents, because that may have some bearing on the costs orders that should be made, and on whether LBH should be ordered to provide security for costs to the former directors. Furthermore, as there is an outstanding motion in which LBH seeks leave to file a new version of a further amended cross claim, a number of observations concerning the inadequacies in the earlier documents are warranted, to reduce the likelihood that any further application by LBH will be a futile waste of time and money.
It will be sufficient to consider the version of the draft further amended cross claim that LBH propounded at the hearing on 7 July 2015.
That cross claim was built on two foundations. The first was an allegation in par 40 that the former directors each owed "equitable, statutory and fiduciary duties to LBH". The second, alleged in par 52, was that, between June 2013 and 25 March 2014, each of the former directors "knowingly, with the intention to injure LBH and Mr Koulis, by unlawful means, conspired together and combined to remove Mr Koulis from the control of LBH, and transfer the assets of LBH to a corporation controlled by themselves, leaving LBH with debt, no assets and no ability to trade".
As to the alleged equitable, statutory and fiduciary duties, LBH listed 11 duties in separate sub-paragraphs of par 40. LBH did not identify which of the alleged duties were equitable, statutory or fiduciary. In some cases, the description of the alleged duty is almost recognisable as having been formulated in the terms of a conventional equitable or statutory duty. In most other cases, that is not so, and some duties appear to be an unconventional aggregation of parts of different conventional duties, and others appear to be a reformulation of a conventional duty with an unconventional component. For example, sub-par (b) alleges: "A duty to act with care and diligence in exercising their powers and duties as directors in making business judgements and to not have a material personal interest in the subject matter of the judgment". Sub-paragraph (f) is "a duty not to cause detriment to the corporation".
There is force in the submissions made on behalf of the former directors that most of the sub-paragraphs either misstate existing statutory duties, or allege duties not known to the law. While there is no rule against plaintiffs alleging the existence of some new duty, or a variation on a generally accepted duty, plaintiffs who wish to take this course must carefully plead the material facts that they allege give rise to the existence of the duty, so that the defendants may understand its source and respond to the allegations. The description of the alleged duties in the bare terms adopted by LBH in the present case was oppressive to the former directors.
LBH then alleged a very substantial number of acts by the former directors, which are baldly alleged to be breaches of the duties pleaded in par 40, or acts to give effect to the unlawful conspiracy alleged in par 52, or both.
The principal vice of the draft pleading was that it alleged the relevant conduct by the former directors in the form of contentious conclusions, without pleading all of the individual material facts that would be necessary to establish the conclusions, and to prove that the conduct constituted any particular breach of duty. The pleading uniformly alleged that all of the conduct constituted breaches of all of the alleged duties, without it being apparent how particular conduct would fall within breach of one duty or another.
I will pick two examples at random. The cross claimants made the following allegations of breach against the former directors: 43. On 4 October 2013 at a LBH board meeting the former directors resolved to materially change the business of LBH by rebranding the business and product name from 'Live Board ®' to 'Cody Live' (the LBH name change). 44. By causing the LBH name change the former directors diminished the value of the trademark 'Live Board ®' by ceasing to promote the business and assets of LBH as 'Live Board ®'. 45. The LBH name change was unlawful. By causing the LBH name change the former directors breached their duties as defined in paragraph 40(b) to 40(j) and caused LBH loss and damage as pleaded at paragraphs 188, 189 and 190. 46. From 7 November 1013 (sic) to 28 November 2014, they failed to mediate a Dispute Notice served on the shareholders and LBH, by Pier Blue on the 7 November 2013 (the Dispute Notice). 47. By failing to mediate the Dispute Notice the former directors breached their duties as defined in paragraph 40(b) to 40(j) and caused LBH loss and damage as pleaded at paragraphs 188, 189 and 190.
It is immediately obvious that both of these alleged breaches are pleaded at the level of mere assertion. The pleading is devoid of allegations of material facts that could establish that any decision by the former directors to cause LBH to change its business and product name, or to fail to mediate a dispute notice, could be a breach of any of the duties alleged in par 40.
It does not necessarily follow from the decision of the directors to use a trademark that was different to the name of the company that LBH would suffer damage (even if the trademark 'Live Board ®' would become less valuable). Nothing is pleaded that would establish that the name change was unlawful. There are no facts pleaded that would make this conduct an arguable breach of each of the duties alleged in par 40(b) to (j).
It does not follow automatically from the receipt of a dispute notice (the terms of which have not been pleaded in any case) that it is an arguable breach of all of those duties for the board of directors not to enter into a mediation. The source of their duty to do so is not pleaded. It does not necessarily flow from a failure to mediate that LBH will have suffered damage. Nothing is pleaded that could found an argument that mediation would have led to a more desirable outcome for LBH than the failure to mediate.
In relation to the conspiracy claim, the draft pleading alleges a substantial number of events occurring over a nine month period that are said to constitute a knowing attempt by the former directors to injure LBH and Mr Koulis. Those events extend far beyond the invalid issue of the shares on 3 September 2013, and the spending of most of the $1 million raised before Brereton J published his reasons for judgment in Cody v Live Board Holdings Ltd on 17 February 2014. For the purposes of a pleading it may be accepted that the findings of Brereton J may justify an argument that the former directors acted in breach of duty to LBH when they took these steps. However, LBH adds the change of trade name to 'Cody Live' (pars 60 and 61); misleading the shareholders as to the validity of the 3 September share issue (par 62 and 63); entering into an agreement with LBH shareholders and all of the subscription creditors to swap their shares in LBH for shares in Cody Live (pars 72 to 76); causing the administrators to advertise for the sale of LBH's assets (pars 77 to 81); executing the deed of company arrangement (pars 82 to 90); making misrepresentations on the Cody Live website and Facebook page (par 91); falsely claiming Mr Cody was the inventor of the invention the subject of the patent and the patent application (par 92 and 93); issuing a false press release (par 94); making false statements to a newspaper journalist (par 95); preparing false financial statements for LBH (pars 96 to 100); and making threats against persons who supported LBH or Mr Koulis (pars 101 to 105). Not only was there no basis pleaded that would support the conclusion that all of these events were part of the one conspiracy between the former directors, but the draft pleading entirely ignores the findings of Brereton J in Re Live Board Holdings Ltd, that Mr Koulis had validly been removed as a director of LBH, and the administrators were validly appointed, and entitled to sell LBH's assets for the benefit of its creditors. It is not unfair to say that the draft pleading ignores the need to properly characterise the conduct of the former directors in responding to changing events, many of which they did not control (such as the bidding process for LBH's assets).
If one then goes to pars 188, 189 and 190, one sees that the LBH pleads claims for damages against Mr Cody, Ms Burke and Mr Ochojski in identical terms. It is sufficient to note that those paragraphs merely set out a claim for damages for breach of various duties, including exemplary damages. As an example, it is stated that LBH claims damages for "loss and damages for breaches of directors duties as pleaded at paragraphs 42, 45, 47, 49 and 51". The claim for damages is circular, and does not plead any material facts capable of showing how particular breaches caused particular losses, or of describing the nature of the damages.
A particular problem was that LBH did not identify in respect of particular breaches whether the compensation was sought at common law or in equity, or for statutory relief. This was a serious omission, as it deprived the former directors of any opportunity to understand how they should meet the claims against them.
There is no purpose in conducting any further analysis of the defective allegations in the draft further amended cross claim. Not only were there many such defects, but it is not unfair to say that there was very little of the draft further amended cross claim that was properly pleaded.
This is a crucial consideration for LBH to bear in mind. Any further application for leave to file a new draft further amended cross claim is unlikely to be successful if it is nothing other than an edited or remodelled version of the documents that have already been abandoned.

The appropriate way to deal with outstanding issues

At the end of the most recent hearing the former directors provided draft short minutes of order to the court that they contended the court should make to dispose of all of the issues that are outstanding. LBH accepted that some of the orders should be made, but disputed the making of other orders.
I will set out the draft short minutes of order below, because that will provide a convenient format for consideration of the orders that should be made.
It will be convenient, first, to deal separately with the security for costs issue, as that was the most significant substantive issue that was ultimately in contention between the parties.
The real position in the present case is not simply that LBH's amended cross claim does not disclose a reasonable cause of action, but it has no cross claim at all, and the continuation of the proceedings will depend upon its being given leave to file a new version of its further amended cross claim. That gives rise to the question whether, in the present circumstances, the court should now deal with the former directors' application for security for costs. It might be premature to do so, because the need for provision of security for costs will not arise if LBH is not given leave to file a new further amended cross claim, and even if it is, it is not now possible to predict what will be involved in the defence of that cross claim by the former directors, which for obvious reasons may prevent the court now being in a position to assess the amount of the costs for which security should be provided.
Notwithstanding the logic that underpins the doubt as to whether it is now timely to deal with the application for security for costs, there are practical reasons why I should do so, at least in principle.
First, the parties have argued the security for costs application on two separate occasions now, but that exercise has been undermined by the repeated abandonment by LBH of the form of its cross claim that was current on each occasion.
Secondly, it will be necessary for LBH to make a considered decision as to the course that it should now follow, and it will be pertinent to that decision whether LBH will have to provide for some amount of security for costs.
In the somewhat exceptional circumstances of the present case, I have decided that it will be appropriate to deal with the parties' submissions concerning the question of whether or not LBH should be ordered to provide security for the former directors' costs of defending the cross claim.
I will then return to deal with the orders that should be made at this stage of the proceedings in the context of the short minutes of order provided by the former directors.

The application for security for costs

The former directors rely upon the following sources of power in the court to order that LBH provide security for their costs of defending its cross claim.
Uniform Civil Procedure Rules r 42.21 relevantly provides: (1) If, in any proceedings, it appears to the court on the application of a defendant: … (d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, or … the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given. (1A) In determining whether it is appropriate to make an order that a plaintiff referred to in subrule (1) give security for costs, the court may have regard to the following matters and such other matters as it considers relevant: (a) the prospects of success or merits of the proceedings, (b) the genuineness of the proceedings, (c) the impecuniosity of the plaintiff, (d) whether the plaintiff's impecuniosity is attributable to the defendant's conduct, (e) whether the plaintiff is effectively in the position of a defendant, (f) whether an order for security for costs would stifle the proceedings, (g) whether the proceedings involves a matter of public importance, (h) whether there has been an admission or payment in court, (i) whether delay by the plaintiff in commencing the proceedings has prejudiced the defendant, (j) the costs of the proceedings, (k) whether the security sought is proportionate to the importance and complexity of the subject matter in dispute, (l) the timing of the application for security for costs, (m) whether an order for costs made against the plaintiff would be enforceable within Australia, (n) the ease and convenience or otherwise of enforcing a New South Wales court judgment or order in the country of a non-resident plaintiff. … (2) Security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct. (3) If the plaintiff fails to comply with an order under this rule, the court may order that the proceeding on the plaintiff's claim for relief in the proceedings be dismissed…
Section 1335(1) of the Corporations Act is in the following terms: (1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.
The Court of Appeal in HP Mercantile Pty Ltd v Plevey [2014] NSWCA 374 at [8] held that the power to award security for costs also arises under the inherent jurisdiction of the court.
The three sources of jurisdiction for the court to make an order that LBH provide security for the former directors' costs have essentially the same effect in the present case, and it will be sufficient to consider the application of UCPR r 42.21.
There is no issue on this application about whether there is reason to believe that LBH will be unable to pay the costs of the former directors if ordered to do so within the meaning of r 42.21(1)(d). LBH has not contested the former directors' submission that there clearly is reason to have that belief.
Nor has LBH contested the former directors' submission that it therefore bears an onus to establish a reason why security should not be granted: Wollongong City Council v Legal Business Centre [2012] NSWCA 245 per Beazley JA (as her Honour then was) at [29]-[30].
It will only be necessary to address the issues relevant to whether or not an order for the provision of security for costs should be made against LBH that have been raised by the parties.
The first submission put by LBH depends upon UCPR r 42.21(1A)(a), which provides that, in determining whether it is appropriate to make an order that a plaintiff (which includes a cross claimant) give security for costs, the court may have regard to the prospects of success or merits of the proceedings.
LBH based its argument substantially on the matters dealt with by Brereton J in Cody v Live Board Holdings Ltd. LBH submitted that the court should find that its claim has reasonable prospects of success, as Brereton J has found that the 3 September 2013 share issue was not made in accordance with LBH's constitution or the shareholders' agreement, and the former directors thereby created an obligation on the company's part to repay the subscription monies to the parties who acquired the preference shares, and that by reason of the subscription monies being substantially spent before Brereton J published his judgment, the former directors created a state of insolvency that has led to the appointment of the administrators and the sale of LBH's principal assets.
While, as I have observed above, those matters may have given rise to the kernel of a claim by LBH against the former directors, I have found that the version of the cross claim propounded by LBH on 7 July 2015 did not disclose a good cause of action against the former directors. So much was accepted by LBH when it abandoned its application for leave to file that document.
Accordingly, as matters stand, LBH has not demonstrated that it has good prospects of success or merits in respect of any cross claim against the former directors.
In any event, I accept the submission made on behalf of the former directors that it is not the correct approach for the court to decline to make an order for the provision of security for costs because it takes the view that the case propounded is bona fides and has reasonable prospects of success. The merits of the claim are a neutral factor and, in the cases where a properly pleaded claim has been filed, the court should assume that the claim is bona fides and arguable and should not embark on a more detailed consideration of the merits: Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 764 at [37]-[38]; and Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276 at [83].
If LBH is not granted leave to file a further amended cross claim against the former directors, that will be the end of the proceedings, and it will not be necessary for the court to make any order for the provision of security for costs against LBH. If LBH is granted leave, then it will have demonstrated that it has a reasonable cause of action, because otherwise leave could not be granted. If that happens, then the merits of the cross claim will be neutral to the issue of whether security for costs should be provided by LBH.
The second submission put by LBH is based upon UCPR r 42.21(1A)(b), which permits the court to take into account the genuineness of the proceedings. LBH's argument commenced with the proposition that the facts pleaded in the cross claim grounded valid causes of action. This submission must fail because of my finding that the cross claim does not disclose any reasonable cause of action. It is in the same position as the first submission.
The third submission put by LBH is based upon UCPR r 42.21(1A)(c) and (d). LBH submits that its impecuniosity is attributable to the former directors' conduct.
LBH submits that, on 29 August 2013, prior to the invalid share issue, LBH's assets were valued at $4,181,237 by the former directors, and it was based upon that valuation that investors invested $1.045 million on 3 September 2013. The evidence for this value relied upon by LBH is a single line in LBH's Supplementary Information Memorandum - Sophisticated Investors, dated 29 August 2013, which states: "The pre-money valuation of the Company is $4,181,237". LBH submits that, on 12 February 2014, the former directors valued its assets in board minutes of that date, a week prior to their appointing the administrators, at about double the 29 August 2013 valuation. Item 5 of the minutes of a meeting of the board of directors of LBH on 12 February 2014 states: Item 5: Capital Raising Update Pierce Cody noted that he and Finola Burke had recently met with Bligh Capital to discuss the next stage of the capital raising. Justin Dethridge had received positive feedback from early discussions with potential additional investors and felt that the pricing for the next round could be as much is double the seed round.
The former directors rely upon LBH's 30 June 2013 financial statements. The statement of financial position shows that LBH had current assets of $33,870 (sic), represented by $440 in cash and $33,431 in trade and other receivables. LBH had current liabilities of $114,467. The company had net assets of $132,207. The principal asset was the company's intellectual property that was valued at $360,697. LBH had non-current liabilities of $147,894, which consisted primarily of a loan of $137,618 from Pier Blue.
The submission that the former directors' conduct has caused LBH's impecuniosity is contentious, and, as suggested in Ritchie's Uniform Civil Procedure NSW at [42.21.10D]: "… This difficulty has led to observations that the defendant's contentious contribution to the plaintiff's impecuniosity is not a significant consideration against requiring security for costs, unless there is a material risk that the requirement for security will stifle the prosecution of an apparently genuinely arguable claim": see for example Advance Innovative Solutions Pty Ltd (in liq) v X-Dem Group (Aust) Pty Ltd [2012] NSWSC 1112 at [19] and Nonox Australia v Certain Underwriters at Lloyds Subscribing to Contract No CV0263CGL [2014] NSWSC 221 at [17] and [18].
On the one hand it is true that, as a result of the appointment of the administrators, the primary assets of LBH including its patent and patent application have been sold. The appointment of the administrators was the direct result of Brereton J having declined to declare that the shares in LBH that were issued on 3 September 2013 had validly been issued. That result in turn flowed from the fact that the former directors had caused the shares to be issued and then caused LBH to spend most of the $1 million subscription price that the company had received in the period before Brereton J delivered his judgment.
On the other hand, LBH's intellectual property had been valued by the company at $360,697 in its 30 June 2013 financial statements. That value was relatively close to the sale price achieved by the administrators of $305,000. There is evidence that LBH had found it difficult to raise operating capital for a number of years and if the 30 June 2013 financial statements, which were produced before the conduct of the former directors had any effect on the company's financial position, disclose its real financial position, LBH would not have been able to meet any costs order likely to be made against it in favour of the former directors in these proceedings in any event.
LBH has sought to meet this argument by pointing to the fact that LBH was able to raise $1 million from the investors who subscribed for preference shares on 3 September 2013, on the basis of an information statement that valued the company at about $4 million. Those investments were plainly speculative, and there is no proper evidence that LBH's business was in reality worth in the order of $4 million.
I am not satisfied that LBH has demonstrated by adequate evidence that its financial inability to meet any costs order that may be made against it in favour of the former directors has been caused by their wrongful conduct. On balance, LBH's financial position was such that it would have been unable to pay the former directors' legal costs irrespective of any conduct of the former directors. It is highly doubtful that, if the former directors' conduct had not led to the sale of LBH's intellectual property, LBH could have raised the funds necessary to pay the former directors' costs by borrowing against the security of the intellectual property. It is one thing for the directors of LBH to attribute a directors' valuation to the intellectual property for the purpose of raising speculative investment capital; it is entirely another to say that LBH could have borrowed money on the security of the intellectual property solely for the purpose of paying the former directors' legal costs.
The uncertainty concerning whether the former directors' conduct was a cause of LBH's impecuniosity leads, as I have suggested above, to LBH's fourth submission, being that the making of an order for security for costs against it will stultify the proceedings (UCPR r 42.21(1A)(f)).
The proper determination of this issue is affected by the fact that LBH made no effort to identify all of the parties who stand to gain from its success in the proceedings, and to establish that it is not within the means of those parties to fund any liability that LBH may incur to pay the former directors' costs of the proceedings.
Mr Koulis was cross-examined on the issue of whether there are parties who stand to gain from LBH's success in these proceedings, who may be in a position to assist it to meet any costs order made against it in favour of the former directors. Mr Koulis did not adduce any adequate evidence of his own asset position, including in relation to his current business called "Innovation Mentors". Mr Koulis did not provide any evidence of his capacity to obtain financial assistance from his family, who have provided some funding to LBH from time to time. That financial assistance was recorded in LBH's accounts as a debt from LBH to Pier Blue. That debt was repaid in full out of the deed fund. The evidence discloses that Mr Koulis may be a beneficiary of the Koulis Family Trust, but no evidence was given concerning the financial position of that trust.
Mr Koulis was questioned about the involvement of a company called Solitaire Capital in LBH's affairs. The principal of Solitaire Capital is a Mr Cusack, who was one of the three directors of LBH at the time of the notice of motion for leave to file the draft further amended statement of claim. Solitaire Capital is apparently a moneylending business. It holds 615,400 shares in LBH. Solitaire Capital had previously lent money to LBH, and Mr Koulis said in cross-examination that he owes about $100,000 to that company. If the relief sought by LBH in these proceedings that would involve the cancellation of shares issued to the former directors is granted, then Solitaire Capital's shareholding in LBH would increase from 3.5% to about 5.3%.
The former directors also relied upon Mr Koulis' concession that his girlfriend, Ms Kor, was also a director of LBH, and no evidence has been put before the court concerning her financial position. That is true, but I doubt that Ms Kor's involvement is ultimately of great significance.
LBH's response to the former directors' submissions on the issue of stultification was simply to point to the present shareholding in LBH, particularly in regard to Pier Blue holding 59.06% of the shares, Mr Cody (through Cody Investments) holding 31.95% of the shares, and the other shares being held by a number of minority shareholders (including Solitaire Capital), and to say that there was no shareholder that LBH could turn to that could stand to benefit from the litigation. The truth of that proposition is not self-evident. It is likely that the ability of Mr Koulis and Pier Blue to raise funds is limited. Apart from her directorship, Ms Kor is unlikely to have an interest in LBH succeeding in the proceedings. It may also be unlikely that Solitaire Capital would advance substantial funds to LBH to cover its obligations to pay legal costs, given its small relative shareholding in the company. It may remain unlikely even if success by LBH in the proceedings might improve the chances of Mr Koulis being able to repay to Solitaire Capital the $100,000 that he owes to that company. However, on the present state of the evidence, these issues largely lay in the realm of speculation.
In a case such as the present, in my view, it is incumbent on a plaintiff who seeks to avoid the imposition of an order for the provision of security for costs on the ground that the making of such an order will stultify the proceedings to fulfil the requirement that it identify the parties who might gain from the success of the proceedings, and provide to the court in a candid way adequate evidence to enable the court to evaluate the capacity of those parties to fund the costs of the proceedings, including any adverse costs order made in favour of the defendant. I am not satisfied that LBH has adequately complied with this obligation in the present case.
LBH put a number of further submissions in opposition to the former directors' application for an order that LBH provide security for their costs. These submissions may be dealt with briefly.
LBH submitted that it was effectively in the position of a defendant, as these proceedings were commenced by the former directors (UCPR r 42.21(1A)(e)). That submission must be rejected. The former directors only sought declarations concerning the validity of the share issue that took place on 3 September 2013. It is plain from the various forms of cross claim that LBH has filed, or sought to file, that it is an effective plaintiff and seeks substantial relief against the former directors for breach of many duties that LBH alleges were owed to it. LBH is the primary moving party in these proceedings, and the former directors have not sought to prosecute their original claim, save for the extent that they may do so to counter the cross claim by LBH against them.
LBH also submitted that these proceedings raise issues of public importance (UCPR r 42.21(1A)(h)), but that argument depended upon LBH's claims against the administrators, so it has fallen away as a result of LBH's discontinuance of that claim.
Finally, LBH initially relied upon the former directors' delay in filing their application for security for costs (UCPR r 42.21(1A)(l)). As I understand it, LBH ultimately abandoned this ground for resisting an order for security for costs against it. The former directors commenced these proceedings on 28 November 2013. LBH's cross claim was filed on 15 August 2014, and then amended on 21 August 2014. The notice of motion seeking security for costs was filed on 15 September 2014, only one month after the cross claim was filed. Brereton J ordered on 26 May 2014 that the interlocutory process filed by the cross claimants continue on pleadings as a cross claim. It appears that the conduct of the administration may have influenced the progress of the cross claim. That did not involve any relevant delay on the part of the former directors.
LBH's difficulties in resisting an order for provision of security for costs have been exacerbated by two additional features. The first arises out of the number and complexity of the issues raised by LBH in its existing amended cross claim, and the various iterations of its draft further amended cross claim. It is plain that if LBH were to prosecute all of those issues, the proceedings would, in relative terms, be extremely costly for the former directors to defend.
Secondly, it should not be ignored that LBH provided particulars of the damages that it claims in par 338 to the initial version of its cross claim that was filed on 15 August 2014. The particulars appear to have been based upon an information memorandum prepared by the former directors. LBH claimed damages of $17,952,780 for the loss of the ability to exploit the patent for a period of four years. LBH appears to have made an additional claim, based upon the possibility that it would list on the ASX in about 2019, with projected earnings of $37,409,984 per year, which would give LBH a projected company value of at least $946,472,590.
LBH apparently thought better of this claim between the filing of its initial cross claim on 15 August 2014 and the filing of the further amended cross claim on 21 August 2014. In the latter document LBH deleted the particulars of its damages claim. The damages claim has evolved into the uninformative and circular claim that I have discussed above. However, as I understand it, LBH has not yet provided, in any positive way, alternative particulars of damage to those that were included in the original cross claim. The quantification of LBH's claim may therefore be uncertain, but nothing has happened, of which I am aware, that would reasonably cause the former directors to understand that LBH has abandoned the enormous claim for damages that it made originally. This is another feature of LBH's claim that would justify the former directors believing that they may be required to expend a very substantial amount of money in defending LBH's claim.
It will be convenient, at this point, to consider the evidence tendered by the former directors to support the amount of the security for costs that they ask the court to order that LBH provide to them. The court must infer that the former directors' approach to the estimate of their legal costs will have been influenced by the number of issues that LBH has sought to agitate against them, and the apparently enormous claim for damages that they will be required to defend.
The former directors' application for security for costs was supported by an affidavit sworn by their solicitor, Mr Stephen Douglas Watt, on 23 September 2014. The affidavit contained Mr Watt's estimate of the former directors' legal costs, on a solicitor/client basis, up to and including a final hearing of $471,100. Mr Watt gave the opinion that the successful party would likely recover approximately 70% of their legal costs on an ordinary basis. He therefore estimated that, if the former directors were successful, it is likely they would recover costs of $329,770.
Mr Watt set out his estimate of the charge out rates applicable to a partner, and junior and senior counsel (par 10), and provided a schedule in which he set out in detail in a conventional way his estimate of the costs of each aspect of the proceedings, including his estimate of the time required by the various categories of lawyer, and his total estimate per item.
Mr Watt compiled his estimate of costs on the assumption that senior and junior counsel would both be required to devote 10 days to preparation for the hearing, and the final hearing would take 10 court days.
The cross claimants did not file any evidence in opposition to the estimate of costs made by Mr Watt, they did not cross-examine Mr Watt, and they did not in their submissions suggest that Mr Watt had made any material errors in his process of estimation.
Mr Watt prepared his evidence in support of the former directors' notice of motion filed on 15 September 2014. At that time, the cross claim was pleaded in the form of the first cross claim filed on 15 August 2014. There were four cross claimants, who pleaded their claim in 338 paragraphs over 54 pages. The form of the draft further amended first cross claim propounded by the cross claimants at the hearing on 7 July 2015, before it was abandoned, pleaded the cross claim in 192 paragraphs over 40 pages. The draft cross claim that is annexed to LBH's 7 August 2015 notice of motion pleads LBH's claim in 75 paragraphs over 20 pages.
It is, of course, entirely unscientific to compare cross claims for the purposes of estimating the costs of their defence by counting the respective numbers of paragraphs and pages that it has taken to plead the claims. However, in a broad way, the reduction in the length of the pleading of the different versions of the cross claims reflects the complexity of the allegations made. Furthermore, the removal of the cross claimants other than LBH is likely to some degree to simplify the proceedings, because only LBH will be seeking remedies. While it is true that much of the relief sought by the other three cross claimants in the first cross claim filed on 15 August 2014 was reflective of LBH's loss, there was at least some appearance that relief was sought for the oppression of Pier Blue, as a shareholder in LBH, under s 232 and 233 of the Corporations Act (see pars 138 to 157, and 158 to 184). While the basis of these claims was not pleaded with any clarity, it is probable that the removal of the other three cross claimants will reduce the burden of the former directors' defence of any future cross claim that LBH may be given leave to file.
In any event, it is clear that Mr Watt's estimates of the costs of conducting the former directors' defence were based upon a different cross claim than LBH now seeks leave to file.
The position that I have reached is that, in principle, LBH should be ordered to provide some appropriate amount of security for the former directors' costs, if LBH is granted leave to file a further amended cross claim. The amount of security to be provided will be a matter for the discretion of the court. Some further evidence would be required from the former directors concerning their costs of defending the further amended cross claim. The court would have to take into account, in formulating the appropriate amount of security to be provided, that LBH has substantially increased the costs incurred by the former directors by pleading the amended cross claim in a manner that it was forced to abandon, and then propounding versions of the draft further amended cross claim that it also abandoned. The court may also be required to take into account the extent to which any further amended cross claim was pleaded in conventional terms limited to reasonably arguable causes of action.
I will return to this issue when I consider the orders that should be made for the continuation of these proceedings.

Orders

At the hearing on 8 July 2015, the former directors provided draft short minutes of order to the court. The parties debated the appropriateness of these orders in the light of what had happened during the two hearings before me. The cross claimants accepted that some of the orders sought by the former directors should be made, but they contested the terms of other orders.
It is unfortunate that it was apparently not possible for the cross claimants to address these issues in a practical way with the former directors in order to obviate the need for the wasted hearings in this matter, and for the present complicated reasons for judgment.
It will be convenient to set out each of the orders sought in the former directors' short minutes of order, as a basis for determining the orders that should now be made. 1. The Amended First Cross Claim Statement of Cross Claim filed on 21 August 2014 be struck out.
The cross claimants agreed with this order, so I will make it.
The next order sought is: 2. The First Cross Claimant's motion filed on 11 December 2014 be dismissed.
This order was also not opposed, and I will make it.
The former directors then ask for the following order: 3. The First to Fourth Cross Claimants are to pay the First, Second, Fourth, Fifth and Sixth Cross Defendants' costs of the hearing on 18 and 19 November 2014 and 7 and 8 July 2015, to be assessed and payable forthwith.
The cross claimants suggested that the words "as agreed or assessed" be substituted for the words "to be assessed". There is no reason why this change should not be made, and I do not understand it to be opposed by the former directors.
The cross claimants oppose the inclusion of the words "and payable forthwith".
As I understand it, without there being any positive evidence to this effect, LBH's position is that, if the orders sought by the former directors is made, so that the cross claimants will be obliged to pay these costs as soon as the process of agreement or assessment is completed, the continuation of the proceedings will be stultified because LBH (as well as the other cross claimants) will not be able to meet the costs order.
That may possibly be true, but as I have said above, the cross claimants have not tendered adequate evidence of the financial capacity of themselves, or of the persons who might gain from success in the proceedings by LBH, to make good this argument.
Rule 42.7 of the UCPR has the effect that, unless the court orders otherwise, the costs the subject of order 3 would be required to be paid in the same way as the general cost of the proceedings, which would mean that they would not become payable until the conclusion of the proceedings.
Barrett J (as his Honour then was) considered the circumstances in which the court may depart from the normal rule that costs are payable at the conclusion of the proceedings in Fiduciary Ltd v Morningstar Research Pty Ltd [2002] NSWSC 432; (2002) 55 NSWLR 1. The second factor identified by his Honour (at [12]) that may incline the court to order that costs be payable forthwith is some unreasonable conduct on the part of the party against whom costs have been ordered. A third factor identified by his Honour (at [13]) was the situation where it would be expected that it would take a fairly long time before the proceedings are finally disposed of.
In the present case, the costs order sought by the former directors in order 3 does not cover the whole of the former directors' costs of defending the proceedings to date. It relates only to the costs of the proceedings in the two hearings that have taken place before me, concerning LBH's attempt to defend its amended cross claim, and then its application for leave to file the version of the draft further amended cross claim that was before the court on 7 July 2015. As I have said above, LBH abandoned the position that it initially took on both occasions. As I have also said, it was not only reasonable for LBH to abandon its positions, but LBH should have abandoned its amended cross claim immediately when it was challenged by the former directors, and it should not have propounded its draft further amended cross claim. The position that LBH adopted on each occasion was clearly unreasonable. LBH ought not to have put the former directors to the cost of appearing at either hearing. That consideration justifies the court departing from the normal rule.
In addition, the costs the subject of order 3 have been incurred before LBH has successfully concluded the pleading of its cross claim. Assuming LBH is granted leave to file a new further amended cross claim, it is likely to be a long time before these proceedings are concluded. If LBH is not granted that leave, then the proceedings on the cross claim will come to an end, and the making of order 3 as sought by the former directors will be appropriate for that reason.
I will therefore make order 3 as sought by the former directors, with the minor amendment suggested by LBH to which I have referred above, and subject to the following qualification. All four cross claimants should be liable to pay the costs of the hearing on 18 and 19 November 2014, but all of those parties bar LBH discontinued their cross claims shortly after that hearing. All cross claimants should be liable to pay the costs of the first hearing, but only LBH should be ordered to pay the costs of the second hearing.
The next order sought is: 4. The leave granted to the Second, Third and Fourth Cross Claimants to discontinue these proceedings be on terms that they may not bring any proceedings claiming the same or similar relief or involving the same or similar cause of action.
The cross claimants agree that this order should be made and I will make it.
The former directors then seek the following order: 5. All claims against the First, Second, Fourth, Fifth and Sixth Cross Defendants be stayed until the costs in order 3 are paid, and if such costs are not paid within 30 days of becoming due the proceeding against the First, Second, Fourth, Fifth and Sixth Cross Defendants be dismissed with costs.
LBH opposes this order being made. As I have said, the normal rule concerning the time for payment of costs orders made on interlocutory applications is that which is stated in UCPR r 42.7. It is one thing for the court to make a contrary order concerning the time at which the costs should be paid; it is entirely a more serious matter for the court to stay the proceedings until the costs are paid, and in addition to dismiss the proceedings if they are not paid within a stated period.
I do not think that it will be in the interests of the administration of justice to delay the ongoing conduct of these proceedings until the process of agreement or assessment of the costs the subject of order 3 can be completed (including in respect of any appeal from any initial assessment).
The appropriate course is for the court to take into account the costs the subject of order 3 if and when it determines the amount of security for costs that LBH should be ordered to provide to the former directors. I will return to this issue below.
The next order sought by the former directors is: 6. Any motion by the First Cross Claimant dealing with leave to re-plead be filed and served by , failing which the proceeding against the First, Second, Fourth, Fifth and Sixth Cross Defendants be dismissed with costs.
LBH did not contest the appropriateness of this order, but its making has been overtaken by the filing of LBH's latest notice of motion seeking leave to file a further amended cross claim. I have decided that the appropriate course is to give LBH a short period to consider whether it wishes to have its latest notice of motion heard, or whether it wishes to further revise its draft further amended cross claim to take into account any observations made in these reasons for judgment. It would obviously be wise for LBH to proceed upon the basis that there must be a very high likelihood that, if it fails in its next application for leave, considerations of fairness to the former directors will preclude LBH being given any further opportunity to apply for leave.
The final order sought by the former directors is the following: 7. If any motion seeking leave to re-plead is filed: (a) the First Cross Claim and it is, upon its filing, to provide security for the costs of the First, Second, Fourth, Fifth and Six Cross Defendants by paying into Court the amount of ; (b) the First, Second, Fourth, Fifth and Six Cross Defendants are to inform the First Cross Claimant whether the motion is opposed, and if so to identify the parts of the proposed amended pleading opposed and the reason for the opposition by ; (c) if the motion is opposed, the parties are to have leave to contact the Associate to his Honour Justice Robb to seek directions for the further conduct of the matter.
In relation to order 7(a), the amount of security for costs sought by the former directors is $329,770. LBH opposes the court making any order for security for costs.
For the reasons that I have given above, I am satisfied that in principle the former directors have made out a good case that LBH should be ordered to provide an appropriate amount of security for their costs. It is, unfortunately, premature for the court to exercise its discretion as to the amount of the security for costs that should be provided. The amount of security should reflect the issues raised by any further amended cross claim that LBH is given leave to file. The precise amount may be sensitive to the way that the further amended cross claim is pleaded, in respect of its relative simplicity, and the appearance that the cross claim is based upon conduct by the former directors that gives rise to a clearly arguable case of wrongful conduct on their part, and the appearance that the relief sought by LBH is conventionally available if the breaches alleged are established.
Plainly, the former directors will not be able to revise their evidence concerning the quantum of the security for costs until they are given the opportunity to consider the draft further amended cross claim that LBH will seek leave to file. On one view, it would be more rational to defer the whole issue of security for costs until it is known whether or not LBH will be given leave to file any further amended cross claim at all. On balance, however, it should not be a great burden on the former directors to serve revised evidence of their costs of defending the new further amended cross claim that LBH seeks leave to file, and it would be in the interests of the administration of justice for both issues to be dealt with once and for all at a single hearing. It will be necessary for me to make appropriate directions to achieve this result.
LBH did not object in principle to the court making orders 7(b) and (c).
The parties also agree to the court making an appropriate order giving the parties liberty to apply on three days' notice.
In principle, I will make orders in the following form. I will give the parties an opportunity to suggest appropriate changes to the proposed orders for the purposes of the orders that are finally made. I have left it to the parties to agree upon the dates that I have left blank in the proposed orders, given the time of the year at which these reasons for judgment will be handed down. The proposed orders are:
Order that: 1. The Amended First Cross Claim Statement of Cross Claim filed on 21 August 2014 be struck out. 2. The First Cross Claimant's motion filed on 11 December 2014 be dismissed. 3. The First to Fourth Cross Claimants are to pay the First, Second, Fourth, Fifth and Sixth Cross Defendants' costs of the hearing on 18 and 19 November 2014, and the First Cross Claimant is to pay the First, Second, Fourth, Fifth and Sixth Cross Defendants' costs of the hearing on 7 and 8 July 2015, to be agreed or assessed, and payable forthwith. 4. The leave granted to the Second, Third and Fourth Cross Claimants to discontinue these proceedings be on terms that they may not bring any proceedings claiming the same or similar relief or involving the same or similar cause of action. 5. If the First Cross Claimant wishes to proceed with its notice of motion filed on 7 August 2015, it must notify the First, Second, Fourth, Fifth and Sixth Cross Defendants of that intention by [ ]. 6. If the First Cross Claimant wishes to revise the draft Further Amended Statement of Cross Claim annexed to its notice of motion filed 7 August 2015, it must file and serve on the First, Second, Fourth, Fifth and Sixth Cross Defendants an amended notice of motion by [ ]. 7. The First, Second, Fourth, Fifth and Sixth Cross Defendants shall notify the First Cross Claimant whether they oppose the First Cross Claimant's motion, and if so they shall identify the parts of the proposed amended pleading that are opposed, and outline reasons for the opposition by [ ]. 8. The First, Second, Fourth, Fifth and Sixth Cross Defendants shall file any additional affidavit evidence concerning the amount of the security for costs that they seek against the First Cross Claimant by [ ]. 9. The parties are given leave, after the steps required by the preceding orders have been completed, to approach the Associate to Robb J for the purpose of fixing a hearing for the First Cross Claimant's notice of motion and the completion of the hearing of the First, Second, Fourth, Fifth and Sixth Cross Defendants' notice of motion seeking an order for security for costs against the First Cross Claimant. 10. The parties are given liberty to apply to the Associate to Robb J to relist the proceedings on three days' notice.

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 December 2015

Cody v Live Board Holdings Ltd

At a glance

Court

Decision date

Before

Source

Judgment (9 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (11)

Cited By (2)