PRACTICE - Further evidence - Application for leave to file further evidence relevant to interlocutory decision - Where further evidence would not change the court's decision even if admitted.
Source
Original judgment source is linked above.
Catchwords
PRACTICE - Further evidence - Application for leave to file further evidence relevant to interlocutory decision - Where further evidence would not change the court's decision even if admitted.
Judgment (25 paragraphs)
[1]
Background
On 3 September 2013, LBH raised $1,045,000 by the issue of preference shares to new shareholders. There was a contest between the cross claimants and the cross defendants as to whether those shares had been validly issued. The then directors of LBH, who are now cross defendants, commenced proceedings on 28 November 2013, seeking a declaration that, on the proper construction of LBH's constitution, and the terms of a shareholders agreement, the board of LBH had power and authority to issue the shares.
On that limited application, which was heard on 18 December 2013, Brereton J dismissed the application, by judgment given on 17 February 2014. It is not necessary to go into the detail, but it may be that his Honour's judgment did not finally determine the question of whether the share issue was invalid.
It is sufficient to observe that, if the share issue was invalid, it would be necessary for LBH to cancel the shares, and refund the subscription price to the subscribers.
The day after Brereton J handed down judgment, the board of directors of LBH appointed administrators of the company, under Part 5.3A of the Corporations Act.
The administrators applied, on 24 February 2014, for relief pursuant to ss 447A, 447C, 447D and 1322 of the Corporations Act to resolve any doubt about the validity of their appointment. Mr Koulis and Pier Blue opposed the application.
On 3 March 2014, Brereton J published his judgment on the application: Live Board Holdings Ltd (administrators appointed) [2014] NSWSC 161. He confirmed the validity of the administrators' appointment.
As I noted at [57] of my earlier judgment, Brereton J made a number of observations relevant to the solvency of LBH. Relevantly, he said that, by the time of the administrators' appointment, LBH's cash at bank had been reduced to $320,000. This was presumably the remaining proceeds of the 3 September share issue. On that footing, the invalidity of the share issue would give rise to an obligation on the company's part to reimburse the subscription money. LBH was insolvent in the opinion of the administrators.
It therefore appeared that the board of directors of LBH had expended at least $680,000 of the amount of the subscription monies between the date of the subscription and the appointment of the administrators, knowing all the time that Mr Koulis and Pier Blue contested the validity of the subscription, and that if it were found to be invalid, LBH would be required to repay the subscription money.
It is only necessary to observe that an issue would seem to arise as to whether the directors breached their duty to the company by spending a substantial proportion of the subscription money, in the face of the doubt as to the validity of the share issue, so that, if the issue was determined to be invalid, LBH may be insolvent as a result.
The answer to this question may involve complex considerations. It would depend upon whether the expenditure of part of the subscription money was the cause of the insolvency. It would be necessary to examine the reasons for the payments, to determine whether the directors had a real choice as to whether to make the payments or not.
It is sufficient to note that, following the proposal of a deed of company arrangement by interests connected with the directors, which led to a public sales process for the assets of the company, in response to which two competitive offers were made, the successful bidder was Cody Live. That company was associated with the director cross defendants. Cody Live paid a price of $305,000. Neither Mr Koulis nor Pier Blue offered to buy the assets of LBH.
The result of these events was that Cody Live, a company associated with the directors who had appointed the administrators of LBH, acquired the patents and other assets of the company, following a public sales process, that occurred as a result of the expenditure of the subscription money, and the consequent insolvency of LBH.
If it was a breach of duty by the directors of LBH to spend a large part of the subscription money during the period that their power and authority to issue the shares was under challenge, there may be a good argument that, as a result of that breach, LBH became insolvent, administrators were appointed, and the company lost the benefit of all of its assets, including its patents.
The directors' liability to LBH would not necessarily flow simply from their knowledge that their power and authority to cause the company to make the share issue was under challenge. It may require an investigation into such matters as the nature of the legal advice received by the directors, any basis that they had for believing that LBH was entitled to issue the shares that went beyond the effect of the constitution and the shareholders agreement, and the reasons why part of the subscription money was paid out. The reasonableness of the payments made would depend upon the need for the payments, and the degree of choice that the directors had in making them.
The point is that it is not self-evident from the primary facts that I have recounted above that the directors breached any duty that they owed to LBH by causing it to pay out part of the subscription money.
It will be appropriate to focus on two aspects of the submissions at the recent hearing, and then to analyse the third amended cross claim in relation to the nature of the claims made by LBH.
First, counsel for the cross defendants made the point (at T 70) that there was no evidence as to why a large part of the subscription monies was spent, or what it was spent on, and the court observed that the pleading did not say what happened to the money.
After I raised with counsel for LBH the fact that the third amended cross claim contained no allegations as to why the money was spent, nor as to whether the directors had any choice in spending the money or not, the following exchange occurred (at T 92.5 to 92.27):
... part of the evidence is that the acquisition of my client's company also included the acquisition of all its books and records. So it has nothing to provide the sort of particulars that your Honour raises. Now, that's a matter for trial - it will be dealt with then. I just mention it. Coming back to what this case is all about, it goes
HIS HONOUR: Did you just tell me that the cross-claimant doesn't know where the $750,000 went?
MENZIES: No. Can't find out.
HIS HONOUR: So the cross-claimant doesn't know whether it has a good case or a bad case.
MENZIES: Well, to that extent, yes. We know it was spent. We know that at the time of the company going into administration, the only creditors were the, I think, legal costs, and other minor creditors. So it wasn't as if there was a great list of creditors out there waiting to be paid, which would have driven the company into liquidation anyhow, and they're listed in the administrator's documents, and it will be able to be demonstrated, as I understand the evidence - but I can't be certain of this, and that's why I've expressed the way I have - that there will be evidence available to show where some of the money went…
That exchange disclosed that, as a result of the sale of LBH's assets by the administrators, the company has not at any time since the filing of the cross claim had access to the financial records necessary to determine whether or not a proper case could be made that the director cross defendants breached their duties.
LBH did not, in conjunction with Brereton J's orders on 26 May 2014 that the cross claim proceed on pleadings, make any application for orders giving it access to the documents then held by Cody Live, in order to enable it to determine whether it had an arguable case, and if so, to plead the basis of that case with proper particulars.
The result, for the purposes of the present application, is that the third amended cross claim in reality only implies that the cross defendants who were its directors breached their duties to the company, and thereby caused its impecuniosity. The cross claim contains express allegations that they did so, but the want of particularity in support of that claim is not merely a result of inadequate pleading. LBH apparently does not know the facts that would enable it to show that it had a real claim that its former directors breached their duty to the company, and also would enable it to particularise its claim in a way that would give it apparent substance.
The second aspect of the submissions that requires attention concerns an exchange between counsel for LBH and the court in relation to the essence of the allegations made by LBH, at T 93.26 to 94.23:
Ultimately, as your Honour observes, the assets of Live Board are sold to the corporation which Mr Cody controls and the beneficiaries of that sale are the subscription creditors. So what has happened is, and we say it's all part of a plan--
HIS HONOUR: You mean conspiracy.
MENZIES: I'm not going to describe it as a conspiracy. It's part of the plan.
HIS HONOUR: When did the plan start? Are you saying the plan started before the original share issue or after the appointment of the administrators? That's an important question because whoever might be involved in the case there may be a claim that the cross defendants wrongfully acted in a way which caused the company to go into administration. That's one case. What we're looking at is entirely separate if a company is in administration and it is insolvent so that it's in the hands of the administrators, who have to act in accordance with Pt 5.3A of the Corporations Act, is there some inhibition on shareholders who also by themselves or a related person are directors in dealing with the administrators?
MENZIES: No. We're not saying that. The point about it is this that if - what happens is at the get go--
HIS HONOUR: When is the get go?
MENZIES: The get go is at the time when the shares are issued. Mr Cody's interests seek to get control of the company and to prevent Mr Koulis controlling the company who up until then is a majority shareholder. Because Mr Koulis doesn't like that happening, they proceed anyhow and issue shares even though the issue of the shares is contrary to the constitution of the company. So what's being done from the start is an attempt by Mr Cody's interests to take control of the corporation which theretofore had been controlled by Mr Koulis. Now true it is--
HIS HONOUR: You say what happened with the appointment of the administrators, the DOCA and the consortium agreement is all some implantation of that plan?
… You
MENZIES: We are saying that Mr Cody and his interests from the start embarked upon a plan, the end result of which was he obtained the control of the corporation, the patent holder and the patents and the business and to prove that one needs to go to various assertions that we make…
As will be seen, in its third amended cross claim, LBH abandoned its conspiracy allegations, but when the remaining allegations are considered carefully, a real doubt arises as to whether LBH has materially changed the essence of its claim. I do not for present purposes understand the difference between an allegation of conspiracy and an allegation of a plan between the remaining cross defendants.
It will now be appropriate to consider more carefully the terms of the third amended cross claim. The pleading is a complex document, and it will not be practicable to summarise all of the allegations contained in it. The purpose of the following summary is to identify the primary components of the claim made by LBH, in order to gain an understanding of what has really been alleged, and what would be involved in the forensic determination of the issues.
The allegations concerning breaches of duty by the cross defendants may be summarised as follows:
[2]
Making of invalid share issue
LBH alleges that the invalid share issue was a breach of LBH's shareholder agreement and constitution, and caused it to incur a debt of $1,045,310, the loss of valid capital of that amount, and the loss of opportunity in promoting the company's business: pars 22 to 25.
Further, it was a breach of directors' duties by the cross defendants, who were directors of LBH, for them to cause the invalid share issue: pars 26 to 38. The duties breached included those created by ss 180, 181 and 182 of the Corporations Act. The shares were issued for the improper purpose of diluting Pier Blue's shareholding, thwarting Pier Blue's attempts to remove Mr Cody and appoint new directors, and to remove Mr Koulis as an executive. The directors did not have a reasonable belief that the share issue was appropriate, because they received notice that the share issue required shareholder approval. The directors did not rationally believe the issue was in the best interests of the corporation as they were aware that Pier Blue had retained lawyers to prevent the share issue.
The directors did not, according to LBH, act in good faith and in the best interests of LBH and for a proper purpose, because they knew that the issue of shares would likely lead to litigation and there was a real possibility of a conflict of interest. The directors used their position to gain an advantage for themselves, because each of them received shares for no consideration, Mr Cody was not removed as a director, and they were able to maintain control of LBH.
The reference to the directors gaining shares for no consideration arose out of the terms of the contracts whereby the directors had first become engaged in the affairs of LBH, under which they or an associated company were issued shares in LBH on terms that, if LBH subsequently issued additional shares, the directors would also be entitled to be issued further shares at no cost to maintain their proportional shareholdings in the company.
This claim is one of serious commercial impropriety against the cross defendants who were directors of LBH at the time.
Its resolution will involve an examination of the reasons why the directors caused the share issue to occur, in the light of the existing evidence that LBH needed to raise money in order to fund the development of its business, and the exploitation of its patents.
This claim is cast in terms of assertions by LBH concerning the purposes and beliefs of the directors. There are no facts identified in the pleading, nor in the evidence tendered on the application, to directly support findings that the beliefs and purposes that LBH has alleged were held by the directors were in fact held.
[3]
Change in LBH's brand name
LBH alleges that the director cross defendants breached their duties under sections 180, 181 and 182 of the Corporations Act in the manner in which they changed LBH's brand name from "Live Board" to "Cody Live": pars 36 to 49.
This claim raises a case that it was a breach by the directors of the duties referred to, to cause the brand name under which the company offered its services from the name established when the company was controlled by Mr Koulis to a name associated with Mr Cody. The name change occurred on 4 October 2013. This claim raises a case that depends upon whether it was a breach of duty by the directors to depart from the history of the company's trading under the name "Live Board", and to adopt a new brand name that incorporated Mr Cody's name (in circumstances where the evidence establishes that Mr Cody had long and successful experience, and indeed some renown, in the outdoor advertising industry).
The resolution of this claim will require an examination in some depth of the reasons why the directors decided to change the brand name under which LBH operated, and in particular whether there were proper grounds for the directors to believe that the prospects of the business would improve if the company became associated in the marketplace with Mr Cody. That would probably be a wide-ranging investigation.
Again, this claim involves an allegation of serious commercial impropriety.
Apart from the fact of the change in brand name being alleged, the pleading does not allege specific facts that would, if proved, be capable of establishing the breaches alleged.
This claim has no direct connection to the share issue that occurred on 3 September 2013. It cannot seriously be suggested that this conduct, if it occurred, contributed to the impecuniosity of LBH.
[4]
Spending part of subscription monies
LBH alleges that the director cross defendants breached their duties under ss 180, 181 and 182 of the Corporations Act by spending $725,000 of the subscription monies between 3 September 2013 and 28 February 2014: pars 51 to 81.
By this claim LBH alleges that the director cross defendants were responsible for making LBH insolvent, taking into consideration the fact that Brereton J declined to rule that the shareholder agreement and the constitution authorised the directors to cause the company to issue the shares.
This part of LBH's claim goes further than the allegation (in par 67) that, on 3 March 2014, Brereton J validated the appointment of the administrators, as the spending of the subscription monies had made the company insolvent.
It alleges that the incorporation of Cody Live on 4 March 2014, the establishment of a consortium between the director cross defendants and the eight creditors who had subscribed for the shares on 3 September 2013 (for the purpose of promoting the deed of company arrangement) and the purchase of the assets of LBH for the price of $305,000 offered by Cody Live on 19 March 2014, constituted breaches of duty by the director cross defendants.
LBH alleges the terms of the consortium agreement in par 71, that Cody Live would issue shares to the subscription creditors, the subscription creditors would assign their debts owed by LBH to Cody Live, LBH was valued at $4,544,826, and Cody Live would receive cash back from the administrators in relation to the subscription debt.
There are issues about the manner in which the terms of the consortium agreement were pleaded, but for present purposes it need only be noted that LBH alleges that the director cross defendants entered into what it called the "consortium agreement" with the subscriber creditors. As a result of the consortium agreement, it is alleged, LBH sold its assets to Cody Live at a cash loss of $740,310, and there was no open market sale of LBH's assets, because Mr Cody failed to disclose the market value of $4,544,826 to the other potential purchaser, and failed to disclose the other terms of the consortium agreement to the market. LBH alleges that it follows that Mr Cody exerted control over both the creditors meetings and the sale process, and that he manipulated the outcome in relation to the administrators' agreement to sell the assets of LBH to Cody Live, and the creditors' approval of the terms of the deed of company arrangement.
This claim therefore goes far beyond an allegation that the directors imprudently spent a large part of the subscription money, knowing that it would all have to be repaid, if the share issue was invalid; thus causing the insolvency of the LBH and the ultimate sale of its assets.
The claim raises an issue as to whether what LBH calls the "market value" of $4,544,826 was the true value of the company.
It also involves allegations of commercial misconduct on the part of Mr Cody, and its resolution would involve an extensive analysis of the circumstances of the administration, and the open market sale process, to determine whether - notwithstanding the involvement of the administrators - Mr Cody's conduct involved some impermissible interference with the sale process and the conduct of the creditors' meeting.
As with the other claims already considered, this claim is pleaded in a way that rises no higher than a series of broad assertions of delinquent conduct on the part of the director cross defendants, and in particular Mr Cody. The pleading is devoid of allegations of specific facts capable, if proved, of making out the serious allegations made.
[5]
Entry into consortium agreement
LBH alleges that the director cross defendants breached their duties under ss 180, 181 and 182 of the Corporations Act by entering into the consortium agreement: pars 82 to 91. The allegation is that they acted for the improper purpose of gaining an advantage for themselves, by obtaining ownership and control of the digital signboard technology; they acted to injure LBH to ensure that Cody Live could exploit the technology; and the sale of LBH's assets made it unable to raise funds, and insolvent and in debt for the amount of the subscription moneys. LBH specifically alleges in par 82(a)(iii) that the director cross defendants acted to injure LBH to ensure that Cody Live could exploit the digital sign board technology.
Paragraph 82(a)(v) contains a specific allegation that the director cross defendants did not enter into the consortium agreement in good faith and that they did so to obtain LBH's assets for the lowest price possible for their personal gain by dishonest means.
LBH alleges that the consortium agreement was designed to be in the worst interests of LBH as it stripped it of its assets and left it with a subscription debt no ability to trade and with the director cross defendants back in control of the empty shell they had created: par 82(c)(i).
Further, the consortium agreement was designed to cause these proceedings to be stayed by seeking an order that LBH pay security for costs: paragraphs 82(c)(iii). (The cross claim therefore goes so far as to allege, without reference to any specific facts, that the director cross defendants were so far‑sighted as to act in the alleged way with a specific intent of causing these proceedings to be stayed).
There is an allegation in par 83 that the price paid for LBH's assets should not have been $305,000, but at least $10 million (which is alleged to be the value of Cody Live as at 12 February 2014).
It is self-evident that this aspect of LBH's claim is extremely wide-ranging. It alleges substantial commercial impropriety against the director cross defendants - including dishonesty - and its resolution would involve a complex factual inquiry.
Once again, the claim is formulated in terms of a series of high level assertions, which are not supported by allegations of the precise facts that would need to be established to make out the claim.
There is a suppressed assumption in the way the claim is pleaded, concerning the obligations of directors towards companies which have been placed into administration because they are insolvent. If, for example, it was a breach of the directors' duty to LBH for them to have caused the company to spend most of the subscription money in the manner described above, then all that followed, including the circumstances surrounding the making and performance of the consortium agreement, may have simply been consequences of the original breach. However, that is not the way LBH has pleaded the cross claim. The claim based upon the consortium agreement, as well as the other claims, is alleged to be a separate breach of duty, irrespective of the success or failure of the other claims. Moreover, the way the allegations are framed makes clear the truth of the observation made by LBH's senior counsel, that it alleges that all of the conduct involved the implementation of a plan made by the director cross defendants at the outset. However, if the claim based upon the consortium agreement is considered in isolation, as it is pleaded, it raises deep questions about the limitations on how the directors of a company can respond to the administration, and deal with the administrators, in relation to the assets of the company in their own interests.
[6]
Propounding the deed of company arrangement
The propounding of the deed of company arrangement by the director cross defendants was, LBH alleges, a breach of the duties created by ss 181 and 182 of the Corporations Act: pars 92 to 100.
LBH alleges that the director cross defendants acted for an improper purpose, being to take ownership and control of LBH's assets away from its majority shareholder, Pier Blue, to make LBH unable to raise funds by stripping it of its assets, to ensure that the subscription creditors were to receive valid shares over LBH's assets through Cody Live, to make Pier Blue and Mr Koulis unable to raise funds, and to ensure that LBH remained indebted in the amount of $1,045,310 to Cody Live.
It is sufficient to note that most of the comments that I have made above concerning the other claims will apply to this claim.
[7]
Failure to prevent insolvent trading
LBH alleges that the director cross defendants acted dishonestly in creating the subscription debt and paying out part of the subscription price, in breach of section 588G of the Corporations Act: pars 101 to 106.
Dishonesty is specifically alleged in par 104(c) and particular (iv) to that paragraph.
The basis of the alleged dishonesty is that the director cross defendants knew or ought to have known that the debt they created could not be paid back and that Mr Cody would be able to use the subscription money for his own benefit.
[8]
Causing LBH to be unable to fund this litigation
LBH alleges that the director cross defendants engaged in misconduct, being breaches of contract and directors duties, by depriving LBH of its assets and leaving it indebted to the subscribers: pars 107 to 109.
The operative pleading is in paragraph 108:
It was throughout the course of these proceedings that the third to fifth cross-defendants dissipated $725,000 of the subscription monies instead of retaining the funds against the risk that the monies would have to be repaid.
This allegation assumes that the directors of LBH were free to retain the money, and that the company did not have ongoing obligations which required some or all of the money to be spent.
This is a convenient place to note that in relation to some of the claims considered above LBH relies upon the general law duties of directors as well as their statutory duties. I have not thought it necessary, in the interests of brevity, to be precise in each case with the identification of all duties specifically alleged by LBH.
[9]
Claims against Cody Live and Cody Investments
LBH pleads claims of knowing assistance and knowing receipt against Cody Live and Cody Investments: pars 110 to 114.
[10]
Breach of contracts by director cross defendants
LBH pleads that there was a total failure of consideration in relation to each of the contracts (entered into on 25 August 2008, 16 May 2012, and 24 January 2013) under which each of the three director cross defendants agreed to provide their services to LBH, and under which they were issued shares in LBH (being 2.5%, 30%, and 3%): pars 115 to 131.
In the case of each of the director cross defendants, the cause of the total failure of consideration is alleged to be resolving to issue shares without authority, causing LBH to proceed with the invalid share issue, causing the brand name change from "Live Board" to "Cody Live", and spending the subscription monies raised by the invalid share issue to promote Cody Live.
It is hardly conceivable that the basis of the claim alleged by LBH, even if proved, could justify a conclusion that the contracts became void for total failure of consideration, given that each of the directors had provided his or her services for a significant period before the date of the share issue. In any event, the making of this claim invites an investigation of the services provided by each of the directors to LBH over the period of their respective contracts.
No particulars are given of the allegation that the subscription monies were spent in order to promote Cody Live.
[11]
Quantum of damages
LBH pleads a number of amounts, as the value of its assets based upon "market assessments" at various times; being $4,181,237 on 3 September 2013 and, on 12 February 2014, "$8,362,474 (pre-money) to $10,453,094 (post-money)". These appear to be values adopted by the board of directors of LBH at various times, for the purpose of determining the appropriate price at which to issue new shares to subscribers.
LBH states that it is not yet in a position to give particulars of its quantum of damages for loss of opportunity to exploit the assets.
LBH did not in its submissions respond to the observations that I made at [132] and [133] of the previous judgment about the potentially large size of the claim for damages that it might ultimately seek to make.
[12]
Estoppel binding cross defendants
An issue arose between the parties as to whether or not the cross defendants were bound by estoppels that would prevent them from contesting various issues, with the result being that the proper estimate of the amount of preparation required and the length of the hearing should be reduced.
As I understand it, LBH's assertion that the cross defendants are bound by estoppels is based upon: (1) the decision of Brereton J made on 17 February 2014 in Cody v Live Board Holdings Ltd [2014] NSWSC 78, in which his Honour declined to make an order that the director cross defendants were authorised by the constitution and the shareholders agreement to cause the company to make the 3 September 2013 share issue; (2) the cancellation of the issued shares by LBH; and (3) the decision of Brereton J made on 18 June 2014 in Pierce Patrick Cody v Live Board Holdings Limited ACN 117801242 [2014] NSWSC 820, in which his Honour declined Mr Koulis and Pier Blue leave under s 237 of the Corporations Act to bring proceedings on behalf of LBH against the director cross defendants on the ground that either: (a) the effect of the first decision was that the share issue was invalid; or (b) even if not, the director cross defendants conceded in correspondence that the share issue was invalid, and they would return control of the board to Mr Koulis, so that Mr Koulis and Pier Blue would not need the court's leave to commence derivative proceedings on behalf of LBH.
LBH has not pleaded any estoppels against the cross defendants in the amended cross claim. The cross defendants challenged the claim that they were bound by estoppels on the technical ground that estoppels could not arise unless the court had made a formal judgment, order or decree, relying upon Blair v Curran (1939) 62 CLR 464 and Withyman v Withyman [2013] NSWCA 10.
It is not appropriate that the court attempt to resolve, on an application for security for costs, the question whether or not LBH is entitled to assert estoppels against the cross defendants.
The only material question is how the subject matter of the estoppel claim may affect the time necessary for the proper preparation and hearing of the proceedings.
If a contested issue arises in the proceedings as to whether the cross defendants are bound by estoppels, that issue will require determination, and may increase the amount of necessary preparation and the length of the hearing. The validity of the estoppel claim must be determined at the hearing, and not on an application for security for costs, so the amount of security to be provided cannot be reduced by a present decision that the estoppel claim is valid. Ordinarily, the existence of an estoppel claim would have the effect of increasing the amount of the security that should be provided, at least in cases where resistance to the estoppel claim is reasonable.
The appropriate way to deal with this issue on the present application is to note that the court has previously decided that the constitution and the shareholders agreement did not authorise the 3 September 2013 share issue, and the director shareholders caused LBH to cancel the shares, and took the benefit of Brereton J's 18 June 2014 judgment, on the basis of their concession that the share issue was invalid. The cross defendants may be entitled to litigate those issues at the final hearing, or to contest their consequences, because of technical reasons which deny those matters formal effect as estoppels. But it would not be reasonable for the court to require LBH in the circumstances to provide to the cross defendants security for their costs of litigating those matters.
The relevant question at present is whether the necessary preparation and the length of the hearing will be significantly reduced if the cross defendants were to accept that the share issue was not authorised and was invalid.
In his 18 July 2016 affidavit, LBH's solicitor, Mr El Daghl, claimed that Brereton J determined that the share issue was invalid, and that the issue was undertaken by the director cross defendants in breach of the shareholders agreement (pars 20 to 22). He also claimed in par 32 that it was determined in the earlier proceedings that the spending of the subscription money caused LBH's insolvency.
Mr Watt, the cross defendants' solicitor, in par 6 of his 30 August 2016 affidavit, responded to the claim that Brereton J had determined that the share issue was undertaken in breach of the shareholders agreement, by saying that Brereton J declined to make the declaration sought on the construction of two documents, and the issue of whether any breach of the shareholders agreement occurred, including by Mr Koulis, as a result of the totality of all parties' conduct, is still live. He also said in par 7, in response to the assertion that the invalidity of the share issue had been determined, that the rights of all parties in respect of the share issue, including the ability of LBH to complain of what has occurred given Mr Koulis' conduct and his duties to LBH, is still a live issue. Finally, Mr Watt responded at par 20 to the claim that it has already been determined that the spending of the subscription money caused LBH's insolvency, by saying that LBH's financial position leading up to the share issue, and following the share issue, has not been determined, and the causal nexus asserted between the conduct of the cross defendants and the nature of debts owed to third parties affecting its solvency are still in issue.
As I read Mr Watt's evidence, he does not suggest that the cross defendants assert that they can contest the fact that the constitution and the shareholders agreement did not authorise the share issue. Nor will they assert that the share issue was valid. They claim that they are entitled to rely upon events related to the share issue to make a case that LBH cannot complain about their conduct. Further, they wish to assert that, for the purpose of determining their own liability, it is not simply a matter of whether the spending of the subscription money was the immediate cause of the insolvency of LBH, but that they are entitled to rely upon additional evidence concerning the financial affairs of LBH, including the circumstances in which money was paid to creditors, to support their claim that the spending of part of the subscription money did not involve a breach of duty.
In my view the attempt by LBH to rely upon the alleged estoppels has created a false issue, in that the cross defendants do not intend to contest the issues identified by LBH; rather, they intend to rely upon evidence of additional surrounding circumstances to support a case that their conduct did not involve breaches of duty to LBH. I do not accept that the amount of preparation required, and the length of the hearing, will be reduced in the major way claimed by LBH, because the cross defendants will not be able to contest the validity of the share issue, or that the issue was not authorised by the constitution and the shareholders agreement.
[13]
Quantification of amount of security
I have provided the analysis of the cross claim that is set out above because of my view that, in a number of important respects, the analysis speaks for itself in relation to the claim for an order that LBH provide security for the cross defendants' costs.
First, it is inescapable, with respect, that the estimate made by Mr El Daghl that the case could be conducted properly in 3 to 4 days if contested, is extremely optimistic, and in truth entirely unrealistic.
Mr Watt originally estimated, on a conservative basis, that if the matter proceeded on all issues, the hearing would take 10 days. He then reassessed his estimate of the length of the hearing on the assumption that the court would agree to make an order that liability be determined separately and before the issue of relief. He reduced his estimate of the length of the hearing to 8 days, again on a conservative basis.
The cross claim in the present case is pleaded so generally, and without particularity, that it is not possible to make a realistic estimate, before the evidence has been served, about the likely length of the hearing.
It is proper for the court to accept the estimate made by Mr Watt of 8 days for a hearing on liability. If all issues raised by the cross claim are fully litigated, I have little doubt that 8 days will be an underestimate.
I am also satisfied that Mr Watt's allowances for work required to prepare the cross defendants' case for hearing are more realistic than the estimates made by Mr El Daghl, assuming that the cross defendants conduct their defence in a way that responds comprehensively to all the issues raised by the cross claim. Mr El Daghl's approach to the forensic steps that will be required in dealing with the issues raised by the cross claim is too simplistic.
Mr Watt estimated that the cross defendants' legal costs, on a solicitor-client basis, up to and including a final hearing, only on liability issues, would be $543,700. On the basis that his clients would be likely to recover approximately 70% of their legal costs on the ordinary basis, if they are successful in defending the cross claim on liability issues, he estimated the costs recovery as being $380,590.
In his 18 July 2016 affidavit, Mr El Daghl estimated that the cross defendants' costs of the matter would be approximately $420,000 on all issues, and would be unlikely to exceed $200,000 in respect of a separate trial on liability. Mr El Daghl apparently based his estimate on the length of the hearing being between 3 and 4 days on the issue of liability only, on the basis that the primary facts alleged in the pleading are to be proved through documents, and that the case will be made out or not primarily on written submissions. He said that an amount of $8000-$10,000 per day should be allowed for senior counsel, rather than the $13,000 allowed for in Mr Watt's estimate. He allowed substantially less time for preparation than did Mr Watt (including an amount of only 2-3 days preparation for hearing). Mr El Daghl did not provide a schedule to explain how he arrived at his estimates. It is likely that the amounts estimated have not been reduced to arrive at figures for party-party costs on the ordinary basis.
As Black J has recently said in Re Felan's Fisheries Pty Ltd [2016] NSWSC 1351 at [40]:
… the court will take a 'broad brush' approach to the quantum of an order for security for costs and will not attempt a detailed cost assessment in that regard: Ashington Capital Pty Ltd v Parissen Capital (Project X) Pty Ltd [2012] NSWSC 410 at [18]; Re Colorado Products Pty Ltd (in prov liq) [2012] NSWSC 410 at [66].
In Farmitalia Carlo Erba SrL v Delta West Pty Ltd (1994) 28 IPR 336 at 345-346, Heerey J made the following observations concerning how the court should approach the quantification of the amount of security to be provided, when there is evidence before the court as to what the likely party-party costs of the applicant for security might be:
I would respectfully agree that a conventional'' reduction of two-thirds of an amount already established as a reasonable estimate of party and party costs has no justification in law or logic. But the decision remains a discretionary one and the cases have indicated some other factors which bear on the exercise of the discretion. Such a list is of course not exhaustive, but the following factors can be usefully considered. First, the court should take into account the chance of the case collapsing without coming to trial, with the consequence that the security ordered turns out to be an overprovision: Dominion Brewery Ltd v Foster (1897) 77 LT 507 at 508 . This factor may be important if the application for security is made relatively early in the course of the litigation: Procon, supra, at 376b, 379f . In the present case the proceeding was instituted a little over 2 years ago and there is no hint in any of the material before me that settlement is likely. Pharmaceutical patents can be extremely valuable commercial property and litigation over them hard fought, extensive and expensive. The present case shows every indication of being true to its genre. Secondly, the apparent prospects of success are relevant, insofar as they are discernible: Bruce Pie, supra, at 404. Thus the weaker the applicant's case appears on the merits, the stronger the case of the respondent for security becomes and the less inclined the court should be to give any discount. However the present case is obviously a complex one involving technical evidence and I am quite unable to make any rational prediction as to its ultimate outcome. Thirdly, the order for security should not be the means of effectively denying the applicant the right to pursue the claim: Bruce Pie, supra, at 404. This factor would also bear on the anterior question whether an order for security ought to be made at all: see Tradestock Pty Ltd v TNT (Management) Pty Ltd (1977) 14 ALR 52 at 58 , Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 512 . However such an argument was not raised in the present case by Farmitalia. Fourthly, if very little information is put before the court on which it can estimate the amount of costs, then again it might be reasonable to make a large discount, particularly since if security proves inadequate as the litigation progresses, a further application may be made for more security: Procon (GB) v Provincial Building Co [1984] 2 All ER 368 at 379h. In the present case Delta West has, through the evidence of Ms Gourlay, given reasonably detailed evidence to base its estimate. The court is certainly not bound'' by this estimate (to use the words of Chitty LJ in Dominion Brewery, supra, at 508) but by the same token I do not think in all fairness that this case warrants the comment of Lindley MR in Dominion Brewery that ``it would be absurd, of course, to take the estimate of the managing clerk of the defendant's solicitors and give him just what is asked for''…
In Allstate Life Insurance Co v Australian & New Zealand Banking Group Ltd (No 19) (1995) 134 ALR 187, Lindgren J stated at 187 that "The amount is in the discretion of the court and should be such sum as the court thinks just, having regard to all of the circumstances of the case", and that "the estimation of that amount involves many factors, some of them imponderable". His Honour then, at 198, cited the principles from the Farmitalia case set out above with approval.
In this case, while the estimate given by Mr Watt is in my view more reliable and objective than that made by Mr El Daghl, it is nonetheless an estimate made at an early stage of the proceedings, before the close of pleadings, when the issues in the proceedings have not been identified, and made by the cross defendants' solicitor, rather than an independent costs consultant. There is an inherent and inescapable uncertainty about the reliability of Mr Watt's estimate of party-party costs.
While, in relation to Heerey J's first consideration, it would be unsafe at this stage of the proceedings to make any prediction about the likelihood of this case collapsing without going to trial, there is in my view a real possibility that, when LBH has served its evidence, the cross defendants will take the tactical course of adopting a relatively minimalist approach, if they believe that LBH has not established a prima facie case on the many claims that it has alleged. It is not improbable that the cross defendants could decide not to go into evidence, or at least not to go fully into evidence. I would be unwilling at this stage to assess the amount of security for costs to be provided on the basis of an assumption that the cross defendants will necessarily respond to LBH's case comprehensively.
Heerey J's second consideration, that the apparent prospects of success are relevant, causes me to distinguish between LBH's narrow case based upon the consequences of its directors having paid out a large part of the subscription money before the validity of the share issue could be determined, and the balance of LBH's case, which at present appears to be pleaded on the basis of mere assertion. I have discounted the amount that I consider is appropriate because, even though LBH is apparently unable to give particulars of why the director cross claimants should not have caused LBH to spend most of the subscription money (because LBH did not have access to its own documents), and even though LBH should perhaps have taken steps to obtain access to those documents before it pleaded its cross claim, I recognise that there is a real likelihood that LBH is entitled to succeed in its claim that the directors ought not to have expended the money in the face of a challenge to the validity of the share issue. I recognise that LBH has some reasonable prospects of establishing that the expenditure of the money was a breach of duty by the director cross defendants, which caused LBH to become insolvent, and caused it to lose its assets following the appointment of the administrators.
In the exercise of my discretion, I find that consideration to be a ground for making a reduction in the amount of the security for costs to be provided, even though it is quite impossible to calculate the appropriate amount of the reduction on any arithmetical basis.
I consider Heerey J's third consideration to have significance in the present case. While I have not accepted that this is an appropriate case to decline the application for security for costs because the making of such an order will stultify LBH's claim, it is proper for the court to have regard to LBH's financial difficulties, to adopt a balance between the disparate interests of the parties. I have also discounted the estimate of the likely recovery of party-party costs on the ordinary basis made by Mr Watt in a broad way by assuming a recovery of two thirds rather than 70% (see Re Felan's Fisheries Pty Ltd at [53]); and I have discounted the allowance for senior counsel's fees from $13,000 per day to a figure more in line with the amount suggested by Mr El Daghl.
On the basis that Mr Watt estimated the party-party costs of the proceedings at $380,590, and Mr El Daghl gave an estimate of $200,000 (likely to be on a solicitor-client basis), I propose to make an order that LBH provide security for the cross defendants' costs for the whole of the proceedings of $250,000 at this stage.
The amount of $250,000 that I have determined as the appropriate amount of security for costs to be provided by LBH is not a figure that I have arrived at by any arithmetical process, but is the result of a 'broad brush' response to the considerations that I have discussed above. The size of the amount has primarily been caused by the number, complexity, and seriousness, of the many claims that LBH has chosen to make in the third amended cross claim. I have broadly accepted Mr Watt's estimates which, although conservative, were made on the assumption that the cross defendants will respond comprehensively in the preparation of their evidence to all of the issues raised by the cross claim. Given that I have preferred the evidence of Mr Watt over that given by Mr El Daghl in relation to the proper basis to assess the costs that the cross defendants are likely to incur in defending LBH's claim, Mr El Daghl's own estimate of $200,000, even if it was made on a solicitor-client basis, supports the selection of $250,000 as the just amount of security to be provided.
It has been necessary for the court to determine a just amount to be provided as security for the cross defendants' costs before the pleadings have closed, and the true extent of the evidence to be relied upon by the parties can be known. It remains possible, if LBH runs the documentary case suggested by Mr El Daghl, that the compass of the whole of the evidence will be significantly less than Mr Watt has assumed. It is also possible that the grounds upon which I have thought it appropriate to discount Mr Watts' estimates will not be realised. While there are reasons why it is not desirable, in a matter such as the present, to leave the parties free to make an application that the court vary an existing order for the provision of security for costs, in my view it will be just to permit the parties to do so in the present case.
However, the parties should not be free to make such an application until after the evidence has been served, and the proceedings are ready to be set down for hearing. If an application is made by LBH to reduce the amount of security for costs to be provided, or by the cross defendants to increase the amount, the court at that stage should have the benefit of evidence as to the actual amount of costs expended, so that it may be in a position to make a more educated assessment than I am presently able to make as to the just amount of security for costs that should be provided by LBH.
If LBH had sought an order that the security for costs be paid in separate tranches at different stages of the proceedings, this would be an appropriate case to make an order to that effect. I assume that LBH did not make that request because of its position that it will not be able to pay any amount of security. The order for security for costs that is made should contain a grant of leave to LBH to make an application that the security be provided in stages.
In the absence of such an application being made by LBH, the orders should provide for the security to be provided within 60 days as sought by the cross defendants and the proceedings should be stayed until the security is provided.
While I have sympathy for the exasperation expressed by the cross defendants concerning the costs that they have incurred in defending the proceedings to date, and in prosecuting their application for security for costs, I do not propose to make a self-executing order for the dismissal of the third amended cross claim, if provision of the security for costs is not made in accordance with the orders. In that event, it should not be too expensive an exercise for the cross defendants, at an appropriate time, to re-list the proceedings before me to apply for an order that the third amended cross claim be dismissed. Any such application will be considered on its merits. It is appropriate for the court to keep control of the fate of these proceedings.
[14]
Significance of the merits of LBH's claims
In-so-far as LBH claims that the merits of its case against the cross defendants are sufficiently strong that it would be an injustice for the court to order that it provide security for costs, with the result that its claim will be dismissed, the "strength" of LBH's case is no better than the "neutral factor in the exercise of the discretion" referred to by McClellan CJ at CL in Jazabas Pty Ltd v Haddad (above) at [84]. I discern from the way the cross claim is pleaded no apparent strength in LBH's case that would be a sufficient reason to justify the court in declining to make an order that it provide security for costs, without regard to the other factors that the court is permitted to take into account.
In expressing this view, I am not saying that LBH has failed to satisfy me that it has established any real likelihood that it will ultimately be successful; nor am I saying anything about the absence of any positive strength in LBH's case.
It is not necessary for me to go further in dealing with this application than to say that the strength of LBH's case is no better than a neutral factor, as I would order LBH to provide security for costs in any event. However, it is to be noted that McClellan CJ at CL stated at [83] that the consideration that the strength of the claimant's case was a neutral factor applied where "the claimants' case is bona fide and raises real issues to be tried". There is a question as to what is meant by this requirement. I am prepared to accept that LBH's claim is subjectively bona fide, in that Mr Koulis has a genuine belief in its merits. The more serious question is as to what is required for a claim to raise real issues to be tried.
That is probably a question that requires a holistic response from the court, and may depend upon the evaluation of many factors. One can readily imagine factual circumstances that are relatively apparent, and where the claimant has suffered some injury in circumstances where, even in the face of uncertain principles of law, and even an ineptly drawn statement of claim, the court would be satisfied that the claim is bona fide and raises real issues to be tried. However, the manner in which a claimant pleads its claim is important, as it is the traditional means of informing the court and the opponent of the nature and basis of the claimant's claim. In response to some underlying set of facts, a claimant may choose to put its claim on a relatively extreme basis, and support its claim by a series of bare assertions, unsupported by allegations of the detailed facts necessary to establish the liability that is asserted. Depending upon the precise circumstances of the particular case, such a statement of claim, which is not sufficiently grounded in allegations of fact, may not satisfy the court that the claim genuinely raises real issues to be tried. In such a case, it will not be a matter of the court not being sufficiently satisfied of the likelihood that the claim will succeed; but it will rather be that when the court, with the aid of its experience, examines the pleading, the reality of the issues is not sufficiently apparent.
LBH's third amended cross claim suffers from this vice in the present case. There are not even facts alleged that would be sufficient, if proved, to establish an arguable case that the directors breached their duty by spending part of the subscription money. There are no facts alleged that would support a claim that the directors made any of the plans alleged by LBH, and a fortiori that the subscribers were party to those plans. No facts are alleged to support the claim that it was a breach of duty by the directors to change the trade name used by the company. In circumstances where innocent explanations are available for the director cross defendants - for example, that they acted to protect the subscribers, that LBH is under the control of professional administrators, that the administrators conducted a public sale process, that Mr Koulis did not bid, and that Cody Live succeeded after competition with another party - there is no reason for the court to treat a welter of claims of dishonesty, commercial impropriety, and what is in effect conspiracy, as genuinely raising real issues to be tried, in the absence of allegations of specific facts capable of making good those claims.
This conclusion is not undermined by the fact that the cross defendants did not resist leave being granted to LBH to file the third amended cross claim. The court was advised by counsel for the cross defendants that the point had been reached where it was not worthwhile resisting the amendment being made any longer: see Northam v Favelle Favco Holdings Pty Ltd, unreported, Supreme Court of NSW, 7 March 1995, BC9504276, per Bryson J at 4. The mere fact that a pleading is permitted to be filed does not give it any substance that it inherently does not have.
Ultimately, the discretion as to whether or not the court should make an order for the provision of security for costs is to be unfettered and exercised in accordance with what the circumstances of the particular case require: see Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 at [23] per Winneke P and Phillips JA; and see Jazabas Pty Ltd v Haddad (above) at [2] and [79].
In my view, were it necessary to do so, it would have been legitimate for the court to take into account, as one of the factors tending to justify the making of an order for security for costs, that the manner in which the third amended cross claim has been pleaded creates a substantial doubt about the reality of the issues to be tried, or at least a substantial proportion of them. That doubt gives rise to an enhanced risk of waste and delay in the preparation of the case and its hearing. It also gives rise to a risk that the cross defendants will incur costs where those costs will not only not be recovered if the cross claim fails, but will be wasted because of the underlying unreality of the claim.
[15]
Application to vary order 3
Order 3 is an interlocutory order of a substantive nature that has already been made in these proceedings, after a hearing and submissions.
I gave my reasons for making the order, including the requirement that the costs be payable forthwith, after agreement or assessment, in my first judgment at [150] to [159]. In that part of the judgment, I considered the submission put by LBH that the proceedings would be stultified if I ordered that the costs be payable forthwith. In outline, I held that it was appropriate in the circumstances of this case for the court to depart from the normal effect of UCPR r 42.7, because LBH had acted unreasonably in not abandoning the earlier versions of its cross claim, and obliging the cross defendants on two occasions, over four days, to prosecute a claim that the cross claim be struck out, only for LBH to abandon the pleading during the hearing. I also held that it was likely to be such a long time before these proceedings concluded, that it was appropriate to order LBH to pay the costs forthwith, after the amount of the costs had been assessed or agreed. As to this last point, I note that it is now some 14 months after I made the 1 December 2015 orders and the cross claim is little more advanced than it was then.
In Ballard v Brookfield Australia Investments Ltd [2013] NSWCA 82 at [11], Ward JA made the following statement as to the relevant principle, with which I respectfully agree:
[11] Mr Murr accepts that an application to set aside, vary or discharge an interlocutory order of a substantive nature (which has been made in contemplation that it will operate until the final disposition of the proceedings) must be based on a material change of circumstances since the original application was heard or on the discovery of new material which could not reasonably have been put before the court on the hearing of the original application (referring to Brimaud v Honeyset Instant Print Pty Ltd (1988) 217 ALR 44, at p 46 per McLelland CJ in Eq).
[12] This principle was confirmed more recently in Levy v Bablis [2012] NSWCA 77, where Young JA referred by way of example to Republic of Kazahstan v Istil Group Inc [2006] 1 WLR 596 at 604 and noted the rationale for this as being that reviews of interlocutory orders should be limited as a matter of judicial policy (citing Programmed Solutions Pty Ltd v Dectar Pty Ltd [2007] QCA 385).
In its submissions on this issue, LBH has not relied upon any material change of circumstances, or upon the discovery of new material which could not reasonably have been put before the court at the hearing that led the court to make order 3. LBH has relied upon submissions to the effect that there was a miscommunication between its counsel and the court (submissions par 107), the court was misled by the failure of the cross defendants to draw certain matters to the attention of the court (submissions par 115), the inability of LBH to pay the costs was caused by the conduct of the cross defendants (submissions par 117), and the court should reconsider its "view that the investments in the cross claimant were "speculative" and not proper evidence of what its assets were worth" (submissions par 121).
These submissions in essence invite the court to vary an effective interlocutory judgment on a substantive issue by changing its mind as to the reasons why the order should have been made in the first place. Such submissions, in the absence of a material change of circumstances or the discovery of new material, are submissions that can only be raised on appeal against the order already made by the court. It would not be proper for the court to entertain them on an application to vary the order.
For the avoidance of misunderstanding, I do not agree that order 3 was made on the basis of a miscommunication between counsel for LBH and the court. I understood full well that LBH, when it abandoned its cross claim as a pleading, did not intend to abandon all of the causes of action that were pleaded in it. I expected that any new draft cross claim would contain some at least of the causes of action in the one that was abandoned. I acted upon the basis that, viewed as a whole, the existing cross claim was so defective that it ought to have been abandoned, and leave sought to file an amended cross claim, without the cross defendants being put to the expense of four days of hearing.
Accordingly, the court will not make the order sought by LBH in order 4 of its notice of motion.
[16]
LBH's application for interlocutory relief
LBH sought the following relief in par 1 of its notice of motion filed on 19 July 2016:
That pursuant to s 66(4) of the Supreme Court Act 1970 the first and third cross-defendants be restrained from making any representation that:
(a) the third cross-defendant was the inventor of the digital real estate signboard now known as "Cody Live" but previously known as "Live Board" (digital sign board);
(b) the third cross-defendant conceived of the digital signboard as a result of his genius;
(c) the third cross-defendant was the pioneer behind the digital signboard;
(d) the third cross-defendant was the brainchild of the product now known as "Cody Live";
(e) the first live on-site digital real estate signboard was "Cody Live";
(f) "Cody Live" was founded by the third cross-defendant;
(g) the first cross-defendant and/or the third cross-defendant secured the patent for the invention of the digital signboard.
This claim for relief is not formulated in the conventional terms used for an interlocutory injunction, although the reference to s 66(4) of the Supreme Court Act 1970 (NSW) makes it clear that the relief sought is an interlocutory injunction. Ordinarily, the restraint would be expressed in the terms "until the hearing of the action or further order": see Australian Broadcasting Corporation v Lenah Game Meets Pty Ltd (2001) 208 CLR 199; [2001] HCA 63 per Gleeson CJ at [16].
As Gummow and Hayne JJ said in that case at [105] (Gleeson CJ agreeing at [10]), the court only has power to grant interlocutory injunctions "in protection of some legal or equitable right of [the claimant] which the Court might enforce by final judgment".
The interlocutory injunction sought by LBH in the present case was not in support of a final injunction in the same terms to be sought at the final hearing. The reason is that part of the final relief sought by LBH is a declaration that the asset sale of LBH's assets and business by the administrators to Cody Live was void (order 12), and a declaration that Cody Live holds all of those assets on a constructive trust for LBH. If LBH succeeds in obtaining that relief, then there will be no occasion for it to be concerned about the need to prohibit Cody Live and Mr Cody from continuing to make the alleged representations. On the other hand, if the court declines to make the declaration sought, the business and assets of LBH will remain in the hands of Cody Live, and there will be no reason to prevent it and Mr Cody from making the representations.
The legal or equitable right that the interlocutory injunction sought is intended to protect is the value of the business and assets that were transferred by the administrators to Cody Live, assuming that LBH obtains the result, by the making of the declarations sought, that LBH regains title to the business and assets. At the heart of LBH's claim is the proposition that the alleged representations are damaging the ability of LBH to successfully restore its effective operation of the business and assets assuming that it regains control of them.
I accept that the proposition enunciated by Gummow and Hayne JJ does not mean that an interlocutory injunction can only be granted in support of a final injunction in the same terms. It will be sufficient if the interlocutory injunction will protect some other legal or equitable right which the plaintiff seeks to enforce in the proceedings. For example, if the plaintiff seeks an order that the defendant holds a particular business on trust for the plaintiff, the court would have power to grant an interlocutory injunction to prevent the defendant damaging the business pending the determination of the proceedings. That might include preventing the defendant from siphoning off the subject matter of the business to some other company. In that way the interlocutory injunction would protect the legal or equitable right of the plaintiff to operate the business.
That is not, however, the basis of LBH's claim in the present case. The alleged representations, by and large, are likely to enhance the business while it is in the hands of Cody Live. There is an issue about how significant the alleged representations are in reality, but, as will be seen, the statements complained of have generally been made in contexts which advertise the business in the hands of Cody Live in a favourable way. They will either have a neutral effect, or will enhance the value of the business.
The thrust of all of the alleged representations, taken as a whole, is that Mr Cody and Cody Live were the inventors of the inventions the subject of the patents, the Cody Live digital signboard was the brainchild of Mr Cody, and that Cody Live had pioneered the business of digital signboards.
In this context, LBH seeks the interlocutory injunction to protect its ability to re-establish the business in its own hands, after it succeeds in obtaining the relief from the court which would have the effect that LBH would regain title to the business and the assets.
This claim depends upon the validity of the proposition that the making of representations by Mr Cody and Cody Live that they were the originators of the digital signboards will have a serious impact on LBH's ability to re-establish the business in its own name, if it obtains the relief that it seeks. The truth of this proposition is debatable, and will be considered further below.
I am prepared to accept for the purposes of the present application that, in a case where the plaintiff seeks declarations and orders that will have the effect that the defendant is required to re-transfer a business to the plaintiff, the court has power to grant an interlocutory injunction to prevent the defendant from engaging in conduct calculated to enhance the value of the business in the defendant's hands, if the effect of that conduct will be to reduce the value of the business in the plaintiff's hands, if the plaintiff succeeds in obtaining the final relief sought. The interlocutory injunction would, in that case, be in aid of the protection of a legal or equitable right of the plaintiff, being all of the rights associated with owning and operating the business.
However, the nature of LBH's case is likely to have significance when the time comes for the court to consider the balance of convenience, in deciding whether the interlocutory injunction sought should be granted. If the likely effect of the conduct of Mr Cody and Cody Live sought to be restrained was to damage the business and the assets, whether in the hands of Cody Live or LBH, then the court might more readily grant the interlocutory injunction. The reason would be because the conduct would be to diminish the value of the subject matter of the dispute whoever was successful at the final hearing.
In the present case, LBH seeks to prevent Mr Cody and Cody Live engaging in conduct that will enhance the value of the business and the assets, if they remain in the hands of Cody Live after judgment at the final hearing. If the court grants the interlocutory injunction sought by LBH, but LBH fails at the final hearing, the effect of the interlocutory injunction will have been to deprive Cody Live of an increase in the value of the business to which it was entitled. It will only be if LBH succeeds that the granting of the interlocutory injunction will protect the party entitled to own and operate the business.
In principle, the court should look more carefully in the present case at the strength of LBH's case, and the balance of convenience, than would be necessary if the effect of the making of the alleged representations was to diminish the value of the business and the assets, whoever was entitled to them.
A number of features of the interlocutory injunction claimed in this case should be noted, as they are relevant to a proper understanding of the meaning of the publications upon which LBH relies in making its submission that Cody Live and Mr Cody have made representations in the terms set out in par 1 of the notice of motion.
First, par 1 describes the digital real estate signboard as being known as "Cody Live", when the words "Cody Live" are actually part of the name of the corporate first cross defendant, not the name of a digital real estate signboard. Of course, the name of the company which includes the words "Cody Live" could readily become associated with the name of the product, in the sense of Cody Live's signboard.
The scope for confusion caused by this description may be seen in the fact that par 1(d) refers to "the product now known as 'Cody Live'", while par 1(f) refers to a representation that "Cody Live" was founded by Mr Cody. That must be a reference to the corporate first cross defendant, as it is meaningful to speak of founding a corporation or its business, and not meaningful to talk about founding a digital signboard.
The representation referred to in par 1(g) of the notice of motion uses the word "secured" in the context "secured the patents for the invention of the digital signboard". The word "secured" does not have a precise legal meaning in this context. Having regard to the facts, "secured" must be taken to mean "purchased", or perhaps more generally "acquired". It would not be reasonable to interpret the word "secured" as meaning "invented".
There has plainly been a drafting error in par 1(d) of the notice of motion, which, if read literally, has the effect of a representation that Mr Cody was the brainchild of the digital signboard. The representation must be interpreted as having the meaning that the digital signboard was the brainchild of Mr Cody.
The analysis of the publications relied upon by LBH must be undertaken having regard to a number of established facts:
1. Mr Koulis was the inventor in respect of the patents upon which the digital signboard technology relevant to these proceedings was based.
2. Mr Koulis, through his company Pier Blue, incorporated LBH to develop and exploit commercially the digital signboard technology the subject of the patents.
3. There was an issue about the extent to which LBH, as opposed to Cody Live, commenced the commercial exploitation of the digital signboards. LBH alleged in par 7(a) of the cross claim that the digital signboard technology was marketed under the trade mark "Live Board ®" from 2006 to October 2013. The cross claim does not elaborate upon what was meant by the term "marketed". Paragraph 9 of the cross claim refers to LBH having released a video of the production prototype in February 2012, in order to promote the raising of capital. Paragraph 14(a) of the cross claim makes a somewhat elliptical reference to an agreement, at an 8 April 2013 board meeting of LBH, that the value of LBH "would significantly increase after the production version of [perhaps meaning "and"] the street launch" of LBH's digital signboard. It is reasonable for the purposes of this interlocutory application to interpret these aspects of the cross claim as having the following meaning. LBH had achieved a production prototype of the digital signboard. It needed to raise capital in order to complete the creation of the production version of the digital signboard, and thereafter to launch the digital signboard commercially. The intention of LBH was to use the $1,045,310 raised by the share issue on 3 September 2013 for the purpose of developing the production version of the digital signboard. Whatever was done using part of that money for that purpose, the production version had not been completed by the time the administrators of LBH sold the company's business, including the patents, to Cody Live in association with the deed of company arrangement on 25 March 2014. This conclusion is reinforced by the fact that the particulars of the valuable assets the subject of the sale that are included in par 107 of the cross claim referred to a "Live Board production prototype", but not to any commercial digital signboards. The point of all of these observations is that I am satisfied for the purposes of this interlocutory application that it was Cody Live that commenced and carried out the commercial exploitation of the digital signboards (or at least was substantially responsible for that exploitation).
4. Mr Cody was the moving party in the incorporation of Cody Live and the establishment of its business, including the acquisition of the business and assets of LBH from its administrators.
LBH maintained its claim for the issue of an interlocutory injunction against Cody Live and Mr Cody by reference to six forms of communication, which are found in Annexures RED-1 to RED-6 to the affidavit of Mr El Daghl sworn on 18 July 2016. A legible copy of the last of these annexures was made Exhibit 4.
It will be necessary to analyse each of these communications in turn.
[17]
First publication
The first arises out of an interview of Mr Cody by Mr Switzer, which was broadcast on Sky Business on 11 April 2016. The court was shown a video of the interview. That video was not tendered, but Mr El Daghl gave an Internet reference to the video in his affidavit. Annexure RED-1 is a transcript of the interview.
From the submissions made by senior counsel for LBH, I understand that LBH complains of the following extract from the transcript:
Switzer: Welcome back to Switzer. In case you didn't know, the world's first onsite digital real estate marketing business is here. So what does this mean? And what does it mean for the property industry? We have serial entrepreneur Pierce Cody, CEO of Cody Live with me in the studio with me in the studio. How are you Pierce?
…
Switzer: And the latest invasion (meaning invention) is an interesting one. Explain to us what you're doing with property signboards.
…
Cody: Of course, you'll always have it there. So I'll come back to the pool. So I thought well this whole thing about if you've got a signage ability there and we've got planning approval to do it, that we can put something instead of showing one-shot or one benefit of the house and, for example, your swimming pool, if it's a really hot sunny day we can tell the board just to play more out the pool shots, the tennis court or whatever it is.
…
Switzer: Okay. So is this being done anywhere else in the world?
Cody: Nowhere else in the world which is, you know…
Switzer: So it's a ground breaker.
Cody: It's a ground breaker yeah. Nobody is doing it anywhere which is either a really good thing and I'm a genius or it's a really bad thing and I'm a loser…
These parts of the interview have been extracted from five pages of transcript.
There was no evidence before the court as to the likely effect of the interview on the business prospects of the exploitation of the digital signboard technology by Cody Live. Nonetheless, it will be reasonably safe for the court to hold, having listened to the interview, that Mr Cody's interview by Mr Switzer on Sky Business will have generally given good publicity and advertising to the business.
It was Mr Switzer who opened the interview by saying "the world's first on-site digital real estate marketing business is here". That is, so far as the evidence goes, a true statement. The question was not dealt with at length in the evidence, but the case was conducted by all parties consistently with the proposition that the digital signboard invented by Mr Koulis is a world first. Mr Switzer's observation does not contain any implication about who was the inventor of the inventions the subject of the patents and who established the business.
Mr Switzer later referred to "the latest invention", and asked Mr Cody to explain what he was doing with property signboards. Apart from that being a statement by Mr Switzer, rather than Mr Cody, there is only a tenuous implication that it was Mr Cody who was the inventor, rather than that he was simply conducting a business using the "latest invention". Earlier in the interview, Mr Switzer had discussed with Mr Cody an earlier business that Mr Cody had "bought" and grown, before he sold it to Woolworths. The implication is available that Mr Cody could have done the same thing with the sign board invention.
I accept that there is a strongly arguable implication in the use by Mr Cody of the words "So I thought well this whole thing about if you've got a signage ability there and we've got planning approval to do it, that we can put something etc" that the digital sign board was Mr Cody's conception.
I also accept that there is a reasonable argument that Mr Cody's statement that it "is either a really good thing and I'm a genius or it's a really bad thing and I'm a loser" implies that he was the creator of the digital sign board concept. The balance of the extract from the interview of which this statement forms part, being to the effect that the digital sign board was a ground breaker that was not being done anywhere else in the world is true, and does not convey by itself that Mr Cody conceived of the technology.
I accept, therefore, that there is a reasonable argument that a couple of statements by Mr Cody during the course of the interview constituted representations in the terms alleged in order 1(c) and (d) of the notice of motion. It is not necessary to split hairs as to whether the statements might also have made others of the representations alleged.
It is important, however, to focus on the meaning and effect of the interview as a whole, and not look too closely at the written transcription, which is likely to give a false impression of the effect of the interview that was broadcast. In my view the interview clearly creates a strong impression that the digital sign board technology is new and that Mr Cody is the entrepreneur who is pioneering the commercial exploitation of that technology. In my view, a listener to the broadcast interview would not gain a strong message that Mr Cody was the actual inventor of the technology. The interview conveys a strong message that Mr Cody got his hands on the technology, so to speak, close to its inception, and that it was Mr Cody who was commercialising the technology. Mr Cody is strongly portrayed as a businessman and entrepreneur, and not as an inventor. There is either no message, or at least only a very tenuous message, that Mr Cody was the first person who had done anything at all to commercialise the technology. The interview simply was not focused on that question.
[18]
Second publication
The second publication is an article that was published on www.anthillonline.com on 22 April 2016. There is no evidence concerning the significance of that web address, although the court may infer from the text of the article that it was written for the attention of persons interested in the real estate market.
The article is four pages plus a few lines long. Significantly, it was apparently written on 22 April 2016 by a person called Gerald Ainomugisha.
At the top of each page appear the words: "Cody Live world first live on-site digital real estate marketing". The title of the article is: "Will this innovation usher real estate marketing into the digital age? [VIDEO]".
The article starts with text apparently written by the author. The parts of the article of which LBH complains are included in this text, which appears on the first page. The parts complained of are:
Innovative new outdoor advertising solution, Cody Live, has launched the first live digital StoryBoards for the real estate market, and is set to shake up the real estate industry and shift the way Australians sell their properties.
Cody Live was founded by sign Guru Pierce Cody, who has more than 33 years' experience in the advertising and media industry having founded Cody Outdoor (now APN Outdoor), Australia's largest outdoor advertising business.
Cody Live StoryBoards are the first signage for real estate that operate with cutting-edge wireless technology, meaning that displays can be updated any time, and anywhere externally.
The article, beginning on the second page, introduced a series of statements in quotation marks, preceded by the words "Pierce remarked that the Story Boards are a huge step…" Seven statements are attributed to Mr Cody. All of the statements contain a message intended to promote the business of Cody Live. LBH does not complain of any of the statements that are actually attributed to Mr Cody.
The extract from the article that is set out above starts by referring to an innovative new outdoor advertising solution. That is a true statement. The article then says "Cody Live, has launched the first live digital Story Boards…" (emphasis added). In this context, the word "launched" does not convey the meaning "invented". Rather, it refers to the inception of the commercialisation of the technology into the real estate market.
The use of the word "launched" is also significant, because of the evidence that it is true that Cody Live developed the production version of the digital sign board technology. Accordingly, Cody Live could accurately assert that it had launched the digital sign boards, without necessarily conveying by implication that it alone was the inventor of the technology and the initial developer of the production prototypes.
The reference to Cody Live as being "founded" by Mr Cody is true. One does not found an invention or technology. One founds a company or a business. "Cody Live" in this extract is clearly a reference to the company and not the sign board technology. This statement is true. The statement "Cody Live Story Boards are the first signage for real estate etc" is a statement that the digital sign boards now marketed by Cody Live are the first digital sign boards to be marketed. That is a true statement, as the digital sign boards originally intended to be marketed under the trade mark "Live Board" were rebranded to be marketed under the trade mark "Cody Live". The words in the third paragraph of the extract do not convey a meaning which excludes the sign boards being intended at some earlier time to be marketed under the trade mark "Live Board".
I do not accept that this article contains any of the representations alleged in order 1 of the notice of motion, or that there is a reasonably strong argument that it does so.
Moreover, I infer that the words complained of were written by the author, and do not necessarily convey statements directly made by Mr Cody. In argument, senior counsel for LBH responded by submitting that Cody Live and Mr Cody must have endorsed or adopted the statements by allowing them to remain on the website. I do not agree. In my view, given the introductory context of the statements, the literal truth of the statements, and the fact that on a proper analysis they are directed to the commercial launching of the sign board technology by Cody Live, they do not make the representations alleged by LBH.
[19]
Third publication
The third publication is an article published on www.eliteagent.com.au on 12 March 2016. This website also appears to be one that publishes articles for persons interested in the real estate market. The text describes the publisher as "Elite Agent Magazine".
The article is attributed to the "News Room". In the text, only one statement is specifically attributed to Mr Cody by the use of quotation marks. LBH does not complain about that statement.
The following extract from the article is the part of which LBH complains:
Innovative new outdoor advertising solution, Cody Live, has launched the first live digital StoryBoards for the real estate market, and are looking to shift the way Australians sell their properties.
Cody Live was founded by sign guru Pierce Cody, formerly CODY Outdoor, now APN Outdoor. Cody Live Story Boards are the first signage for real estate that operate with cutting-edge wireless technology, meaning that displays can be updated any time, and anywhere externally…
It is sufficient to observe that the comments that I have made above concerning the second publication apply equally to the third. In particular, the article focuses on Cody Live as having launched the first live digital story boards.
[20]
Fourth publication
The fourth publication is an article which was published on www.compaigntrack.com on an unknown date.
It appears from the text that the website is operated by an organisation called "Campaigntrack". The article includes the sentence: "In an industry first, Campaigntrack and Cody Live are connecting residential properties to the digital world". The next paragraph begins: "At Campaigntrack we are dedicated to bringing you the latest real estate marketing products…" It is therefore clear from the text that not only is the article written by some unknown persons at Campaigntrack, but it is written on behalf of that organisation to convey its own position.
The article contains a reference to Cody Live as being "industry leaders", and "the next evolution in real estate marketing". There is a reference to the "unrivalled industry knowledge to deliver a new generation of signboard" of Campaigntrack and Cody Live.
I do not accept that any part of this article even arguably makes any of the representations alleged in order 1 of the notice of motion. The article is not only written by Campaigntrack, but it speaks in the voice of that organisation, and not Cody Live.
[21]
Fifth publication
The fifth publication is an article published on www.domain.com.au on an unknown date. This website is a well-known real property advertising website.
The article was written by a person called Caroline James. The article contains text apparently written by the author, as well as statements attributed to Mr Cody by the use of quotation marks. LBH does not complain of any of the statements specifically attributed to Mr Cody, but complains of the following statement:
Cody Live, the brainchild of marketing guru Pierce Cody, founder of Macro Wholefoods Market, has secured the patents for its StoryBoards digital marketing invention, giving it the exclusive right to install its cutting-edge 4G signage on Australia's residential and commercial property exteriors.
Apart from the fact that I would attribute this statement to Ms James, I do not accept that it conveys any of the representations alleged in order 1 of the notice of motion, except for the representation in order 1(g), which it does convey.
The article does state that Cody Live, obviously referring to the company, is the brainchild of Mr Cody. The article distinguishes between Cody Live and what it describes as the "StoryBoards". The article does not say that the StoryBoards were the brainchild of Mr Cody.
The article does say that Cody Live "has secured the patents". For the reasons that I have given above, I do not accept that in this context "secured" has the same meaning as "invented". On the contrary, it means that Cody Live has acquired the patents. That is exactly what Cody Live did by means of the assignment made by the administrators of LBH.
[22]
Sixth publication
The final publication is an article that was published in the Daily Telegraph on Saturday, 23 April 2016.
The author of the article is Mr Aidan Devine. A number of statements are attributed to Mr Cody by the use of quotation marks. LBH does not complain of those statements.
LBH complains of the following statement:
Businessmen Pearce Cody has pioneered the concept in NSW through Cody Live, which offers a range of freestanding and wall-mounted display units equipped with 4G capabilities.
The use of the words "pioneered the concept" does not convey the meaning that Mr Cody was technically the inventor of the technology, but it does convey that he has instigated the commercialisation of the technology. Although it is likely that Mr Cody provided the information to Mr Devine that he used to write the article, it would be unsafe to attribute to Mr Cody the authorship of the words "pioneered the concept". In any event, I do not accept that the expression conveys a sufficiently strong meaning that would exclude Mr Koulis or LBH from having any involvement in the development of the digital sign board technology. It is true that the word "pioneered" would best apply to Mr Koulis, but I do not accept that the words used by Mr Devine can be accepted as constituting a representation made by Mr Cody or Cody Live that Mr Cody was the pioneer of the concept or the invention, as opposed to the pioneer of the commercial exploitation of the digital sign board technology.
[23]
Consideration
The result of this analysis is that, apart from the relatively weak implications in the interview that Mr Switzer conducted with Mr Cody that may be founded on statements actually made by Mr Cody that he conceived of the digital sign board technology, and that it was a product of his genius, I do not accept the basal submission by LBH that there is a serious case to be tried that Mr Cody and Cody Live have made the representations alleged in order 1 of the notice of motion.
Although, as I have said, an analysis of the transcript of Mr Switzer's interview with Mr Cody would justify an argument that Mr Cody made two of the alleged representations, in my view those representations are almost inconsequential when they are considered in the context of the whole of the interview as broadcast. In my view, a listener would simply not attribute any great significance to the statements in relation to who conceived of the digital signboards, especially as the tone of the interview was more one of banter than serious discussion.
This conclusion is enough to cause the court to reject LBH's application for an interlocutory injunction. Either there is no serious case to be tried that the representations were made, or there is no serious case to be tried that any representations arguably made will have any serious consequences.
I should also record that there are other reasons why I would decline to grant the interlocutory injunction sought by LBH, even if there had been a serious case to be tried that Mr Cody and Cody Live had made the alleged representations.
First, LBH did not make any submissions to support an argument that there was any real likelihood that the court on a final hearing would make the declarations sought, to the effect that the assignment of LBH's business and assets by the administrators to Cody Live was invalid, or that Cody Live holds the business and assets on a constructive trust for LBH.
As I have observed above, when senior counsel for LBH was asked to explain why the involvement of Cody Live and the other defendants in the purchase of the assets from LBH and the consortium agreement could have the result that the sale was invalid and Cody Live holds the business and the assets on a constructive trust for LBH, his response was to re-enliven the conspiracy case by saying that the outcome was all part of a plan that was implemented over the whole period from the 3 September 2013 date of the share issue.
I do not positively find that there is no way that a proper case could be pleaded that would give rise to a serious likelihood that the court would on a final hearing find that the assignment was invalid, and that the business and assets are held on a constructive trust. It is just that I am not satisfied that LBH has yet articulated an orthodox legal basis upon which that outcome could be considered to be a serious possibility.
Further, LBH did not in its submissions explain why the relatively innocuous statements made in the publications, which may have suggested in some general way that Mr Cody may have conceived of the idea of the digital sign board technology, would be likely to cause any substantial impediment to LBH's ability to re-establish the business in its own hands, if it succeeded in obtaining from the court the declarations that it seeks at a final hearing.
It is almost certain that both Mr Cody and Cody Live publish their connection with the digital sign board business now undertaken under the trade mark Cody Live on a continuing day-to-day basis in a very substantial number of connections. Support for that conclusion can be found in the six publications that have formed the basis of LBH's case. It is likely that the connection between Mr Cody and Cody Live and the digital sign board technology has been firmly established as a result of the ordinary conduct of the business.
It is not at all difficult to imagine that LBH may face all sorts of difficulties in re-establishing the business under the trade mark Live Board, if it succeeds in these proceedings.
However, LBH has not to my satisfaction established that the alleged representations, even if made, will make any significant difference at all, when compared to the totality of the connections between Mr Cody and Cody Live and the business of exploiting the digital sign board technology that has occurred, and will continue to occur until the hearing, over a very broad range of activities, which the application for the interlocutory injunction will not prevent.
In short, I am not satisfied that the balance of convenience would favour granting the interlocutory injunction, to the extent that it would inhibit Mr Cody and Cody Live from advertising its business in a way that would involve statements of this sort that have been extracted above from the publications upon which LBH has relied.
Finally, when I first asked senior counsel for LBH whether his client was in a position to offer the usual undertaking as to damages, he replied that it was not, because it did not have any assets that would support such an undertaking and make it worthwhile.
When I responded that, in that event, it might be prudent for LBH to consider carefully whether it should pursue the application for an interlocutory injunction, as the application might be doomed to failure, with a costs order against LBH, senior counsel said that LBH would rely upon a principle that in exceptional cases the court would grant an interlocutory injunction, even though the plaintiff was not in a position to give a worthwhile undertaking as to damages. This is a serious issue, given that it is part of LBH's overall case that any costs order made against it by the court is likely to stultify the litigation.
Later, in submissions, senior counsel informed the court that first, LBH, and later that both LBH and Mr Koulis, were prepared to give the usual undertaking as to damages to support any interlocutory injunction that the court might grant. Senior counsel very properly informed the court that neither LBH nor Mr Koulis had any significant assets to support the undertaking as to damages, and they were not in a position to give adequate security for the undertaking.
While I do not rule out the possibility that there may be instances of an exceptional character when the court may be prepared to grant an interlocutory injunction in a case where the plaintiff is unable to give a worthwhile undertaking as to damages, I do not regard the present case as being exceptional.
I will therefore make an order that the claim made by LBH in order 1 of its notice of motion be dismissed.
LBH should be ordered to pay the costs of Mr Cody and Cody Live of the application for an interlocutory injunction.
LBH has also failed in its resistance to the cross defendants' application for security for costs, on its application for leave to rely upon the three additional affidavits, and on its application for a variation of order 3 made on 1 December 2015. It should be ordered to pay the cross defendants' costs of those applications.
I do not propose to make any order that LBH be required to pay the costs referred to in the preceding two paragraphs before the end of these proceedings.
[24]
Orders
I make the following orders in respect of the two notices of motion that are before the court (remembering that I have already made an order giving LBH leave to file in court the third amended cross claim):
1. Order the cross claimant to pay the costs of the cross defendants occasioned by, and thrown away, by reason of the filing of the third amended cross claim.
2. Order that the claim by the cross claimant for interlocutory relief in par 1 of the cross claimant's notice of motion filed on 19 July 2016 be dismissed.
3. Order by consent pursuant to Uniform Civil Procedure Rules 2005 (NSW) r 28.2 that the question of the cross defendants' liability be decided separately from and prior to the question of the relief to which the cross claimant is entitled.
4. Order that the claim by the cross claimant for a grant of leave to adduce further evidence in the form of the affidavits referred to in par 3 of the cross claimant's notice of motion filed on 19 July 2016 be dismissed.
5. Order that the claim by the cross claimant in par 4 of the cross claimant's notice of motion filed on 19 July 2016 for a stay of order 3 made by the court on 1 December 2015 until the determination of the notices of motion currently before the court or further order be dismissed.
6. Order that the cross claimant pay the cross defendants' costs of the cross claimant's notice of motion filed on 19 July 2016, save for the costs of dealing with the cross claimant's claim for relief in par 2 of that notice of motion, as to which the costs of that claim will be costs in the cause.
7. Order that the cross claimant provide security for the cross defendants' costs of the proceedings in the sum of $250,000 in such form as may be agreed between the parties, or determined by a registrar.
8. Subject to order 11, order that the security for costs required to be provided by order 7 be provided within 60 days of the date of the making of these orders.
9. Order that these proceedings be stayed pending the provision by the cross claimant of the security for costs required to be provided by order 7.
10. Order that the cross defendants may apply to the court for an order that the third amended cross claim be dismissed if the security for costs required to be provided by order 7 is not provided within the time specified in order 8.
11. Notwithstanding order 9, grant leave to the cross claimant to apply to the court by notice of motion filed within 14 days of the date of the making of these orders for an order varying order 8 to require the provision of the security for costs required to be provided by order 7 in accordance with such timetable as the court may determine to be appropriate.
12. Grant leave to the parties to apply for an order varying the amount of the security for costs required to be provided by order 7, whether by increasing or decreasing the amount of the security for costs to be provided, but such application may only be made after the completion of the service of the evidence of the parties in accordance with any timetable for the service of evidence ordered by the court, and before the proceedings are fixed for hearing.
13. Order the cross claimant to pay the cross defendants' costs of the application made in par 4 of the cross defendants' notice of motion filed on 15 September 2014 for an order that the cross claimant provide security for their costs.
I have determined the orders that should be made to implement the conclusions reached in these reasons for judgment, in order to bring this aspect of the dispute between the parties to an end. However, I will grant the parties leave to advise the court by communication with my associate within 14 days as to whether any variation should be made to the orders in the preceding paragraph to properly implement these reasons for judgment, or to deal with all matters raised by the two notices of motion with which these reasons have been concerned.
[25]
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: 31 March 2017
The court has before it two outstanding notices of motion in these proceedings.
The first was filed on 15 September 2014, by which the remaining cross defendants sought an order against the remaining cross claimant (which has been called "LBH" in these proceedings) for security for the costs of the cross claim against them. Although not specifically raised in the notice of motion, the cross defendants also seek a stay of the proceedings pending the provision of the security for costs, and an order that the cross claim be dismissed, if the order for security for costs is not complied with within 60 days of the proceedings being stayed.
At the time this notice of motion was filed, there were additional cross claimants and cross defendants, who have since been dismissed as parties from the proceedings.
On 18 and 19 November 2014, and 7 and 8 July 2015, the relief sought in the notice of motion was considered at a hearing, together with other interlocutory issues between the then parties to the proceedings. I published a judgment on 1 December 2015: Cody v Live Board Holdings Ltd [2015] NSWSC 1790.
By order 1, I ordered that the amended first cross claim filed on 21 August 2014 be struck out.
Order 2 made on 1 December 2015 is immaterial to the present applications.
By order 3, I ordered that the original cross claimants, which included LBH, pay the cross defendants' costs of the hearing on 18 and 19 November 2014, and that LBH pay their costs for the hearing on 7 and 8 July, 2015, such costs to be agreed or assessed, and payable forthwith.
I made orders for the purpose of regulating the manner in which LBH might be given leave to file an amended cross claim against the cross defendants.
I dealt with the application for security for costs at [97] to [143]. I reached the following conclusion at [141] to [143]:
141 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.
142 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.
143 I will return to this issue when I consider the orders that should be made for the continuation of these proceedings.
LBH has now formulated an amended cross claim, which the cross defendants have accepted is pleaded in a manner that justifies the court giving LBH leave to file the cross claim.
Consequently, as contemplated by the judgment given on 1 December 2015, the cross defendants have renewed their application for an order that LBH provide security for costs. That application is in respect of the new cross claim.
LBH also filed a notice of motion seeking various orders, which was heard at the same time as the continuation of the security for costs application.
By order 1 of the notice of motion, LBH sought an interlocutory injunction against the first and third cross defendants. That is a new application, which raises issues that are separate from those that the court has been considering to date. It will be convenient to defer further reference to this claim, until I deal with it separately at the end of this judgment.
By order 2, LBH claimed an order under Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 28.2, that the question of the cross defendants' liability be decided separately from the question of the relief to which LBH is entitled. At the commencement of the hearing, the court was informed that order 2 could be made by consent. Notwithstanding the well-known dangers in the court splitting the issues to be determined in proceedings, it seemed to me that, in the present case, it was appropriate for the court to deal with liability before relief, as that course will save considerable costs and court time, if it should happen that the cross claim is dismissed.
In due course, an order will be made in accordance with order 2 of the notice of motion.
By order 3, LBH sought a grant of leave to adduce further evidence in the form of affidavits by three named witnesses.
The primary purpose of the additional evidence is to remedy a deficiency in the evidence that LBH led in opposition to the application for security for costs, which I identified primarily at [126] of the earlier judgment. LBH also seeks to bolster its case that its impecuniosity was caused by the cross defendants' wrongful conduct.
The parties dealt with the claim for relief in order 3 during the hearing, but at the end of the submissions, I decided that the court did not have time to give a considered judgment on the claim, and I reserved judgment on the issue. The cross defendants indicated to the court that, if the leave sought by LBH was granted, it may be necessary for them to respond to the evidence of at least two of the witnesses.
That problem will not arise unless and until I grant LBH the leave sought. If I do grant that leave, it will be necessary for me to deal with the effect of the court's having to give the cross defendants an opportunity to respond to the evidence. I will return to LBH's application in order 3 below.
By order 4, LBH sought an order that order 3 made on 1 December 2015 (the costs payable forthwith order) be stayed until the determination of the notices of motion currently before the court, or until further order.
As it appeared during the hearing, this claim for relief is in reality an application for an order varying the original order 3, so that the costs will not be payable forthwith, but will be payable at the conclusion of the proceedings. The primary basis of the application is that, if the costs payable forthwith order stands, it will stultify the proceedings, as LBH does not have the funds to pay the costs, whatever they may be assessed to be.
The court was told at the beginning of the hearing that LBH would not proceed with the claim for relief in order 5 of the notice of motion.
By order 6, LBH sought an order that the cross defendants pay its costs of the notice of motion, such costs to be payable forthwith.
As I have mentioned above, the cross defendants did not oppose LBH being given leave to file the latest version of the cross claim. Accordingly, I made an order granting leave to LBH to file a third amended first cross claim in court.
I have not yet made any order concerning the costs of the application for leave to file the amended cross claim, but I advised the parties, following an application by the cross defendants, that in due course I would make in favour of the cross defendants an order that LBH pay the costs occasioned by, and thrown away, by reason of the amendment of the cross claim.
I will address the issues raised by the two outstanding notices of motion in the following way. First, I will deal with LBH's claim for leave to file three additional affidavits, as the outcome of this claim may affect the basis upon which the cross defendants' application for security for costs must be addressed. Second, I will complete my determination of the cross defendants' application for security for costs. Third, I will determine LBH's application for an order varying order 3 made on 1 December 2015. Finally, I will deal with LBH's application for an interlocutory injunction.
Leave to rely upon additional evidence
By order 3 of its notice of motion, LBH sought leave to rely upon three further affidavits in opposition to the cross defendants' application for an order for security for costs.
One of those affidavits, being an affidavit by LBH's solicitor, Mr El Daghl, sworn on 18 July 2016, contains evidence intended to support LBH's case that its impecuniosity was caused by the wrongful conduct of the cross defendants.
On 8 December 2015, Cody Live lodged with ASIC a Form 484 that revealed, according to Mr El Daghl, that on 19 November 2014, Cody Live issued 10,199,999 additional shares at a price of $0.20 per share. On the basis that the total share capital of Cody Live is 49,843,621 shares, that would give a valuation of the company's share capital of $9,728,724.20, according to Mr El Daghl.
On 22 December 2015, Cody Live lodged a further Form 484 that revealed, according to Mr El Daghl, that on 4 December 2015, Cody Live issued 1,200,000 additional shares at a price of $0.20 per share, giving a total additional share value of $240,000.
Both Forms 484 were lodged after the original hearing and the delivery of the first judgment on 1 December 2015.
Mr El Daghl complained that the first Form 484 was lodged approximately 12 months after the due date for lodgement contained in s 254X of the Corporations Act 2001 (Cth) (Corporations Act). LBH initially submitted that the delay in lodgement of the first Form 484 was intentional on the part of the cross defendants, in order to prevent LBH being able to rely upon the evidence contained in it, but LBH withdrew that claim during the course of the hearing.
LBH also now acknowledges that, when the first Form 484 is read carefully, it is not the case that all of the 10,199,999 shares were issued on 19 November 2014. Six parcels of shares were issued on 19 November 2014, while seven parcels were not issued until 30 November 2015.
LBH submitted that it should be able to rely upon this evidence, as it was not available at the time of the first hearing, and demonstrated that the cross defendants' conduct was the cause of LBH's impecuniosity, as the result of that conduct was that all of LBH's assets had been transferred to Cody Live for a price of only $305,000, while the value of those assets was at least $9,968,724.20.
In my first judgment at [112] to [119], I considered LBH's submission that its impecuniosity was attributable to the director cross defendants' conduct, and concluded, on the basis of the evidence then before the court, that I was not satisfied that LBH had demonstrated by adequate evidence that its financial inability to meet any costs order that may be made against it had been caused by the wrongful conduct of the cross defendants.
The cross claim
It will be convenient to begin by considering the latest version of the amended cross claim.
There is a significant disparity between the estimates made by the solicitor for LBH and the solicitor for the cross defendants as to the complexity of the issues raised by the cross claim, the amount of preparation that will be necessary, and the likely length of the hearing. That is reflected in the fact that LBH's solicitor estimates that the hearing will take three to four days, while the solicitor for the cross defendants makes an estimate of eight days (reduced from 10 days to allow for the deferral of the determination of the relief to which LBH will be entitled, if it succeeds in its claim). An analysis of the issues raised by the cross claim will be necessary to resolve this dispute.
Consideration of the claims made in the cross claim is also necessary in order to determine the overarching argument put by LBH as to why it should not be ordered to provide security for costs to the cross defendants. This is a somewhat unusual case, in that the claimant, LBH, positively asserts that it will not be able to meet any costs order made in favour of the cross claimants if its claim is dismissed. LBH says that it will not be able to comply with any order for security for costs. Accordingly, if such an order is made, and if the proceedings are ordered to be dismissed if the security is not provided within a particular time, LBH's claim will inevitably be stultified. LBH's primary defence to the application for an order for security for costs is that, in this case, it would be a manifest injustice if LBH was deprived of the ability to prosecute its claim against the cross defendants because of its impecuniosity. LBH says further that its impecuniosity was caused by the wrongful conduct that is the basis of its cross claim. LBH, thereby asserts that the claim that it makes in its cross claim has such clear strength that its stultification would plainly constitute an injustice.
As stated in the extract of [142] of my first judgment which I have set out above, I found that "in principle, LBH should be ordered to provide some appropriate amount of security". However, that statement was made in the context that LBH had abandoned its existing cross claim and accepted that I would make an order dismissing that claim, as I ultimately did by order 1. The question of whether the cross defendants would be entitled to an order for security for costs would only arise if and when LBH was granted leave to file a further amended cross claim. Furthermore, as a practical matter, both the entitlement on the part of the cross defendants to an order for security for costs, as well as the amount of security that may be required, might be influenced by the terms of the amended cross claim that was filed. That is why I said only that "in principle", on the evidence then before the court, the cross defendants were entitled to an order for security for costs, and also why I made the comment in the last sentence of [142].
In coming to that conclusion, I considered the significance of LBH's submission that the 3 September 2013 share issue was carried out on the basis that the directors of LBH had valued its assets at $4,181,237. I also referred to the evidence that suggested that, by 12 February 2014, the directors had resolved that the value of LBH might be double the earlier valuation. In brief, I examined the evidence concerning LBH's financial position at the time of the issue of the shares, including the fact that its intellectual property had been valued by the company at $360,697 in its 30 June 2013 financial statements. I concluded, in relation to LBH's reliance on the directors' attribution of a value of $4,181,237, that the directors' valuation was speculative, and that there was no proper evidence that LBH's business was in reality worth in the order of that amount.
In proceeding in this fashion, I was applying a line of authority, which is constituted by many cases, including MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100 (Needham J); Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at 585 (Austin J); Sharjade v Darwinia Estate [2006] NSWSC 708 (McDougall J); and Re Felan's Fisheries Pty Ltd [2016] NSWSC 1351 at [25] (Black J). In particular, I was influenced by the observation made by Austin J in Fiduciary Ltd v Morningstar Research Pty Ltd at 585, where his Honour said:
[w]here the corporate plaintiffs had not been operating in Australia for a sufficiently lengthy period of time to establish a track record, it is correct, in my view, to require them to prove that they were in an adequate financial state, prior to the commencement of their association with Morningstar's interests, to have been able to meet an adverse costs order…
By way of elaboration of the reasoning I adopted in the first judgment, in the present case the evidence established that LBH, while under the control of Mr Koulis, had not developed the sign board technology to the point that it was the basis of a commercially established business. The director cross defendants became involved in LBH's affairs in order to assist it to raise finance and to put its technology into commercial operation. That was the essential reason why the directors of LBH resolved to make the share issue that was the subject of the proceedings before Brereton J, as well as a further share issue that has not, in the events which have happened, taken place. The companies associated with the director cross defendants had a contractual right to be issued additional shares without having to pay any subscription price, in order to enable them to maintain their proportionate share holdings in LBH. Pier Blue did not have that right.
The consequence was that progressive share issues would water down Pier Blue's proportionate shareholding in LBH, so that Mr Koulis would eventually lose majority control of the company. For present purposes, the relevant point is that LBH needed to raise funds in order to commercialise the sign board technology. As the share issue was cancelled, as a result of Brereton J's judgment, LBH has never raised the funds necessary to establish a successful commercial business. Accordingly, at the time that the alleged breaches by the director cross defendants occurred, LBH's business did not have an established track record. If the court had regard to the evidence concerning LBH's actual financial circumstances, it could not be satisfied that LBH was in a position to pay any legal costs that it may be ordered to pay the cross defendants, before the occurrence of the conduct by the cross defendants of which LBH complains.
However, it does not follow that LBH's assets, particularly its sign board technology, were without value. Evidence would be required to prove that value, having regard to the amount for which the technology was valued in LBH's recent annual financial statements. It is not sound to say, as LBH now says, that if Cody Live can attract share capital in order to exploit the sign board technology, that as at the date of the earlier alleged breaches by the director cross defendants, LBH had a value equal to the paid-up capital of Cody Live. All that is proved by Cody Live's capital raising is that there are investors who regard the sign board technology as having sufficient commercial potential to justify the making of an investment in shares in Cody Live, which is essentially a speculative enterprise. Further, it is an enterprise carried out in circumstances where Cody Live is under the control of its directors, with their particular expertise, and without any disturbance that may have resulted from Mr Koulis' continuing involvement in the enterprise.
The new evidence that LBH now wishes to tender proves no more than, that on 19 November 2014, Cody Live was able to issue 3,450,000 shares to subscribers at a subscription price that valued the company at $9,968,724.20. That date was about one year after the directors of LBH had made the original share issue at a subscription price that valued the share capital of LBH at $4,181,237.
I propose to reject LBH's application for leave to reopen its case to rely upon this new evidence on the basis that the evidence would not make any difference to my original finding, even were it now admitted.
Further, even though, as I understand it, the cross defendants have not foreshadowed an intention to tender additional evidence in response to this new evidence, I would nonetheless feel obliged to give them an opportunity to consider whether they wish to do so, and I do not think that it is warranted, given the number of days that this application has already been before the court, to take any risk that the final determination of the application would be further delayed by reason of the cross defendants having an opportunity to respond to this evidence.
LBH has also sought the leave of the court to rely upon the affidavits of two additional witnesses, being Mr Koulis' father, Mr Petros Koulis, dated 14 June 2016, and Mr Mark Cusak, dated 28 June 2016.
The purpose for which LBH has sought this leave is to remedy a deficiency in its evidence that I identified and discussed in the first judgment at [120] to [126]. In particular, I identified at [122] that LBH had not proved that it could not raise any funds through financial assistance from Mr Koulis' family, and at [123] that LBH had not demonstrated that one of its shareholders, Solitaire Capital, of which Mr Cusak is the principal, was unable to provide it with financial assistance, given in particular that Mr Koulis owed $100,000 to a company associated with Solitaire Capital.
The cross defendants relied upon the fact that, in the first judgment, I found at [142], that in principle LBH should be ordered to provide some appropriate amount of security for costs of the cross defendants. I did not make an order for the provision of security for costs, because it was not clear that LBH would ever be given leave to file an amended cross claim, and the amount of any security would depend upon the issues raised by any amended cross claim that was filed in accordance with leave given by the court.
The cross defendants submitted that, as a matter of principle, the court in the exercise of its discretion should not give leave to LBH to file additional evidence to cure deficiencies in its case that were specifically identified in the first judgment; a fortiori so where the evidence was available before the first hearing, and the only reason why the evidence was not before the court is that, for whatever reason, LBH did not seek to tender it.
In my view, even though the present application for security for costs is an interlocutory application, and even though the court has not yet made a formal order on that application for the special reasons mentioned above, the court should not in its discretion permit LBH to rely upon the additional evidence. There is force in the cross defendants' submission that it would be inappropriate for the court to permit LBH to remedy the consequences of its own forensic judgments, after the court has identified the deficiencies in a judgment in which it has stated the outcome to the application that in principle should occur.
In any event, it is appropriate that the court decline the leave sought by LBH to rely upon the two additional affidavits, for the reason that the evidence contained in them will not change the in principle determination that the court has already made.
The effect of the evidence in Mr Koulis senior's affidavit is to establish that he is in no financial position to provide any further financial assistance to LBH. From the terms of the affidavit, it is very likely that LBH could not obtain any funds from Mr Koulis' father.
However, the effect of Mr Cusak's affidavit may be found in his statements that: "Solitaire Capital Pty Ltd has no means to lend money to Live Board Holdings Limited and would not do so even if it had such means" (par 6); and: "Solitaire Capital does not wish to be involved in these proceedings nor does it expect or want to receive any financial return from the proceedings" (par 16).
Apart from Mr Cusak's bare assertion to that effect, he has not provided any evidence of Solitaire Capital's financial position, and in particular he has not proved that it is financially unable to meet any costs order made in favour of the cross defendants.
The real thrust of Mr Cusak's evidence is that Solitaire Capital will not stand behind LBH financially in any event.
I do not accept that the contents of Mr Cusak's affidavit are sufficiently likely to change the in principle conclusion that I reached in the first judgment, so as to justify the delay that would be involved in giving LBH leave to rely upon the affidavit, which would entail a further adjournment of the application, in order to enable the cross defendants to be able properly to respond to the evidence, and a further hearing.
Accordingly, I will not make the order sought in par 3 of LBH's notice of motion.
The first matter provided for in the UCPR r 42.21(1A)(a), to which the court may have regard in determining whether it is appropriate to make an order for security for costs, is "the prospects of success or merits of the proceedings".
The significance of that criterion, and the equivalent that may exist under s 1335(1) of the Corporations Act and the inherent jurisdiction of the court, has been considered by the Court of Appeal in Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276. There, McClellan CJ at CL (as his Honour then was) said, with the agreement of Mason P:
[83] Her Honour said that she was not persuaded that the claimants had "any real likelihood" of success in the main proceedings. To my mind this was not the correct test to be applied (Equity Access Ltd v Westpac Banking Corp (1989) ATPR 40-972 at 50,636 per Hill J). The question which must be asked is whether the claimants' case is bona fide and raises real issues to be tried. Unless obviously hopeless the prospect of success or failure is of little relevance. This must especially be the case where, as in the present matter, the issues to be litigated are complex and where it may be thought the law is developing.
[84] To my mind, although the pleadings require considerable attention, the case as presently pleaded appears bona fide and although it may face difficulties, one of which is whether it is statute barred, it could not presently be said that it is doomed to fail. No defences have yet been filed. The claim is not frivolous and there appear to be real issues to be tried. In my judgment the "strength" of the claimants' case is a neutral factor in the exercise of discretion. (see Litmus Australia Pty Ltd (in Liq) v Paul Brian Canty [2007] NSWSC 670 at [28], Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at 574 [37]-[39]).
Their Honours disapproved the way the trial judge had taken into account the consideration that: "I need only say that I am unpersuaded that they (the plaintiffs) have yet established any real likelihood that they will ultimately be successful".
I must therefore be guided by the direction from the Court of Appeal that, if the claimant's case is bona fide and raises real issues to be tried, then unless it is obviously hopeless, the "strength" of the case is a neutral factor in the exercise of the discretion.
It may well be that, more often than not, it would be the defendant who wished to bolster a claim for an order for security for costs by arguing that the claimant's case was weak. Whether or not that be true, the present is a case where the claimant puts the case that its claim is sufficiently meritorious that it would be an injustice to deprive it of the opportunity to pursue its claim, even if the result is to throw all of the risks of the cross defendants' costs onto them.
That argument should be as much susceptible to the response that it is a "neutral factor" as the reverse argument, if put by the cross defendants. The merits of the argument that LBH has put will emerge from a consideration of the cross claim.
It will be convenient to assume a knowledge of the terms of my first judgment, particularly the history of the proceedings at [20] to [68].
It will also be convenient to refer to a number of aspects of the first judgment that addressed the manner in which the cross claim was then pleaded.
As I observed at [69], 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. I then set out a number of reasons why I considered that it was appropriate for the cross claimants to have abandoned their pleadings.
One aspect of the cross claim as pleaded, was to make a conspiracy claim, which I considered at [83]. In outline, the cross claimants had alleged a list of different actions on the part of the cross defendants, and then alleged that all of the actions were part of a conspiracy between the cross defendants to injure the cross claimants.