- Farrow v Registrar of Building Societies - [2012] NSWSC 1007 - NSWSC 2012 case summary — Zoe

JYC was entitled to the Company's assets used in its bronze business, including specified assets and warehouse stock of certain items other than those of stone or wood materials and to 90% of the shares in another entity, Austmin Development Pty Limited (cl 3(4));
JSC was entitled to all of the shares in the Company which would continue to conduct its stone business (cl 4(2)); and
The cash balances as at 6 May 2011 in all bank accounts of companies specified in the Chinese Agreement (including the Company) together with the cash balance of a specified amount in JYC's personal bank account in Xiamen were to be divided equally between the brothers (cl 5). The Chinese Agreement contemplated that, following its implementation, JYC would specialise in bronze products and JSC would specialise in stone products. The Chinese Agreement also contemplated the division of Chinese companies and assets in a similar manner. From mid-June 2011, an Australian solicitor was engaged by JSC and JYC to prepare a deed to give effect to the Chinese agreement, which was ultimately not completed by reason of disagreement between the parties. Both parties accepted before me that the Chinese Agreement was binding upon them, although it appears that there are some matters not resolved by that agreement, other matters as to its proper operation are in dispute and both parties have not fully complied with their obligations under it. 5In May, June and July 2011, Ms Runa Chen ("RC"), who is JYC's daughter, allegedly acting on JYC's instructions, transferred certain amounts out of the Company's bank accounts to other entities. Another entity, Everlon & Co Pty Limited was incorporated on 15 June 2011 and, JSC alleges, JYC caused Everlon & Co Pty Limited to carry on businesses known as "Everlon Bronze" and "Glory Bronze", previously carried on by the Company, from 15 July 2011. On 30 and 31 July 2011, JYC and RC attended the Company's warehouse and removed the majority of its bronze stock. 6Negotiations in relation to the Australian deed to give effect to the Chinese Agreement failed on 29 July 2011 and, on 8 August 2011, the Australian lawyer engaged by JYC and JSC to prepare the Australian deed ceased to act. A further meeting between JYC and JSC to resolve matters in China in September 2011 was unsuccessful. 7On 20 September 2011, JSC gave notice to JYC and the Company of his intention to bring the Leave Application and brought that application on 4 November 2011. 8In a directions hearing in respect of the Leave Application before Hammerschlag J on 30 April 2012, Senior Counsel for the Defendants pointed to the fact that the proposed Derivative Proceedings were part of a broader dispute in relation to the Chinese Agreement and that the Defendants were considering whether there needed to be other proceedings on foot to resolve that broader dispute. JSC's then Counsel indicated that he was taking instructions for the commencement of proceedings that would deal with the entirety of the matter. On 3 May 2012, JYC's solicitors sent a letter to JSC's solicitors inviting JSC to commence such wider proceedings, on the basis that the issues raised in the Derivative Proceedings were a small part of that broader dispute between JSC and JYC which could only be resolved by the enforcement of the Chinese Agreement. JSC's solicitors did not respond to that letter and, on 18 June 2012, JYC commenced the Commercial List Proceedings against JSC and the Company seeking orders enforcing the Chinese Agreement. 9By his Amended Originating Process filed on 21 June 2012, JSC sought an order under s 237 of the Corporations Act that he have leave to commence and prosecute the Derivative Proceedings in the name and on behalf of the Company against JYC and RC. The Amended Originating Process identified the subject matter of the Derivative Proceedings as claims for breach of statutory duties imposed by ss 181-183 of the Corporations Act owed by JYC and RC to the Company, breach of fiduciary duty owed by JYC and RC to the Company and conversion. JSC also sought an order under s 242 of the Corporations Act that the Company pay the costs of the Derivative Proceedings. Notwithstanding the commencement of the Commercial List Proceedings, JSC pressed the Leave Application before me on 21 June 2012 as an application for leave to commence the Derivative Proceedings as separate proceedings from the Commercial List Proceedings and expressly did not seek leave to, for example, bring a cross-claim by the Company in the Commercial List Proceedings. 10After I reserved judgment, JSC restored the matter before the Court on 26 July 2012 and indicated that he would seek to pursue, in the alternative to the existing application for leave to commence and prosecute the Derivative Proceedings as separate proceedings, an application for leave to defend the Commercial List Proceedings in the name of and on behalf of the Company and commence and prosecute proceedings in the name of and on behalf of the Company by way of a Cross-Claim in the Commercial List Proceedings. I deferred my judgment so that all issues could be determined in the same judgment and made directions for JSC to serve a proposed Commercial List Response and any proposed Cross-Claim in the Commercial List Proceedings. 11When the matter was again listed before me on 21 August 2012, JSC did not press his claim for an order that he have leave to commence and prosecute the Derivative Proceedings as separate proceedings, significantly amended the proposed claims and instead sought orders that he have leave to take specified steps in the name and on behalf of the Company in the Commercial List proceedings. The Defendants consented to the grant of leave in that form. Costs of the Leave Application 12JSC contends that the Defendants should pay his costs of the Leave Application on the ordinary basis as agreed or as assessed. The premise of that contention is that JSC was ultimately successful in obtaining, by consent, leave in the form referred to in paragraph 11 above although, as will emerge below, that leave was for proceedings in a different form and different in substance from those which were originally the subject of the Leave Application. 13Uniform Civil Procedure Rules 2005 (NSW) r 42.1 provides that costs generally follow the event unless it appears to the Court that some other order should be made as to the whole or any part of the costs. However, that rule does not apply where there has been no adjudication on the merits: Lake Burrendong State Park Trust v Thompson [2011] NSWSC 1554. The Court's power to award costs is discretionary and, in an appropriate case, the Court will make such an order even where there has been no hearing on the merits, although it is less likely to do so where this would involve the trial of a hypothetical action between the parties and deprive them of the cost saving which they would have achieved by settlement. In particular, costs may be awarded where the Court is confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried: Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622 at 624-625. The relevant principles were helpfully summarised by Ball J in Transfield Services (Australia) Pty Ltd v Gaha [2012] NSWSC 865 at [27]: "The general rule in relation to costs is that costs follow the event unless it appears to the court that some other order should be made: Uniform Civil Procedure Rules 2005, r 42.1. Where proceedings are finalised without a hearing on the merits, there is no event to "enliven" the operation of UCPR r 42.1: Fire Containment Pty Ltd v Robins (No 2) [2011] NSWSC 547 at [11] per Gzell J. Nor is it appropriate for the court to embark on an inquiry of what the outcome would have been. Consequently, where proceedings are settled and no order for costs has been agreed, it is generally appropriate that each party bear their own costs: Re Minister for Immigration and Ethnic Affairs (Cth); Ex parte Lai Qin [1997] HCA 6 ; (1997) 186 CLR 622 at 624-5 per McHugh J. There are, however, two exceptions to that general principle. One is where one of the parties has acted so unreasonably that the other party should obtain the costs of the action. The other is where the court is confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried: Lai Qin at 624-5. One instance where the court may be satisfied that that is the position is where the consent orders agreed by the parties amount, in effect, to capitulation by one of the parties." 14JSC contends that the Defendants have "capitulated" to the relief sought by JSC and that his application for relief remains "substantively unchanged". Conversely, JYC contends that JSC has, in substance, abandoned the case that he pursued in the Leave Application and now sought different orders to which JYC consents. 15The relief which was initially sought by JSC was an order for leave to bring separate proceedings in the Company's name, which would not have raised, at least so far as the Company's claim was concerned, any issue as to the Chinese Agreement. In the course of the hearing before me, Senior Counsel for JYC had, appropriately, distinguished between the position which JYC took in resisting the commencement of separate proceedings by the Company and the position which JYC would potentially take if leave was sought for the Company to defend or bring a Cross-Claim in the Commercial List Proceedings, which would not involve the commencement of separate proceedings. The issues raised by the commencement of separate proceedings, with the risk of different outcomes in the Commercial List Proceedings and the Derivative Proceedings, were quite different from the issues now raised by the application (to which JYC consents) for JSC to have leave to defend and bring a Cross-Claim in the Commercial List Proceedings. 16JSC also contends that an examination of the draft proceedings proposed to be filed by the Company in the Commercial List Proceedings: "reveals that, with the exception of the recognition of the so-called Chinese Agreement (and its consequential impact), the issues that are sought to be raised on behalf of the Company in those proceedings substantively mirror the issues that were sought to be raised on behalf of [the Company] in the originally proposed derivative proceedings." There are difficulties with that submission. The first is that the exception acknowledged in it, namely that the originally proposed Derivative Proceedings did not recognise the Chinese Agreement and the Cross-Claim now sought to be brought in the Commercial List Proceedings does so, is a matter of considerable importance. The second is that an examination of the draft proceedings also indicates other changes. The Statement of Claim which JSC originally sought leave to file contended that the removal of bronze stock by JYC was wrongful and that the incorporation of a new company, Everlon & Co Pty Limited and the transfer to it of the business names "Everlon Bronze" and "Glory Bronze" were wrongful. On its face, the Chinese Agreement contemplated the transfer of the bronze business to JYC and those allegations are not pressed in the Cross-Claim which JSC now seeks to pursue on behalf of the Company in the Commercial List Proceedings. The Derivative Proceedings were also originally sought to be pursued against RC, who is not joined as a defendant in the proposed Cross-Claim in the Commercial List Proceedings. 17JSC also contends that it is likely that he would have obtained the relief sought in the Leave Application, because each of the elements prescribed by s 237 of the Corporations Act were satisfied. I do not accept this submission. Had JSC not amended his application in the manner which has now occurred, both to recognise the Chinese Agreement and to seek to raise the issues in the Commercial List Proceedings rather than in separate proceedings, I would not have granted leave to JSC to bring proceedings in the name of the Company, because I would not have been satisfied that the Derivative Proceedings in the form initially proposed were in the Company's best interests. 18In order to grant leave to JSC to bring the claims originally contemplated in separate proceedings, the Court would have needed to be satisfied, under s 237(2)(c) of the Corporations Act, that the grant of leave for proceedings in that form was in the Company's best interests. This test requires more than a prima facie indication that the proceedings may be or are likely to be in the Company's interests and the court must be satisfied that the proposed action actually is, on the balance of probabilities, in the company's best interests: Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313. Relevant matters include the prospects of success of the proceedings, their likely costs, the likely recovery if the proceedings are successful and the likely consequences if they are not: Maher v Honeysett and Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [44]. In Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432 at [57], Ball J observed that: "In considering what is in the best interests of the company, it is necessary to consider the prospects of success of the action, the likely costs and likely recovery if the action is successful and likely consequences if it is not. One relevant matter in considering these issues is the nature of any indemnity the applicant has offered to the company if the action is brought and the likelihood that the company will recover under that indemnity. It is also necessary to consider the resources the company will be required to devote to the action and the resources it has available, together with the effect that the action may have on other aspects of its business. Finally, it is necessary to consider whether some other remedy is available to the applicant so as to make the proposed action unnecessary from its point of view ..." 19The form of the Derivative Proceedings for which JSC initially sought leave had real difficulties, since it ignored the fact that certain steps taken by JYC appeared to be authorised by the Chinese Agreement. The earlier form of the Derivative Proceedings would also have created a significant risk of overlap between the issues which would be raised in the Commercial List Proceedings and the Derivative Proceedings, where it was inevitable or at least overwhelmingly likely that the defences raised by JYC to the Derivative Proceedings would raise the same issues as the Commercial List Proceedings in respect of the Chinese Agreement. JYC and JSC, the parties to that Agreement, are the only shareholders in the Company and there is no suggestion that creditors' interests had intervened in a manner which would prevent the implementation of a transaction which had the unanimous consent of the Company's shareholders. So far as it was contended that JYC and RC appropriated monies from the account of the Company, there would be a question whether they were authorised to do so under the Chinese Agreement. So far as they removed bronze products from the warehouse, and incorporated Everlon Bronze to trade in bronze products, there would also be a question whether that was authorised by the Chinese Agreement. 20Had JSC pressed the application in its original form, I would have been comfortably satisfied that the commencement of the Derivative Proceedings as separate proceedings and in the form originally proposed by JSC was not in the Company's best interests, where it did not address the issues arising from the Chinese Agreement and, once those issues were raised by JYC in defence of the Company's claim, would have led to duplication of issues raised in the Commercial List Proceedings and the risk of inconsistent findings. I would have declined leave to JSC to commence such proceedings in the name of the Company on that basis. 21JSC also relies on evidence of Mr Di Bello, who is one of the solicitors who has carriage of the proceedings on his behalf, that there was insufficient time to take informed instructions from JSC as to the appropriate response to the Commercial List Proceedings between 19 June 2012, when those proceedings were served, and 21 June 2012, when the application for leave to bring the Derivative Proceedings was listed before me. I give little weight to these matters. First, the need for wider proceedings had been foreshadowed in the directions before Hammerschlag J on 30 April 2012 and by the letter from JYC's solicitors dated 3 May 2012, to which JSC's solicitors had not responded. Second, I had asked Senior Counsel representing JSC when the matters were listed before me on 21 June 2012 whether he sought an adjournment to address the implications of the filing of the Commercial List Proceedings and JSC, by his Counsel, indicated that such an adjournment was not sought and pressed the application for leave to commence separate proceedings. 22JSC, somewhat surprisingly, also relies on the fact that his solicitors did not respond to the letter from JYC's solicitors requesting advice as to whether he would commence proceedings for enforcement of the Chinese Agreement, and on the Defendants not having commenced those proceedings (I interpolate, until 19 June) to contend that he was "entitled to assume that such proceedings would not be commenced" and that he prepared for the hearing of the Leave Application accordingly. I do not accept this submission. Given the matters raised in the directions hearing before Hammerschlag J, there was no reason for JSC to assume that the Defendants would accept the risk of two separate proceedings being brought with the risk of divergent outcomes, rather than ultimately commencing proceedings to seek to resolve all issues if JSC did not do so; and, in any event, the Defendants had in fact taken that course prior to the hearing before me, so that, if JSC had made that assumption, he was aware by the time of that hearing that it was no longer valid. As I have noted above, JSC had the opportunity to, but did not, adjourn that hearing so as to seek to assess the implications of the commencement of the Commercial List Proceedings. 23JSC also relies on the fact that he did not have opportunity to seek advice from a Chinese law expert in order to assist him to consider whether Chinese law or New South Wales law applied to the Chinese Agreement and whether a Chinese Court or the Supreme Court of New South Wales should determine that dispute. I have some difficulty in seeing the relevance of this matter, since the Commercial List Proceedings had been commenced, JSC was resident in New South Wales and could properly be served with those proceedings, and the question whether Chinese law or New South Wales law governed the relevant agreement would exist as much in the Derivative Proceedings to be brought by JSC (at least once that agreement was raised by JSC's defence) as in the Commercial List Proceedings. 24JSC also contends that the Defendants should pay his costs of this application because the reason that it has been necessary for him to bring this application is because JYC has not resigned his directorship or transferred his shareholding in the Company to JSC, as required by the Chinese Agreement, and leave to bring the Derivative Proceedings would not have been necessary had he done so. While that submission is correct in its terms, it has the difficulty that the Chinese Agreement contemplated performance on the part of each of JSC and JYC of their respective obligations and it was common ground before me that each of them has not performed obligations imposed upon them by that agreement. In my view, the Court should not isolate one aspect of non-performance by JYC from other aspects of non-performance by JSC so as to treat any one particular act (or failure to act) as the cause of the need for leave to bring the Derivative Proceedings, at least prior to a determination on the merits of the matters in dispute between the parties. To put the proposition another way, the need for leave arose because several aspects of the Chinese Agreement had not been performed by the parties to it, and who was at fault (if anyone) in that regard is a matter for determination in the substantive proceedings. Accordingly, I do not consider that this matter provides a basis for an order that the Defendants pay JSC's costs of the application. 25Conversely, JYC and RC seek orders for costs of the Leave Application against JSC. JSC resists such an order on the basis that the ordinary principle that costs should follow the event ought apply. As I noted above, there has been no determination of this matter on the merits so that principle has no direct application. However, for the reasons I have indicated in paragraph 20 above, I am satisfied that JYC and RC would almost certainly have succeeded had JSC continue to press the form of application heard before me on 21 June, and this warrants an order for costs in their favour in accordance with the principles noted in paragraph 13 above. That result is not altered by the fact that JSC has now altered course and sought leave to defend the Commercial List Proceedings and file a Cross-Claim in different form in those proceedings, to which the Defendants have consented. 26JSC also opposed an order for costs against him on the basis that the Defendants did not "unequivocally communicate" that they would consent to the relief sought by him if an application for leave were to be brought in the Commercial List Proceedings. I do not accept that criticism. As I noted above, the Defendants had given an indication of the likelihood that they would consent to leave for such proceedings both by their solicitors' letter dated 3 May 2012 and in the course of submissions before me on 21 June 2012. In my view, the Defendants could not reasonably be expected to indicate more than that until provided with the form of JSC's proposed Commercial List Response and Cross-Claim in the Commercial List Proceedings. 27For these reasons, I consider that the proper order is that JSC should pay the costs of the proceedings before me on an ordinary basis, as agreed or as assessed. Company's costs of the Commercial List Proceedings 28JSC seeks an order under s 242 of the Corporations Act, that the Company bear the costs of the proceedings to be brought by the Commercial List Response and Cross-Claim in the Commercial List Proceedings. In the alternative, JSC indicates that he will consent to an order that he bear the costs in the first instance, subject to an ability to apply to the Court for leave to recover them at a later date. 29In Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 412; (2005) 53 ACSR 732, Austin J declined to make a costs order where the company's claim was, as here, one aspect of a wider dispute between the parties. His Honour observed at [51] that: "Sometimes satisfaction of the "serious question to be tried" criterion will lead readily to the conclusion that the applicant should be permitted to assert the company's claims on its behalf. But where, as here, the assertion of those claims is simply a manifestation of aspects of the overall dispute between the parties, it will often be appropriate for the court to address the question of costs in the event that the claims fail. A suitable way of doing so, addressed during the hearing of the present application, is to grant leave on terms that the applicant is responsible for the costs ordered against the company, and undertakes not to seek contribution or indemnity from the company." In Roach v Winnote Pty Ltd [2006] NSWSC 231; (2006) 57 ACSR 138 at [29], Barrett J observed that: "It is thus clear that courts are concerned in some cases to ensure that the person granted leave under s 237 should bear, either wholly or in part, the burden of the company's costs in relation to the proceedings in which that person is to represent the company. Measures of that kind are intended to protect the company's financial resources and are merely part of the domestic arrangements within the company as to the basis on which the person concerned will be permitted to act for it." In Sub Rosa Holdings Pty Ltd v Salsa Sudada Production Pty Ltd [2006] NSWSC 916 at [49], Barrett J similarly noted that: "[i]t is commonplace for a person given permission to pursue a claim on behalf of a company to be required, in the first instance, to bear the burden of costs". On the other hand, an order that the company pay the costs may be made in an appropriate case, as occurred in Farrow v Registrar of Building Societies [1991] 2 VR 589 (where that costs order was later revoked) and in Woods v Links Golf Tasmania Pty Ltd [2010] FCA 570. 30On balance, I do not consider that I should make an order that the Company bear the costs of the steps to be taken in the Commercial List Proceedings at this stage. Those steps seem to me to be a relatively small part of what is, in substance, a dispute between the respective shareholders in the Company. I recognise that, as JSC contends, the Chinese Agreement contemplates that he will hold the entire interest in the Company and, if that had occurred, he would (subject to the interests of creditors in an appropriate case) be entitled to cause the Company to defend the Commercial List Proceedings and bring a Cross-Claim in them at the Company's cost. However, there are presently disputes between the parties as to the performance of the Chinese Agreement and the evidence before me does not allow me to assess the potential impact of those disputes on the Company. 31In my view, the Court will be in a significantly better position to exercise its discretion as whether JSC or the Company should bear those costs when the Commercial List Proceedings have been resolved, and the prudent course is to defer making a ruling as to the costs of those proceedings until that point. That position may also be affected by any order as to costs made in those proceedings. Orders 32In these circumstances, I make the following orders and note the following matters:

- Farrow v Registrar of Building Societies - [2012] NSWSC 1007 - NSWSC 2012 case summary — Zoe