Flynn v PPK Mining Equipment Pty Ltd

Background

1. The second defendant, PPK Group Limited, is listed on the Australian Securities Exchange. The first defendant, PPK Mining Equipment Pty Ltd, is a wholly owned subsidiary of PPK Group. It designs, manufactures and services utility vehicles used in the mining industry.
2. The second plaintiff, Flynfam Pty Limited, is the trustee of the Flynn Family Trust. The first plaintiff, Mr David Flynn, is a beneficiary of that trust. His wife is the director and sole shareholder of Flynfam.
3. Prior to 16 October 2014, Mr Flynn owned all the shares in a company known as Exlech Pty Ltd and Flynfam owned all the shares in a company known as Exlech Holdings Pty Ltd. Together, those companies manufactured and sold mining equipment and parts to participants in the mining industry.
4. By a share purchase agreement dated 15 October 2014 (the SPA), the plaintiffs sold their shares in Exlech and Exlech Holdings to PPK Mining in exchange for a cash consideration together with an agreement by PPK Group to issue two tranches of shares to Flynfam. The cash consideration has been paid and the first tranche of shares was issued and subsequently distributed to Mr Flynn.
5. Under cl 7.2 of the SPA, PPK Group was required to issue the second tranche of shares to Flynfam if relevantly the net profit after tax of the business carried on by Exlech and Exlech Holdings for the period specified in the SPA, and calculated in accordance with the Accounting Standards (as defined in the SPA) after making the Agreed Adjustments (as defined in the SPA), exceeded $250,000.
6. In these proceedings, the plaintiffs claim that on or about 6 May 2015 or 28 June 2015 the SPA was varied by an agreement entered into orally and by an exchange of emails between Mr Flynn and Mr Peter Barker, the Chief Executive Officer of PPK Mining, so that the precondition for the issue of the second tranche of shares would change from net profits exceeding $250,000 to gross revenue exceeding $1,000,000. The plaintiffs advance an alternative case based on an estoppel. They contend that the target of $1,000,000 was exceeded. They also contend that, even if the SPA was not varied, the net profit of the business, when calculated correctly in accordance with the SPA, exceeded $250,000. By their Summons, the plaintiffs seek various declarations and an order "that the second defendant issue the first or second plaintiff with 3,441,039 shares and pay the first or second plaintiff any dividends payable on those shares as if they had been issued on 16 October 2015". In the alternative, they claim damages.
7. It is common ground that, apart from paid up capital of $100 and the chose in action consisting of these proceedings, Flynfam has no assets. Consequently, it is accepted that the precondition for the granting of security (that there is reason to believe that the corporation will be unable to pay the defendants' costs if ordered to do so: see Uniform Civil Procedure Rules 2005 (NSW), r 42.21; Corporations Act 2001 (Cth), s 1335(1)) has been met.

Should security be ordered?

1. Flynfam advances two discretionary grounds why it should not be required to provide security. The first is that Mr Flynn is also a party to the proceedings and the issues that concern him overlap with the issues that concern Flynfam.
2. The second is that Mr Flynn has offered to provide security. As finally put that offer was an offer to pay any costs ordered against Flynfam up to the sum of $122,500 and to undertake to the Court not to diminish his assets below that amount. The evidence is that Mr Flynn owns shares in PPK Group worth $205,000. He also owns two properties jointly with his wife. Mr Flynn gives evidence that he was expecting to finance the plaintiffs' costs of these proceedings through the sale of the shares. He also gives evidence that the net value of his assets (including the properties and shares) is $889,100. The defendants did not take issue with that evidence for the purpose of this application.
3. Flynfam also submits that if security is ordered, it should only be required to provide security for that part of its claim that is independent from the claim made by Mr Flynn.
4. In considering the first discretionary ground relied on by the plaintiffs, it is important to consider its basis.
5. Generally, a court will not order one plaintiff to provide security where there is another plaintiff who would not be required to do so. The principle was developed where there were two individual plaintiffs, one outside the jurisdiction (and therefore amenable to an order for security) and the other, albeit impecunious, within the jurisdiction, who would not normally be required to provide security.
6. The rule was explained in these terms by Connolly J in Harpur v Ariadne Australia Limited (No 2) [1984] 2 Qd R 523; (1984) 8 ACLR 835 at 841 (with whom Campbell CJ and Demack J agreed): The "two plaintiff" cases started with the situation in which one is out of the jurisdiction. Prima facie he ought to be ordered to provide security but his co-plaintiff is within the jurisdiction. In such a case it was considered that there was no ground for ordering security. See Sykes v Sykes (1869) 4 LR CP 645 at 648 per Byles J and Montague Smith J. This principle was held to apply even where the plaintiff within the jurisdiction was insolvent. I take the underlying reason to be that the defendant was really in no worse position than if he had been sued by a single plaintiff resident within the jurisdiction and insolvent. As Brett J remarked at 650, the cases show that, unless there is ground for making an order for security against all the plaintiffs, it cannot be made against any.
7. That approach has been followed in this State: Maples v Hughes [2002] NSWSC 617. It has also been applied where one of the plaintiffs is a corporation rather than an individual who is resident overseas: Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317. See also Brecher v Barrack Investments Pty Ltd [2018] FCA 472.
8. The rule is not an absolute one. As Brereton J explained in Street v Luna Park Sydney Pty Ltd at [28]: Where there is a complete identity between the corporate plaintiff and the individual plaintiff, so that all plaintiffs are suing in relation to one and the same defendant, and all plaintiffs must succeed or fail together, security will not ordinarily be ordered against only one of them. But where the various plaintiffs' claims have different elements and aspects, so that they will not all necessarily succeed or fail together, although the existence of individual plaintiffs is a factor that diminishes the defendant's claim to be entitled to security against the corporate plaintiff, it does not extinguish it. And where the degree of overlap between the claim of the individual and corporate plaintiffs is comparatively small, such that separate orders for costs might be made in respect of each of the plaintiffs, it is usually appropriate that an order for security be made (citations omitted).
9. As Brereton J pointed out in the passage just quoted, the absence of overlap is important because it may raise the possibility of a costs order against the corporate plaintiff alone. The same point was made by Austin J in Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564 at [55], where his Honour said: The issue was considered in John Bishop (Caterers) Ltd v National Union Bank Ltd [1973] 1 All ER 707, where Plowman J distinguished the "foreign co-plaintiff" cases and made an order for security for costs. There were two grounds of distinction. First, in the foreign co-plaintiff cases the claims of the plaintiffs were identical or overlapped, whereas in the case before Plowman J, in which there was a long and complicated statement of claim, there were very large areas of claims raised by the corporate plaintiff as to which the individual plaintiff, a secured creditor of the corporate plaintiff, had no locus standi, and consequently the overlap was comparatively small. This meant, according to Plowman J (at 710), that if the corporate plaintiff were to lose at the trial, it would be unlikely that the individual plaintiff would be ordered to pay the defendants all of the defendants' costs incurred vis-a-vis the corporate plaintiff. The second ground of distinction was that the foreign co-plaintiff cases did not arise under the security for costs provisions of companies legislation, an area which the legislature had "singled out for special treatment" (at 711).
10. It follows that the real question is not whether there is a substantial overlap between the two claims, but whether, having regard to any differences between the two claims, there is a realistic possibility that the individual plaintiff would not be ordered to pay all the costs in the event that the defendants are successful.
11. In the present case, in my opinion, there is no realistic possibility that if the defendants are successful, some different costs order will be made against Mr Flynn than the order made against Flynfam. All of the relief sought in the Summons is sought by Mr Flynn and by Flynfam and the grounds for the relief sought by both of them are the same. It is possible that Flynfam could succeed and Mr Flynn fail on the basis that only Flynfam is entitled to seek an order that the shares be issued to it. It is very difficult to see how, however, Mr Flynn could succeed and Flynfam fail. Consequently, there is no realistic possibility of a costs order against Flynfam alone.
12. Consistently with the authorities, that provides a strong discretionary ground for refusing an order for security. There are no other countervailing considerations in this case which suggest that the Court should depart from what would be the usual order. The impecuniosity of the individual plaintiff who is within the jurisdiction is not a reason for ordering security. But here, the evidence suggests that Mr Flynn is not impecunious and that if the defendants are successful they will be able to recover their costs from him. The proceedings are being brought for the benefit of a trust of which he is a beneficiary. The evidence suggests that if they are successful, he is the person who is likely to benefit from them. Far from taking advantage of the trust structure to avoid any liability for costs, he has joined as a plaintiff in the case and sought relief that makes him amenable to any costs order the defendants are likely to obtain. It seems plain that if security is ordered it will have to be provided by Mr Flynn. In a practical sense, the grant of security would put the defendants in a better position than they would have been if the true beneficiary of the claim was the only party to the proceedings.
13. Having regard to those conclusions, it is unnecessary to consider the alternative arguments advanced by the plaintiffs. For the reasons I have given, in my opinion, no order for security should be made.

Quantum

1. In view of the conclusions I have reached, the issue of quantum does not arise. However, I should say something about it.
2. The amount of security sought by the defendants is $165,000. That claim is supported by an affidavit of the defendants' solicitor, Mr Patrick Kaluski, who provides what appears to be a careful breakdown of the estimated future costs of the proceedings on a solicitor client basis and then applies a discount of approximately 25 percent to arrive at an estimate of future party/party costs (on a GST exclusive basis).
3. Mr Peter Rogers, the solicitor for the plaintiffs, considers that estimate and makes a number of adjustments to it to conclude that a reasonable estimate of solicitor client costs falls within the range of $170,649 and $178,474 (excluding GST), depending largely on whether the hearing will last three or four days. The principal difference between the views expressed by Mr Kaluski and Mr Rogers arises from the views they express about the number of hours that various tasks will occupy the attention of a partner or counsel, rather than an employed solicitor. Applying a discount of 34 percent, Mr Rogers concludes that the range for party/party costs is $112,628.34 to $117,792.84. Applying a 25 percent discount, he concludes that it is $127,986.75 to $133,855.50. Again, all figures exclude GST.
4. The determination of the future legal costs of a proceeding necessarily involves a degree of guesswork and estimation. For that reason, it is usual for the Court to adopt a broad-brush approach to the fixing of security. The defendants submitted that I should prefer the approach of Mr Kaluski because he had more experience than Mr Rogers. However, in my opinion, it is evident from both their affidavits that they sought to apply as much rigor as the subject-matter will bear. Both appear to have adopted what appear on their face to be reasonable assumptions. The evidence given by neither was challenged. On that basis, in my opinion, the appropriate approach is to assume that the hearing will last four days and that the defendants would be successful in recovering 75 percent of their costs, and to take the mid-point of the two estimates on that basis. Some rounding is desirable so as not to give the appearance that the task involves a greater degree of precision than it actually does. Accordingly, had it been necessary I would have ordered Flynfam to provide security in the sum of $150,000.

Orders

1. The plaintiffs have been successful in resisting the order for security. There is no reason why in those circumstances they should not have their costs of the application.
2. It follows that the orders of the Court are that the defendants' amended notice of motion filed on 5 July 2019 is dismissed with costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 July 2019