Flynn v PPK Mining Equipment Pty Ltd

Court of Appeal (NSW)|2023-06-26|Before: Stern JA, Mr AJ, Rees J

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

JUDGMENT

STERN JA: By notice of motion filed on 9 June 2023, application is made by PPK Mining Equipment Pty Ltd and PPK Group Limited (together PPK), the respondents to an appeal before this Court, that the respective appellants, Daniel Flynn (Mr Flynn) and Flynfam Pty Ltd (Flynfam) as trustee for the Flynn Family Trust, provide security for costs of the appeal in the sum of $145,000 (or such other sum as is appropriate) within seven days, that the appeal be stayed until such security is provided, and that the appellants pay the costs of the notice of motion. PPK relies on Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 51.50 and s 1335 of the Corporations Act 2001 (Cth) in support of their application.
The appeal is listed for hearing on 27 July 2023 with a time estimate of two days.
The respondents rely upon an affidavit of Mr Kaluski sworn 9 June 2023 and exhibits to that affidavit and the appellants relied upon an Affidavit of Assets and Liabilities from Mr Flynn dated 19 June 2023, and two affidavits from Mr Whittaker dated 19 June 2023 (Whittaker 1) and 23 June 2023 (Whittaker 2) and exhibits to those affidavits. Save for paragraph [6] of Whittaker 2, which was rejected, the affidavits and exhibits were read and tendered without objection.

Decision below

The appeal arises from a judgment of Rees J delivered on 2 December 2022: Flynn v PPK Mining Equipment Pty Ltd (No 2) [2022] NSWSC 1640. The trial took place on 18-22, 25-27 July, 1-2 August 2022, with final submissions received on 26 August 2022. It was a costly trial.
As found by the primary judge, on 15 October 2014 Mr Flynn and Flynfam had entered into a Share Purchase Agreement (SPA) with PPK, pursuant to which Mr Flynn and Flynfam sold their shares in Exlec Pty Ltd (Exlec) and Exlec Holdings Pty Ltd (Exlec Holdings) in return for cash, shares in PPK and, subject to satisfaction of the "Second Performance Conditions", further shares in PPK: at [1] & [37]. It is apparent from this description of the SPA that both Mr Flynn and Flynfam were sellers under the SPA, and that the consideration for that sale included that shares in PPK would be issued to Flynfam.
Mr Flynn was a shareholder of Exlec: at [11]. Flynfam was the sole shareholder of Exlec Holdings: at [14]. As explained by the primary judge, Exlec owned the intellectual property, drawings, plant and equipment and Exlec Holdings held the Certificates of Conformity for the drawings held by Exlec: at [14]. Certificates of Conformity had the effect of certifying Exlec to manufacture certain products: at [27].
Under the SPA, the shares to be issued upon satisfaction of the Second Performance Condition (the Second Performance Shares) were to be issued to Flynfam: at [38]. The sole director and shareholder of Flynfam was Rebekah Flynn, Mr Flynn's wife. The Flynn Family Trust is constituted by a discretionary trust deed dated 15 April 2013 pursuant to which the beneficiaries of the Flynn Family Trust were Mr Flynn, Rebekah Flynn and their children: at [14].
Following the acquisition, Mr Flynn ceased to be a director but became an employee of Exlec (which changed its name to PPK Exlec and then to PPK Electrics) and Exlec Holdings Pty Ltd: at [41].
In the proceedings, Mr Flynn and Flynfam sought transfer of the further shares in PPK together with payment of unpaid dividends. The issues were whether the SPA had been varied and whether, as varied, the Second Performance Conditions had been fulfilled. The primary judge found that the SPA was varied on 6 May 2015 such that the requirement under sub paragraph (a) of Part B of Schedule 2 that Business [of Exlec] NPAT [net profit after tax] was greater than $250,000 was replaced with a requirement that the Business revenue was greater than $1,000,000: at [103] & [199].
The primary judge found that PPK Mining Equipment Pty Ltd was in breach of the SPA by failing to provide an NPAT Statement calculating revenue: at [119]. However, the primary judge found that revenue at the relevant date was $743,689, being less than the $1,000,000 figure in the Second Performance Condition: at [126] & [197]. This was based upon the calculation in a revised NPAT Statement sent on 29 November 2016 (Revised NPAT Statement) which the primary judge found "stands": at [126] & [197]. Thus, the Second Performance Condition (as varied) was not satisfied and there was no entitlement to the transfer of the Second Performance Shares: at [197]. The primary judge made an order that "the plaintiffs", without any differentiation between Mr Flynn and Flynfam, pay 80% of the defendants' costs of the proceedings.
The primary judge made the following orders: 1. Declare that the Share Purchase Agreement was varied on 6 May 2015 such that the requirement under sub paragraph (a) of Part B of Schedule 2 that Business NPAT was greater than $250,000 was replaced with a requirement that the Business revenue was greater than $1,000,000. 2. Otherwise dismiss the Amended Summons. 3. Order the plaintiffs to pay 80% of the defendants' costs of the proceedings.
By order dated 19 April 2023, on application of the respondents, orders were made by consent for a gross sum costs order of $1,786,424.12 (excluding GST) to be paid by the appellants. That order was sought against "the plaintiffs" without differentiation: Kaluski Affidavit at [16]. By consent it was ordered that the gross sum costs order would take effect seven days after judgment in the appeal.
Following this, on 21 April 2023 solicitors for the respondents wrote to the solicitors for the appellants seeking information as to the appellants' assets and liabilities so that they could advise their clients in relation to bringing an application for security for costs. In response, the solicitors for the appellants queried whether special circumstances as required for such an order existed and indicated that they did not at that point in time (when they were preparing submissions for the appeal) intend to divert resources towards preparation of evidence of the appellants' financial position but that that position may change if particulars of special circumstances were provided.
The respondents rely upon this correspondence to explain the timing of this application but not otherwise.
There has also been some correspondence between the respective solicitors as to the contents of the blue appeal book. Whilst the final position in this regard has not been settled the appellants' position remains that between half and two-thirds of the 3,800 pages of documents that were before the primary judge will need to be included in the blue appeal book.

Witnesses before the primary judge

Mr Flynn gave evidence before the primary judge. Her Honour found that she "could not rely on the evidence of this witness in the absence of corroboration from a contemporaneous document, a reliable witness or where his evidence was against interest": at [6]. It is also apparent that a number of experts provided reports and gave oral evidence before the primary judge, including two forensic accountants, Ms Delbridge for the appellants and Mr Jackson for the respondents.

The grounds of appeal

A notice of appeal against orders 2 and 3 as made by the primary judge was filed on 1 March 2023 (NOA). The NOA advances 20 separate grounds of appeal. Ground 1 contends that the primary judge erred in not finding that the Second Performance Condition, as varied, was satisfied. Grounds 2 to 19 contend that findings which contributed to that ultimate finding were erroneous. Ground 20 alleges that the primary judge erred by not ordering that PPK issue the Second Performance Shares or alternatively, pay damages or equitable compensation "arising from the appellants' financial harm caused by the respondents' breaches" of the SPA. The relevant "breaches" here appear to be non-performance of the obligation to properly calculate the revenue of Exlec and to issue shares upon satisfaction of the Second Performance Condition.
On 24 May 2023 the appellants filed written submissions on the appeal (ASA). In these the appellants abandon grounds 15-18 & 19.4 of the grounds set out in the NOA.
As elaborated upon in the ASA, the grounds of appeal seek to agitate the following issues: 1. Whether the primary judge erred in the manner of her Honour's reliance upon accounting standards to determine revenue for the purpose of determining whether the Second Performance Condition as amended was satisfied (grounds 2-9.6). 2. Whether the primary judge, having at [135] (consistent with the appellants' submission) identified that the relevant accounting standards were those applicable to Exlec rather than PPK, erred in failing then to approach calculation of revenue consistently with that finding. The appellants contend, in grounds 2 and 3 as explained in the ASA at [6], that the primary judge used "post-acquisition accounting policies" to calculate revenue when she ought to have used accounting policies applicable to Exlec prior to its acquisition by PPK. These grounds depend upon expert evidence, the characterisation of the accounting standards and accounting principles, and the proper construction of the Second Performance Condition. They may also involve some analysis of the evidence before the primary judge as to the accounting standards applied by Exlec prior to its acquisition by PPK. 3. In grounds 4-8, the appellants' challenge one consequence of this alleged error, being the primary judge's failure to apply a "transfer pricing model" in the calculation of revenue for the purposes of the Second Performance Condition. At ASA [15], it is alleged that the primary judge misunderstood and misapplied the expert evidence of Ms Delbridge in relation to transfer pricing. More particularly, it is contended that the primary judge misunderstood Ms Delbridge's evidence that transfer pricing analysis was advanced as a means of adjusting the PPK figures for revenue so as to reflect the appropriate calculation of revenue for an entity similar to Exlec or Exlec Holdings: ASA at [19]-[23]. On this basis, the appellants contend that the primary judge erred in stating that it was not clear "why "transfer pricing" forms part of generally accepted accounting principles for an entity similar to Exlec": at [145]. These grounds turn on a proper understanding of the accounting evidence and the proper construction of the Second Performance Condition save that, in ground 8, it may be necessary on appeal to consider evidence as to what internal jobs were undertaken by Exlec, and that may in turn depend upon evidence from Mr Flynn; 4. At ground 9, elaborated upon at ASA [24]-[28], the appellants contend that the primary judge erred in the manner in which her Honour calculated revenue of Exlec in respect of 41 fireproof enclosures it produced for a solution known as the FLP-1 solution which was devised as response to a problem with unplanned movement of Coaltram vehicles produced by PPK. The primary judge found, in this regard, that no adjustment to revenue should be made as regards the 41 fireproof enclosures as there was no expectation to Exlec of a further economic benefit. Rather, it was a matter of sharing the economic burden (with others) of remedying a serious product defect: at [158]. The primary judge also relied upon the fact that 35 of the enclosures were never used as part of the FLP-1 solution and as regards the 6 that were used, those 6 FLP-1 were sold at a loss: at [155]-[159]. The appellants contend that the primary judge erred in not adjusting revenue by reason of these facts, given that the enclosures were produced and were transferred by PPK Exlec to another entity within the PPK group. Thus, it is contended, for the purposes of calculating the "revenue of the business" in the Second Performance Condition, Exlec (as a stand alone entity) should be deemed to have been entitled to revenue for supply of the 41 enclosures. This ground again turns upon a proper understanding of the accounting evidence, the proper construction of the Second Performance Condition, and the significance of the factual findings made in relation to the FLP-1 solution. The respondents did not contend that this ground depended in any way upon the evidence of Mr Flynn. 5. At ground 10, elaborated upon at ASA [31]-[34], the appellants contend that the primary judge erred in not including a deposit of $254,552.96 as revenue of Exlec as a stand alone entity (rather than the $179,807.84 actually recognised): at [162]. The errors alleged in this regard are the finding of the primary judge that the job had not been cancelled but had instead been put on hold: at [164], and in rejecting the appellants' submission below that "money in the bank should be counted as revenue": at [163]-[165]. This ground turns upon a proper understanding of the accounting evidence. Whilst factual findings are to some extent challenged, as accepted by counsel for the respondents, these do not rely upon the evidence of Mr Flynn. 6. At grounds 11-14, elaborated upon at ASA [35]-[36], the appellants contend that the primary judge erred in the manner in which her Honour understood the defined term the "Business", in particular excluding overhauling work from the definition of the Business. Thus, it is alleged, the primary judge erred at [168] in finding that the "Business" as relevant for the calculation of revenue in the Second Performance Condition is the business as expressly identified in the text of that condition, namely "manufacturing and selling mining equipment and parts". The appellants contend that this error had the consequence that the primary judge did not take into account revenue which should have been considered when calculating whether or not the Second Performance Condition had been satisfied. This ground appears to depend primarily upon the proper construction of the SPA although, as the respondents contend, it may also involve challenge to factual findings, potentially involving evidence from Mr Flynn albeit that the appellants submit that these grounds, to the extent that they challenge findings of fact, rely only documents and not affidavit or oral evidence. 7. At grounds 19.1-19.3 and 19.5-19.9, elaborated upon at ASA [37]-[40], it is contended that the primary judge erred in rejecting a submission of the appellants that revenue of the Business, for the purpose of calculating whether the Second Performance Condition was satisfied, includes revenue from revenue earning activities which Exlec had carried on immediately prior to the purchase: at [188]-[195]. The appellants rely, in this regard, upon the fact that Exlec had, under the SPA, transferred manufacturing licences to PPK, and say that revenue gained by use of such manufacturing licences should be calculated as revenue of the Business in the Second Performance Condition: at [191]. Again, this ground depends upon the proper construction of the SPA save that ground 19.6 may also involve a challenge to the correctness of the primary judge's findings of fact as to whether overhaul and repair work was "in the ordinary course of" Exlec's business prior to its acquisition by PPK. Counsel for the appellants submitted that this would be made good without recourse to Mr Flynn's evidence. Counsel for the respondents submitted, however, that as regards one of these sub-grounds, ground 19.6, questions of the correctness of the primary judge's findings of fact will arise.
As is apparent from the analysis of the grounds of appeal and submissions set out above, the grounds of appeal primarily raise questions as to the proper construction of the Second Performance Condition in the SPA, as to the proper understanding of the accounting evidence, the accounting standards and principles and the proper conclusions that should have been reached on the accounting evidence. Counsel for the respondent accepted that this was so "in the main". Save in limited respects, the NOA does not challenge findings of fact and does not seek to rely upon Mr Flynn's evidence. That was reflected in the submission of counsel for the appellants that those matters in their claim that did rely upon Mr Flynn's evidence and findings of fact about credibility had been "excised" from the appeal.
Comparison between the grounds of appeal in the NOA as explained in the ASA (and having regard to the fact that some grounds are not pressed) and the primary judge's reasons under the heading "Revenue", being from [125]-[196], indicates that on appeal the appellants seek to reagitate most of the substance of what was submitted below, save in respect of the now abandoned grounds 15-18 & 19.4.
The respondents have filed a notice of contention.

Evidence as to impecuniosity

The evidence of Mr Flynn in his Affidavit of Assets and Liabilities dated 19 June 2023 sets out that his assets include: 1. a property with an estimated value of $1,100,000 in Seaham (the Property). It was common ground that the Property was held jointly with Mr Flynn's wife, Rebekah Flynn; 2. bank accounts totalling $5,232.48 as at 16 June 2023; 3. vehicles and a boat at an estimated value of $74,000; 4. furniture and household items with an estimated value of $40,000; and 5. funds in a solicitors' trust account in the amount of $41,543.84.
His liabilities as set out in that affidavit are: 1. a loan over the property in the total amount of $825,000 (leaving a balance of $275,000.00 equity in the Property). Again, it was common ground that this loan was a liability of both Mr Flynn and his wife Rebekah Flynn; 2. a personal loan with a balance of $16,745.79; 3. a lease over one of the vehicles in the amount of $38,000; and 4. a loan over the boat in the sum of $9,555.18.
Having regard to both assets and liabilities (and allocating to Mr Flynn 50% of each of the Property and the loan over the Property), that evidence shows a surplus of assets over liabilities in the sum of $233,975.35. That includes furniture and household items and funds in a solicitor's trust account to meet disbursements: Whittaker 1 at [11]. Estimated disbursements appear likely to exceed that sum (as set out by Mr Whittaker in Whittaker 1 at [17]), albeit that the cost estimate for the blue appeal book may reduce if it is reduced in scope.
Mr Flynn's income is $2,467 net per week and his living expenses are estimated at $2,756.97 per week.
There was no evidence from Rebekah Flynn nor is there any evidence as to her assets or liabilities (save as regards the Property and the loan over the Property). There is no evidence as to whether she has an income or the capacity to advance funds or obtain a loan in order to assist Mr Flynn in meeting an order for security for costs, or as to whether or not she would be willing to do so and if not, why not. There is no evidence that she has wholly or partly funded the litigation to date, or financially "stood by" or supported the litigation or Mr Flynn to date or is doing so at present.
According to the Affidavit of Assets and Liabilities, Flynfam's assets are shares with a market value of $20,958.47 and furniture and household items with an estimated value of $40,000. It also has a loan from "Flynn family super" for legal costs and disbursements in the amount of $160,000.
Again, whilst Rebekah Flynn is the sole director and shareholder of Flynfam, there is no evidence as to her ability or willingness to provide financial support to Flynfam in the event that security for costs is ordered. Nor is there any evidence as to whether or not a further loan may be available to Flynfam from Flynn family super if security for costs were ordered against Flynfam.
As to the likely costs of the proceedings, affidavit evidence from Mr Kaluski estimates the respondents' costs of the appeal and disbursements as being $206,670. Reduced by 30% to reflect a more realistic estimate of costs awarded on a party party basis, that comes to a figure of $145,000 (excluding GST) for the preparation and hearing of the two day appeal in which he has instructed both senior and junior counsel.
Mr Whittaker, solicitor for the appellants, in his affidavit of 19 June 2023, estimates the likely costs of the hearing (not including disbursements), in which he has instructed junior counsel but not Senior Counsel, as being $112,375 ($18,000 + $6,375 + $61,500 + $26,500).
The appellants have entered into a conditional cost agreement for the costs of the appeal: Whittaker 1 at [8]. There is no evidence that there was any such agreement in the proceedings before the primary judge.
Both Mr Flynn and Flynfam are impecunious. It is apparent from the Affidavit of Assets and Liabilities that neither Mr Flynn nor Flynfam will be able themselves to meet the costs of the appeal on top of the existing costs liability of $1,786,424.12 (excluding GST) being the costs of the proceedings before the primary judge. There is thus a real risk that the respondents will be out of pocket in respect of their costs if they succeed on the appeal.

Relevant principles

This application is brought under both UCPR, r 51.50 and s 1335 of the Corporations Act.

UCPR, r 51.50

UCPR, r 51.50 provides, relevantly, as follows: (1) In special circumstances, the Court may order that such security as the Court thinks fit be given for costs of an appeal. (2) Subject to subrules (1) and (3), no security for costs of an appeal is to be required.
The relevant principles as regards the requirement for "special circumstances" under r 51.50 were set out by Basten JA (Ipp JA and Hoeben J agreeing) in Preston v Harbour Pacific Underwriting Management Pty Ltd [2007] NSWCA 247 at [18] (Preston): "The principles governing applications for security were helpfully set out by Beazley J in the Federal Court in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 197-198. Although the factors are discussed in the context of an unfettered discretion, in contrast to the power conferred by Pt 51 r 16, the factors themselves remain relevant in assessing special circumstances. The considerations engaged by the concept of "special circumstances" in relation to security for costs were considered by this Court in Transglobal Capital Pty Ltd v Yolarno Pty Ltd (2004) 60 NSWLR 143 (Beazley, Santow and Ipp JJA), and in Porter v Gordian Runoff Ltd [2004] NSWCA 171 (Bryson JA, Sheller and Giles JJA agreeing). The following principles were identified: (1) no order for security should be made in the absence of "special circumstances"; (2) consideration of what may constitute special circumstances should not be fettered by some general rule of practice; (3) impecuniosity, without more, will usually be insufficient; (4) an order may be appropriate if the appeal is shown to be hopeless, unreasonable or of an harassing nature; (5) where a bona fide and reasonably arguable appeal would be stifled by an order for security, such an order should usually not be made, and (6) the subject matter of the appeal, including an issue as to the liberty of the individual, or a public interest may provide a reason for not imposing a security order which would stifle the continuation of the appeal."
As held by Gleeson JA in Xenos v FAL Healthy Beverages Pty Ltd [2017] NSWCA 240 at [23]: "When weighing all the circumstances of the case in the exercise of the discretion to order security for costs, it is necessary to keep in mind that the weight to be given to any circumstance depends not only on its own intrinsic persuasiveness, but upon the impact of the other circumstances which have to be weighed (see P S Chellaram & Co Ltd v China Ocean Shipping (1991) 102 ALR 321 at 323; [1991] HCA 36 per McHugh J)."
Whilst impecuniosity alone will not amount to special circumstances for the purposes of r 51.50, it may do so when combined with other factors: Preston at [18].
Whilst the ultimate onus is on an applicant for security for costs to establish "special circumstances", the evidentiary onus of establishing that any order for security would stultify the appeal is on the appellants. In Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Group Limited [2007] NSWCA 344 at [51] (Pioneer), Basten JA, Tobias and McColl JJA agreeing on this issue, held that stultification is not made out "merely by reference to the company's impecuniosity, but requires proof". Their Honour's refer to the judgement of Clarke J in Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 5 ACLC 542 at 545 that "the mere fact that the corporate plaintiff is financially unable to provide security does not lead inevitably to the conclusion that the making of an order for security will stultify the plaintiff's claim. It may be that there is someone else who will satisfy the order on the plaintiff's behalf."
In so finding, Basten JA cited with approval the statement from Sheppard, Morling and Neaves JJ in Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4; [1984] FCA 34 that: "a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means."
That statement has been frequently applied in this Court: see e.g., Black Hill Residents Group Inc v Marist Youth Care Ltd [2021] NSWCA 314 (White JA). It has been applied as regards both corporate and individual respondents to an application for security for costs. Thus, in Ballard v Brookfield Australia Investments Ltd [2012] NSWCA 434 (Ballard), one factor to which Ward JA (as her Honour then was) had regard was the ability of those standing behind Mr Ballard (and who appeared to have some personal interest in the maintenance of the appeal) to provide security for the litigation: at [41]. Similarly, in Murray John Carter v Ian Mehmet t/as ATF Ian G Mehmet Testamentary Trust [2021] NSWCA 32 at [21] (Mehmet), in which security for costs was sought under UCPR, r 51.50, Meagher JA held that: "Ordinarily the Court is not justified in declining to order security on the ground that it would stultify the relevant proceedings unless it is established that those who stand behind the litigation, and would benefit from it if successful, are also without means."
In that case, the solicitors for the appellant stood to benefit from the successful prosecution of the appeal by the recovery of their unpaid costs and expenses from the hearing at first instance.
Further, as held by Meagher JA in Boros v Pages Property Investments Pty Ltd [2021] NSWCA 50 at [25]: "Ordinarily, the risk of stifling access to the courts by requiring security will be of less significance in an appeal proceeding, where there "has already been a determination adverse to the person against whom security for costs is sought", than it is where a natural person has commenced proceedings as plaintiff: Tait v Bindal People [2002] FCA 322 at [3] (Spender J); Starr-Diamond v Diamond [2013] NSWCA 7 at [19] (Hoeben JA)."
In this regard, as held by Gleeson JA in Hannaford v Commonwealth Bank of Australia [2013] NSWCA 472 at [48] "it is unnecessary and inappropriate to undertake any detailed examination of the appeal grounds and their likely prospects."
As to the relevance of the scope of an appeal, in Ballard Ward JA (as her Honour then was) held that: "[27] …Mr Ballard is seeking a rehearing on almost all the issues thrown up in the first instance hearing and hence the scope of the appeal will be extensive. Whether or not, as a matter of justice, Mr Ballard has a right to appeal "basically the entirety of the decision", the fact that he is choosing to do so is something that in my view (having regard to the objective prospects of such an appeal and the enormous cost that has been incurred to date and will be incurred on the appeal) brings the present case squarely within the notion of "special circumstances". [28] The scope of the appeal that Mr Ballard intends to bring is such that there must be a very real risk that costs will be unnecessarily incurred by the respondents to the appeal (in the sense that if the appeal were confined to more narrow grounds of appeal those costs would be minimised)."
A further factor that can be relevant when considering special circumstances is that costs of the proceedings before the primary judge have not been paid and are unlikely to be paid: Mehmet at [39] (Meagher JA).

Section 1335 of the Corporations Act 2001 (Cth)

PPK also rely in this application on s 1335 of the Corporations Act, Flynfam being a corporation. As set out by Basten JA in Tomanovic Multitown Pty Ltd v Interlux Projects Pty Ltd [2022] NSWCA 38 at [6]-[7] (Tomanovic) the discretion under s 1335(1) is "unfettered" once the jurisdictional requirement of "credible testimony providing reason to believe the corporation will be unable to pay the respondents' costs if the appeal fails" is satisfied. This has been described as an "undemanding" test: Treloar Constructions Pty Ltd v McMillan [2016] NSWCA 302 at [11]; HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87 at [17].
As explained by Basten JA in Tomanovic at [8]: "Satisfaction of that test does not require that an order for security be made, nor does it say anything about the amount of security which may be appropriate. In Livingspring Pty Ltd v Kliger Partners, Maxwell P and Buchanan JA identified the foremost consideration in determining whether to order security as whether such an order would work an injustice. Thus, it is necessary to assess the degree of likelihood that costs may not be paid if the appeal fails against the possibility that an order for security may stifle the appeal. In considering that balance, such other factors as may be apparent from the limited materials usually available on a security application can be taken into account. One such factor is the apparent merit of the appeal; another is the scope of the appeal, so far as that may be gleaned from the notice of appeal. The conduct of the parties in the course of the trial proceedings may also be relevant."

Could security for costs be ordered against Flynfam alone without regard to the position of Mr Flynn?

PPK submit that security for costs could be awarded against Flynfam alone under s 1335 of the Corporations Act irrespective of the position as against Mr Flynn. They submit, Mr Flynn is a "hanger on", is not a necessary party to the appeal and that the question of security for costs should be determined without reference to his position (Respondents Submissions at 4 [21]; Tcpt, 26 June 2023, p 35(2), (14)). PPK base that submission upon two matters. First, they submit the obligation in the SPA which is to be enforced is an obligation to transfer shares to Flynfam only. Thus, Mr Flynn is not a necessary party to proceedings in respect of this obligation. Second, they submit that upon a proper construction of the SPA the promise to transfer shares upon performance of the Second Performance Condition is not a promise given to Mr Flynn. Rather, it is a promise to Flynfam only.
In Hung v Aquamore Credit Equity Pty Ltd [2022] NSWCA 123 (Hung), Leeming JA summarised the relevant authorities: "[11] In Uptown Sydney Development Corporation Pty Ltd v Bank of New Zealand (No 1) (1993) 11 ACSR 300, Kirby P addressed this circumstance and, relying upon an unreported judgment at first instance of Rogers CJ of Comm Div, considered it appropriate to treat the discretion applying to natural persons as extending to the whole of the costs of the appeal. [12] In Macedonian Orthodox Community Church St Petka Incorporated v Petar [2012] NSWCA 304, Allsop P said at [10]: "without undertaking minute analysis of the issues, the Community Church and the other individual appellants and applicants share a common interest in the fate of the applications and will share a common responsibility for costs in respect of a significant number of them. A differential approach to individuals and corporations in the one appeal is ordinarily inappropriate: Uptown Sydney Development Corporation Pty Ltd v Bank of New Zealand (No 1) (1993) 11 ACSR 300 at 303 (Kirby P). I do not consider that this consideration is limited by any narrowly framed rule that might be drawn (impermissibly) from the remarks of Mason P in dealing with the facts before him in Winnote Pty Ltd v Page [2005] NSWCA 362; 64 NSWLR 244 at [43]." [13] Most recently, in Zhu v Wang [2021] NSWCA 109, Macfarlan JA, once again dealing with an application for security for costs in relation to an appeal brought by a natural person and companies she controlled, proceeded on the same basis (see at [9] although it was noted that there was not argument on the point in that case). [14] It was not said that those authorities were wrong. Instead, it was said that "it's apparent that the appeal is an appeal by the third appellant, the corporation, where the first two appellants are essentially just hangers-on to that appeal". I was taken to two judgments, of Ormiston J in Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 and Brereton J in Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317. [15] In the former, Ormiston J addressed the point at 624-625 asking whether the claims of the natural persons at trial were sufficiently intertwined or interrelated with those of the corporate persons. A similar test was applied by Brereton J in Street v Luna Park at [27]-[28]: "It is undoubtedly relevant to the exercise of the discretion to order security that there is one or more individual co-plaintiffs against whom an order for security could not or would not be made [Pearson v Naydler [1977] 1 WLR 899; Interwest Ltd v Tricontinental Corporation Ltd & Anor (1991) 5 ACSR 621, 635 (Ormiston J); Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564]. This appears to have originated with cases in which there was a plaintiff outside the jurisdiction (against whom security might be ordered) but also a plaintiff, albeit an impecunious one, within the jurisdiction. The view was taken that the defendant's position should not be improved by the mere circumstance that there was an additional plaintiff. In other words, as the defendant would not have been able to get an order for security against the impecunious plaintiff in the jurisdiction, it should be no better off by reason of the circumstance that a plaintiff outside the jurisdiction was also joined [Sykes v Sykes (1869) LR 4 CP 645; D'Hormusgee & Co v Grey (1882) 10 QBD 13]. The rationale of these cases was examined in this court by Studdert J in Maples v Hughes [2002] NSWSC 617, in the course of which his Honour referred to Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523; (1984) 8 ACLR 835, a decision of the Queensland Full Court in which a natural person was joined with three companies as plaintiffs. The leading judgment was given by Connolly J who (at 841) having posed the question 'What is the rule when there is more than one plaintiff', proceeded: The "two plaintiff" cases start 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. However, this is not an absolute rule, as appears from the judgment of Plowman J in John Bishop (Caterers) Ltd v The National Union Bank Ltd [1973] 1 All ER 707; see also Fiduciary Ltd v Morning Star Research. 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 [Bishop, 709-710]. 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 [Interwest Ltd v Tricontinental]. 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 [Bishop, 716; Fiduciary v Morning Star, 33-36]." (emphasis added) [16] In particular, in the passage emphasised above, his Honour referred to the circumstance of there being 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. Brereton J said that in those circumstances "security will not ordinarily be ordered against only one of them"."
On the facts of Hung, where the borrower was the corporate appellant and the natural person appellants were the guarantors, Leeming JA held that, so far as the issues arose on the appeal, there was complete identity between the corporate and the natural person appellants. Further, there was only one set of costs in relation to which any application for security could relate. Thus, there was no reason to displace the ordinary rule and order that the corporate appellant provide security for the costs of the appeal in circumstances in which special circumstances for the purposes of UCPR, r 51.50 had not been established: Hung at [19].
In my judgment the ordinary rule applies in this case. Security for costs should not be ordered against Flynfam without the need to establish special circumstances under UCPR, r 51.50. In this case there is complete identity between Flynfam and Mr Flynn and Mr Flynn is a necessary party to the appeal. As to the former, the single issue on the appeal is whether or not the Second Performance Condition was satisfied. The consequence of success on the appeal will be that shares should be issued to Flynfam, or that damages should be awarded. There is no realistic possibility of different costs orders being made against Mr Flynn and Flynfam in the event that the respondents are successful on the appeal.
Mr Flynn, as party to the SPA, agreed with PPK that satisfaction of the Second Performance Condition should have the consequence that the Second Performance Shares would be transferred to Flynfam. As found by the primary judge, the promise to transfer shares was part of the consideration provided by PPK in exchange for Mr Flynn and Flynfam transferring their shares in Exlec and Exlec Holdings to PPK. It was part of their bargain. As party to the SPA, Mr Flynn has an interest in having the agreement performed. The orders sought on appeal include an order for specific performance. Mr Flynn, as a party to the SPA, has a proper interest in that remedy being granted irrespective of whether he is the recipient of the shares. Just as a party to a contract is entitled to enforce obligations under a contract for the benefit of a third party: Coulls Bagot's Executor and Trustee Co Ltd (1967) 119 CLR 460; [1967] HCA 3; Beswick v Beswick [1968] AC 58, so too is Mr Flynn entitled to enforce obligations under the SPA which benefit Flynfam.
I thus reject the respondents' contention that the fact that shares would be issued to Flynfam, and not to Mr Flynn, on satisfaction of the Second Performance Condition prevents there being an identity of interest on the appeal as between Mr Flynn and Flynfam on the appeal.
I would also reject the respondents' submission that the SPA should be construed such that the promise to transfer shares to Flynfam upon satisfaction of the Second Performance Condition was a promise to Flynfam alone. The respondents' submission in this regard relied wholly upon the fact that the obligation was to transfer shares to Flynfam and not to Mr Flynn. The fact that Flynfam was to be the recipient of the shares does not preclude the promise by PPK to transfer shares being consideration flowing to both Mr Flynn and Flynfam.
Moreover, here there is a large costs order against both Mr Flynn and Flynfam. The respondents sought and (ultimately by consent) obtained that order without differentiation between the position of Mr Flynn or Flynfam. On that basis also, Mr Flynn and Flynfam both have a proper interest in the proceedings, and their interest is identical.

Special circumstances

Both Mr Flynn and Flynfam are impecunious in the sense that there is a real risk that they would be unable to pay the costs of the appeal if they were unsuccessful. Beyond that, the respondents rely, by way of special circumstances upon three factors.

No sufficient evidence as to stultification

First, the respondents submit that it has not been established that an order for security for costs would stultify the appeal proceedings. In this regard, the respondents rely upon Mr Flynn's surplus of assets over liabilities and upon the appellants' failure to lead any evidence as to either: 1. Mr Flynn or Flynfam's ability to obtain finance in order to meet an order that he pay security for costs; and 2. the position of Rebekah Flynn, Mr Flynn's wife and the sole director and shareholder of Flynfam, and in particular whether she would be willing or able to provide or arrange for finance to enable an order for security for costs to be met.
The respondents submit that in these circumstances the appellants have not satisfied their evidentiary burden as regards stultification. Further, the respondents contend that even if a loan could not be arranged so as to enable Mr Flynn to meet an order for security for costs, the Court has a discretion as to what order it would make. Thus, it is submitted, the Court could order that the appellants give the respondents a second mortgage over the Property in order to provide security for their costs of the appeal.
In response, the appellants submit that there is real doubt as to whether Mr Flynn would be able to obtain finance given that the evidence as to his income and expenses suggests that he would be unable to service any additional loan save perhaps on the basis of asset lending. They also rely upon Mr Flynn's evidence in his Affidavit of Assets and Liabilities at [21] and say that, as that assertion was not challenged the Court should conclude that "there is no more to be had" (Tcpt, 26 June 2023, p 29(9)-(10)). As to the position of Rebekah Flynn, the appellants submit that the Court would not find that she could reasonably be expected to come to the aid of either Mr Flynn or Flynfam if an order was made for security for costs.
Further, the appellants submit that it would be inappropriate to make an order requiring Mr Flynn to give a second mortgage over the Property when the Property is jointly owned by Mr Flynn and Rebekah Flynn.
In my judgment, the appellants have satisfied their evidentiary burden of showing that the appeal is likely to be stultified if an order for security for costs is made.
First, the affidavit evidence of Mr Flynn shows that, whilst he has assets and the value of his assets exceeds that of his liabilities, he also has significant loans secured against his assets. His monthly income is less than his monthly expenses. On that evidence it is unlikely that he would be able to obtain finance in the relatively short period of time necessary to meet an order for security for costs.
Second, the unchallenged affidavit evidence of Mr Flynn in his Affidavit of Assets and Liabilities at [21] is that he will be unable to meet an order for security for costs. Whilst he does not expressly identify that he is unable to obtain finance to do so in his Affidavit of Assets and Liabilities, his statement is sufficiently broad to cover this.
Third, I do not accept that in this case the failure of the appellants to adduce evidence from or in relation to the financial position of Rebekah Flynn precludes a finding that an order for security for costs is likely to stultify the appeal proceedings. This is not a case in which there is any evidence that Rebekah Flynn has in the past, financially stood behind either Mr Flynn or Flynfam or is now doing so, whether as regards this litigation or more generally. In that regard, her position is relevantly different from that of the solicitors standing behind the litigation in Mehmet at [21]-[38] or those who stood behind the appellant in Ballard.
As one of the beneficiaries of the Flynfam Family Trust (noting she is the sole director and shareholder of the trustee Flynfam but that this is a discretionary trust) she potentially would benefit if the appeal were successful. However, in my judgment that does not give rise to an inference that she may be able to assist Mr Flynn in meeting an order for security for costs. In those circumstances, the failure by the appellants to lead evidence as to her financial position or ability to assist Mr Flynn in meeting an order for security for costs does not preclude them satisfying their evidentiary onus as to stultification.
As to the position of Flynfam, whilst there is evidence that it had a liability, being a loan from Flynn family super "for the legal costs and disbursements", that does not of itself suggest that the Flynn family super would be able to provide further funding in order to meet an order for security for costs. Further, in his Affidavit of Assets and Liabilities at [21] Mr Flynn deposes that both he and Flynfam have "devoted all of our financial resources" to the prosecution of the proceedings to date and that they would not be able to provide security for costs. That statement expressly refers to the financial resources of both Mr Flynn and Flynfam and is inconsistent with Flynfam being able to loan further money to meet an order for security for costs.
In these circumstances, I am satisfied that there is a real risk that an order for security would stultify the appeal.

The merits of the appeal

The second matter relied upon by the respondents by way of special circumstances is that the grounds of appeal involve numerous challenges to findings of fact suggesting weak prospects of success, in particular where those findings may rely upon the evidence of Mr Flynn. In oral submissions, counsel for the respondents confirmed that save as regards this submission, the respondents do not contend that the grounds of appeal are weak or unlikely to succeed (Tcpt, 26 June 2023, p 23(2)) Further, the respondents contend that, in order to succeed on appeal, the appellants will need to succeed on numerous grounds. This is because they will not succeed unless the Court concludes that the revenue on the Revised NPAT Statement should have exceeded $1,000,000 (thereby satisfying the Second Performance Condition).
In my judgment, properly construed, the grounds of appeal are not to any significant extent reliant upon challenges to findings of primary fact, still less are they reliant upon acceptance of the evidence of Mr Flynn. As is clear from my analysis of the grounds of appeal as set out at [21] above, the grounds of appeal here are predominantly focussed upon the proper construction of the Second Performance Condition in the SPA and upon a proper understanding of the expert accountancy evidence and the relevant accounting standards and principles.
Without a detailed analysis of the expert evidence before the primary judge and of the accounting standards, neither of which would be appropriate on an application such as this, it could not be said that these grounds were manifestly groundless or lacking in sufficient substance to have any realistic prospect of success. That is so notwithstanding that the appellants may need to succeed upon multiple grounds in order to succeed on appeal.
Thus, the strength or otherwise of the grounds of appeal do not count in favour of an order for security for costs.

The breadth of the issues and material on appeal

Third, the respondents rely, by way of special circumstances, upon the breadth of the grounds of appeal, and what they describe as the character of this appeal being broad and factually dense. They rely upon the appellants' apparent intention to include some 1,900 pages in the blue appeal books. This will require considerable factual analysis and enquiry both by way of preparation for, and the hearing of, this appeal. The respondents also rely upon the extent to which the grounds of appeal seek to re-agitate the case before the primary judge.
In response the appellants contend that the factual material to be included in the blue appeal books is predominantly to ensure that adjustments can properly be made to the calculation of the revenue of the business if the appellants succeed on a ground of appeal. The appellants submit that the expert accounting evidence, which goes to such adjustments, relies upon documentary material which must therefore be before the Court in case issues arise as to the basis for the adjustments made by the experts.
In my judgment, this factor weighs in favour of there being an order for security for costs but is not a weighty factor. On the evidence before me it is clear that this will be a document heavy and costly appeal. However, as is clear from my analysis of the grounds of appeal and the ASA, the issues raised are predominantly issues of contractual construction and whether or not the primary judge erred in her treatment of the accounting evidence. The ASA contain very few references to underlying documents, and predominantly raise points of principle as regards the proper way in which the accounting evidence should be understood.

The status of the respondents

The appellants contend the Court should have regard to the fact that the respondents to the appeal (the applicants for security for costs) are public companies such that the costs of the appeal would be a relatively insignificant amount albeit that they would be a significant amount for the appellants. The appellants rely upon the judgment of Basten JA, with whom Tobias and McColl JJA agreed, on this issue in Pioneer at [56]. There, Basten JA referred to Prime Form Cutting Pty Ltd v Baltica General Insurance Co (1989) 8 ACLC 29 at 32-33 where Brooking J implied that whilst large corporate defendants "should not be seen as standing outside the policy of the security for costs provisions", the Court should not ignore the fact that they "stand in no special need of care and protection". Thus, Basten JA held in Pioneer, "it might be seen as oppressive to allow a large corporate defendant to obtain an order for security for costs which would be likely to stifle the litigation in circumstances where it could be seen that the claim had potential merit and the quantum of costs would in any event be a relatively insignificant amount for the corporate defendant, though beyond the capacity of the corporate plaintiff to pay."
There was no evidence before the Court as to the financial position of the respondents. However, it is apparent that both respondents are public companies. Whilst publicly listed companies in no way stand beyond the protection of an order for security for costs, in my judgment, this factor can be accorded some weight on the facts of this case.

Conclusion

Weighing all the matters which arise for consideration on this application, I am not satisfied that special circumstances have been shown which enliven the discretion to order security for costs under UCPR, r 51.50. There is no suggestion that this is anything other than a bona fide appeal. Save as regards their contentions as to the difficulty of overturning findings of fact on appeal, the respondents do not contend that the grounds of appeal are weak or without merit. That is particularly significant given that the grounds of appeal as explained in the ASA do not involve significant challenges to underlying findings of fact but in the main involve questions of contractual construction and the proper understanding of the accountancy evidence. Whilst this is a document heavy appeal that will be costly, given my finding that there is a real risk that an order for security for costs will stultify the appeal and giving some limited regard to the position of the respondents, the requirement for special circumstances is not satisfied.
Accordingly, I make the following orders: 1. The application is dismissed. 2. The respondents pay the appellants' costs of the motion.

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: 04 July 2023

At a glance

Court

Decision date

Before

Source

Judgment (17 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (30)

Cited By (2)