By a Notice of Motion filed on 25 September 2023, the Plaintiffs in these proceedings, and the Applicants on the motion, Mr Chen and Ms Zheng, seek an order that a non-party, Mr Chan, who is or was a director of the First Defendant, Das Schneider Pty Ltd (in liq) ("Company") be liable to the Plaintiffs for the payment of their costs of the proceedings, including their costs of this application for a non-party costs order. I pause to note that the motion was narrowed, without objection, to seek that order only against Mr Chan, and not to extend to the order originally sought that Mr Chan be jointly and severally liable with the Company (now in liquidation) for those costs.
An application to amend the Notice of Motion, to extend it to seek a lump sum costs order, made as an oral application at this hearing, was declined, and so any costs order that is made will be subject to assessment on the usual basis.
The application has a degree of complexity about it, so far as the Plaintiffs will need to address, in effect, three issues to establish their success, namely whether the default position under r 42.20 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") should be displaced and an order for costs made in favour of the Plaintiffs; the implication of the fact there has been no determination of the proceedings on the merits; and whether a basis is established to make an order for costs against Mr Chan as a non-party to the proceedings. I am satisfied that the Plaintiffs have established that an order for costs should be made against Mr Chan for the reasons noted below.
[3]
History of the proceedings and affidavit evidence
It is first necessary to say something as to the history of the proceedings, and the affidavit evidence led in the substantive proceedings, and now in this application.
By Originating Process filed on 1 June 2022, nearly eighteen months ago, the Plaintiffs filed an application seeking orders under s 247A of the Corporations Act 2001 (Cth) ("Act"), that Mr Chen, who is allegedly the beneficial owner of certain shares in the Company, be authorised to inspect specified books of the Company on behalf of Ms Zheng, who it appears is the registered owner of those shares (where the contrary has not been put) and that Ms Zheng also be authorised to inspect those books of the Company. The relatively long period for which the proceedings has continued is an unfortunate feature of the matter, albeit the proceedings may have been delayed to some extent by the Company's voluntary administration and subsequent liquidation.
Ms Zheng relied on her affidavit dated 23 May 2022, in respect of the application, which it might then have been thought identified a relatively straightforward basis for the application, namely that there had been multiple share issues and transfers in respect of the Company, which she claimed were not known to her at the time they occurred, although the Company's constitution has pre-emptive rights provisions in common form which limit the circumstances in which shares may be issued to third parties without first being offered to existing shareholders. The transactions referred to in that affidavit included, relevantly, an issue of some 200,000 shares to Mr Chan in January 2018, which involved a very substantial increase in the Company's share capital and significantly diluted Ms Zheng's proportionate shareholding in the Company, and any beneficial interest of Mr Chen in respect of that shareholding in the Company. Ms Zheng also there referred to a subsequent change of shareholding, so that shares previously held by Mr Chan were transferred to a new shareholder, Accrue Holdings Pty Ltd. It appears that company is wholly owned and controlled by Mr Chan, and it seems to me that the transfer of shares to a company that is wholly owned and wholly controlled by Mr Chan makes no substantive difference in respect of Mr Chan's role in the proceedings.
By an affidavit dated 31 May 2022 of Mr Chen, also filed in the substantive proceedings, Mr Chen referred to the circumstances of his investment in the Company.
By Interlocutory Process filed on 9 March 2023, some nine months after the proceedings had commenced, the Company (relying on an affidavit of Mr Chan dated 22 November 2022, which is in turn tendered by the Plaintiffs in the application) sought a declaration that Mr Chen and Ms Zheng were not shareholders in the Company and that they were estopped from asserting that either or both of them are shareholders in the Company. The basis of that claim was then set out in Points of Claim filed by the Company on 3 April 2023, namely that Mr Chen had made certain representations in May 2016 that he had secured a line of credit for the Company from a manufacturer in China, which were false or made recklessly or were intentionally deceptive, and had secured the issue of shares in the Company to Ms Zheng, to be held on trust for him, on that basis. The Points of Claim sought an order that the shares held by Ms Zheng were held on trust, although it was not apparent how that order would be supported by a claim for deceit or a reckless misrepresentation, and that the Plaintiffs were not entitled to retain any interest in shares in the Company.
The filing of the Points of Claim, did not deprive the Plaintiffs of their then standing, or at least Ms Zheng's standing, to seek an order for inspection of the Company's books as a shareholder in the Company, since the Company did not contest that Ms Zheng was then registered in the Company's share register as a shareholder in the Company. The impact of that cross-claim would depend upon any relief being granted, which in some way extinguished the Plaintiffs' or Ms Zheng's registered holding in the Company, or prevented her reliance on that holding to obtain relief by way of access to information as a matter of the Court's discretion. There has also been a debate between the parties, represented by Mr May for the Plaintiffs and Mr Dobbs for Mr Chan, as to whether the claim raised in the Company's Points of Claim was or was not available by reason of a limitations defence, and whether that limitations defence was available when it was not pleaded in the Plaintiffs' Points of Defence to that claim, but it is not necessary for me to determine that matter given the conclusions that I reach on other grounds.
The Company was later placed into voluntary administration and then passed from voluntary administration into creditors' voluntary liquidation, and the Plaintiffs obtained at least some of the documents they sought from the Company's liquidator. In consequence, I dismissed the proceeding where they had no continuing utility. The Plaintiffs then sought a special costs order against Mr Chan, as a non-party, and further evidence was subsequently filed in respect of that application.
The Plaintiffs rely on the affidavit dated 25 September 2023 of Mr Hou, who is a solicitor acting for them in the proceedings, which records the position in respect of the Plaintiffs' shareholding in the Company, the changes to that shareholding to which I referred above, the filing of the Originating Process, the filing of the Company's Interlocutory Process by way of cross-claim, the subsequent steps in the proceedings, and the appointment of voluntary administrators and then liquidators to the Company. Mr Hou points out that, once the voluntary liquidators were appointed, they made available the documents sought by the Plaintiffs in the proceedings, or at least some of them. There is also a debate between the parties as to the basis on which that occurred, and whether that amounted to a capitulation by the Company in the proceedings. It is also not necessary to address that debate, for the reasons noted below. By a further affidavit dated 30 November 2023, Mr Hou clarifies certain aspects of his affidavit, dated 25 September 2023, addressing matters which I need not further address in these proceedings.
The Plaintiffs in turn tendered a voluminous exhibit to the affidavit of Mr Hou dated 25 September 2023 which included, relevantly, the Company's constitution which contained the pre-emptive rights provisions to which I referred above; correspondence by which the Plaintiffs had sought and the Company had refused to provide, by its solicitors, access to the relevant documents; a subpoena which subsequently sought production of correspondence with persons to whom share issues were made, and Mr Chan's response that there were no documents to be produced; and without prejudice communications with the liquidators of the Company which ultimately led to production of the relevant documents. The Plaintiffs also tendered annexures to other affidavits, to which no substantive reference was made in oral submissions, and tendered an affidavit dated 22 November 2022 to Mr Chan, which set out Mr Chan's evidence on which he relied for the representational case to which I referred above.
Mr Chan in turn relies on his affidavit dated 9 November 2023, where he refers to aspects of the history of the proceedings, in a very brief way, including the filing of the Originating Process and the Company's Interlocutory Process by way of cross-claim, and refers to the then position in respect of the Plaintiffs' application for documents, and a possible application by the Plaintiffs for leave to continue the proceedings while the Company was in voluntary administration, which apparently did not proceed after the voluntary liquidators made the relevant documents available.
Importantly, Mr Chan there makes no attempt to explain his decision-making in respect of the Company's conduct of the proceedings, including the basis on which he, as the director or one of the directors of the Company, authorised the defence of the proceedings, or why that occurred, or what benefit was sought to be obtained by that defence, or why that defence did not involve a significant waste of the Company's funds in circumstances that the Company subsequently passed into voluntary administration and voluntary liquidation. Where Mr Chan offered no explanation of those matters, notwithstanding the obvious matter that the Company's defence of the application had continued for a long period, and until the Company passed into voluntary administration and voluntary liquidation, I infer that the evidence that he would have led in that regard would not have assisted him in the defence of the claim for costs against him.
[4]
The parties' submissions and determination
Each of the parties made relatively lengthy submissions, which drew attention to the matters necessary to support a costs order against Mr Chan and joined issue as to whether those matters were established. I have had regard to those submissions, but it is not necessary to address them in detail, where it seems to me that the application can and should be determined on a somewhat simpler basis.
The first issue in the application is the effect of the dismissal of the proceedings under UCPR r 42.20. That rule provides that, if the Court makes an order for the dismissal of proceedings, then, unless the Court orders otherwise, the plaintiff must pay the defendant's costs of the proceedings to the extent to which they have been dismissed. Mr Dobbs, who, as I noted above, appears for Mr Chan, relies on that rule to contend that the Plaintiffs have here no basis for the recovery of their costs of the proceedings against the Company or Mr Chan.
I should add to the observations in my oral ex tempore judgment that, in Re Bailey Roberts Group Pty Ltd (in liq) [2023] NSWSC 492 at [6]-[7], I also summarised the effect of UCPR r 42.20 as follows:
"In McNamara v San [2010] NSWSC 809 at [12], Hallen AsJ (as his Honour then was) summarised the principles applicable to this rule as including that:
"(c) Rule 42.20 of the UCPR does not give rise to a presumption that costs will be ordered against the [p]laintiff: Fordyce v Fordham [2006] NSWCA 274; (2006) 67 NSWLR 497; Foukkare v Angreb Pty Limited [2006] NSWCA 335 at [65]; Pentroth Pty Ltd v Kirschild Pty Ltd (2006) 96 SASR 129; Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [53]; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32. However, the rule does create a starting point by requiring "… the plaintiff must pay the defendant's costs of the proceedings …" unless that outcome is displaced by a discretionary decision ("unless the court otherwise orders");
(d) Generally, there must be some proper justification, sound positive ground, or a good reason, for departing from the ordinary position: Fordyce v Fordham at [2] per Santow JA; Australiawide at [54] per Bryson JA; circumstances in which it has been held appropriate to depart from the ordinary position include where the proceedings have been rendered unnecessary by circumstances beyond the plaintiff's control; where the plaintiff achieved practical success in the proceedings, or where costs have been significantly increased by the unreasonable conduct of the defendant.
(e) The [p]laintiff should be the moving party on an application for an alternative costs order: Bitannia at [70] per Basten JA. If facts are to be relied upon to found the court making a different order, the [p]laintiff will bear the onus of proving the relevant facts;
(f) Where the proceedings are dismissed prior to any hearing on the merits, "the Court cannot try a hypothetical action between the parties" to determine the question of costs: Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201; Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 at 624; Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2007] NSWSC 1120 at [35];
(g) It may be necessary to analyse the whole of the proceedings to determine the appropriate costs order: Fordyce at [67] per McColl JA. A relevant consideration is whether the [p]laintiff acted reasonably in commencing the proceedings and whether the defendant acted reasonably in defending them: Australian Securities Commission v Aust-Home Investments Ltd at 201 (cited with approval in Foukkare); all the relevant circumstances, and not just the fact of dismissal, should be considered;
(h) It is also important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event, or settlement, so removes, or modifies, the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the court's discretion otherwise than by an award of costs by the successful party. It is the latter type of case that usually creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs: One.Tel Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548 at 553; cited with approval in Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 per Davies AJA (with whom Mason P and Meagher JA agreed) at [5];
(i) The distinction between the two categories referred to above is often helpful in exercising the costs discretion, notwithstanding that neither category can be precisely defined, the boundary between them is unclear and other factors may be relevant: Bitannia per Basten JA at [79]-[81]; Perre v State of New South Wales [2009] NSWLEC 51 at [49];
(j) The rule requires the court to make such order as it thinks just in the particular circumstances of the case."
That summary was cited with approval by Kunc J in Spatt v Benson [2019] NSWSC 1195 at [64] and I followed it in Parlby v Blair [2013] NSWSC 100 at [13]ff, Re Myao Travel Pty Ltd [2020] NSWSC 1672 at [7]ff, Australian Unity Funds Management Ltd v NorthWest Healthcare Australia RE Ltd [2021] NSWSC 1039 at [15]ff and in Davis v Certain Lloyd's Underwriters [2022] NSWSC 131 at 9[ff]."
Returning to my oral judgment, the effect of UCPR r 42.20 parallels that of UCPR r 42.19, where proceedings are discontinued, and the effect of those rules has also been considered in the case law, including that which I summarised in my decisions in Re Cabramatta King Tea Pty Ltd [2022] NSWSC 462 and Re Central West Civil Pty Ltd [2023] NSWSC 1145. The case law indicates that UCPR r 42.20 does not establish a presumption that costs will be ordered against a plaintiff upon the dismissal of proceedings, but that the onus is on the plaintiff, where proceedings have been dismissed, to justify a departure from the "default" position established by that rule in order to obtain an order for costs in its favour. Such a departure can be made where there is some sound positive ground or good reason for departing from the default position.
In determining whether such a ground exists, the Court will have regard to the principles recognised in cases such as Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 ("Lai Qin") at 624-625. In particular, where there has been no hearing on the merits in proceedings, a court will ordinarily be deprived of the factor that usually determines whether it will make a costs order. However, as the decision in Lai Qin recognised, and subsequent cases have accepted, the Court may make a costs order in such proceedings, where that does not require it to conduct a hypothetical action between the parties, and it may conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. It is relevant here that, in dismissing the proceedings, the Court had noted that they had been dismissed on the basis that the Plaintiffs no longer pursued them where the Company was in liquidation, a matter which plainly had significance for the practical utility of the relief sought. I have also referred above to the fact that, in the event, the Plaintiffs obtained a significant part of the documents they sought from the liquidators when the Company was placed in liquidation.
I am satisfied that, having regard to the principles applicable to costs in respect of the dismissal of proceedings under UCPR r 42.20 and the application of the principles in Lai Qin in the relevant circumstances, this is a case where the Company acted so unreasonably, apparently under the control of Mr Chan, that an order for costs in favour of the Plaintiffs is warranted. Here, what ought to have been a straightforward application for access to documents, to be determined in accordance with the principles that I summarised in Re Sirrah Pty Ltd [2017] NSWSC 1683 has been substantially extended because the Company introduced, by way of its Interlocutory Process, the attack on the allocation of shares to the Plaintiffs, or at least Ms Zheng, which would have had no impact on Ms Zheng's status as a registered shareholder, or on her standing to obtain the relevant relief or on the apparent merits of that relief in respect of an investigation of the multiple share issues that she attacked, unless and until final relief was granted. The defence, on that basis, was pursued and the determination of these proceedings delayed until ultimately the Company passed into voluntary administration and then into voluntary liquidation, with the result that that defence could have no utility and that the costs that the Plaintiffs and the Company had incurred in respectively pursuing and defending that application were wasted.
No doubt, those matters may have been capable of explanation by Mr Chan, and there may or may not have been good reasons for him to cause the Company to take that approach. However, significantly, Mr Chan makes no attempt to explain those matters or to rebut the inferences which readily arise from the introduction of the substantive cross-claim in the proceedings, the consequential delay in the proceedings, and the lack of utility of the defence where the Company then passed into voluntary administration and voluntary liquidation. He does not identify, for example, any commercial imperative that supported the Company's defence of the proceedings so as to avoid production of the documents sought by the Plaintiffs; he also does not say, for example, that the financial difficulties which led to the Company passing into voluntary administration and then into voluntary liquidation caught him by surprise; or that any utility which might otherwise have existed in the Company's defence of the proceedings was not achieved because of the unexpected event of the Company's voluntary administration and voluntary liquidation. No attempt is made by Mr Chan to explain these matters, and I can properly infer that no explanation that he could have given would have assisted the Company, or him, in resisting a costs order on that basis.
[5]
The claim for costs against Mr Chan as a non-party
Turning now to the position of Mr Chan, who is, I recognise, a non-party in respect of the proceedings, the principles applicable to a non-party costs order are well-established and the parties have drawn my attention to several of the cases which have considered the circumstances in which such an order was made. Those decisions include the High Court's decision in Knight v FP Special Assets Ltd (1992) 174 CLR 178, to which Mr Dobbs referred at some length; the decisions of the Court of Appeal in FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 ("FPM Constructions") and May v Christodoulou [2011] NSWCA 75; my decision in Re Aquaqueen International Pty Ltd [2015] NSWSC 500; and the more recent decision of Darke J in Jose v InvestaFox Pty Ltd [2021) NSWSC 827.
I accept that appellate authority, and particularly the decision in FPM Constructions, emphasises that the exception to the general rule that an order for costs is only made against a party to the litigation should not be allowed to expand so as to undermine the rule itself. I recognise that the relevant criteria include whether the source of the funds for the litigation was the non-party or its principal, which is not established here, so far as there is no suggestion that the Company did not incur the costs of the proceedings, albeit likely following a decision made by Mr Chan that it should do so; whether the conduct of the litigation was unreasonable or improper; whether the non-party or its principal had an interest which was a substantial interest; and whether the unsuccessful party was, or here became, insolvent. I have regard to these criteria, and I recognise that the fact that a director represents a company in litigation, or may have control of the conduct of the litigation, is not enough in itself to justify the exercise of the power to award costs against the director personally.
However, the matters to which I have referred above, including the length of the proceedings, the introduction of a substantive defence by way of the Company's Interlocutory Process, the lack of utility in the defence of the proceedings, where the Company passed into voluntary administration and liquidation, and the absence of any explanation of those matters by Mr Chan, seem to me to be sufficient to establish that the conduct of the litigation was at least unreasonable, if not improper. It seems to me that Mr Chan had a substantial interest, as a shareholder, in the defence of the proceedings, particularly where he caused the Company to seek to attack Ms Zheng's shareholding, and Mr Chen's beneficial shareholding, by introducing the Interlocutory Process in the proceedings; and, ultimately, Mr Chen and Ms Zheng were exposed to the costs of conducting lengthy proceedings, extended by the introduction of that Interlocutory Process, in circumstances that the Company was or became insolvent during the course of the proceedings, and again Mr Chan offers no explanation of how that occurred and makes no suggestion that that result was unexpected.
In these circumstances, it seems to me that this matter falls within that narrow class of circumstances where it was unreasonable to conduct the proceedings in this manner, which led to a significant delay and likely escalation in their costs and had the consequence that the Plaintiffs are left with a costs order against a company in voluntary liquidation which is plainly insolvent. These matters seem to me to be sufficient to support an order for costs against Mr Chan in the circumstances.
[6]
Orders
Accordingly, I make the following orders:
Mr Ka Kan Chan pay the Plaintiffs' costs of the proceedings, including the Plaintiffs' costs of its application for a non-party costs order, as agreed or as assessed.
The exhibits be returned.
[7]
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Decision last updated: 08 December 2023