In the matter of Sunny International Hardware Group Pty Ltd

Representation: Counsel:
Mr S Lee (Solicitor) (Applicant)
Ms J Steele SC/Ms S Steinhoff (Respondents)
Solicitors:
Spencer Reyner Law Office Pty Ltd (Applicant)
Diligence Lawyers (Respondents)

File Number(s): 2024/246385

JUDGMENT

Background

1. The Defendants, Ms Hong and Mr Hong, seek now seek an order for indemnity costs in respect of an unsuccessful application brought by the Plaintiff, Mr Cai, for leave to bring derivative proceedings on behalf of Sunny International Hardware Group Pty Ltd (“Company”). Alternatively, the Defendants seek an order that Mr Cai pay their costs of the proceedings on an ordinary basis and pay their costs of preparing a first report of Ms Thompson dated 14 October 2024 on an indemnity basis, where that report responded to expert evidence led by Mr Cai which was not read at the hearing.

2. By way of background, I dismissed Mr Cai’s application for leave to bring the proceedings by the reasons set out in my judgment delivered on 24 March 2025 ([2025] NSWSC 254]) (“Primary Judgment”). Mr Cai had also previously abandoned a claim in oppression and, during the hearing of that application, he abandoned an additional claim for access to documents under ss 247A–247B of the Corporations Act 2001 (Cth).

3. I observed (at Primary Judgment [44]):

“ I will assume, without deciding, that Mr Cai honestly believes that a good cause of action against Mr Hong and Ms Hong exists and has reasonable prospect of success. It does not seem to me that he can reasonably hold that view, where a rational assessment of that matter depends upon an understanding of the treatment of the relevant issues in the Company’s financial accounts which would require, as Mr Jones rightly pointed out in cross-examination, at least the review of the Company’s general ledger, which Mr Cai has not obtained and reviewed. At best, it seems to me that Mr Cai could reasonably believe that a good cause of action might exist, and might succeed, depending upon what emerged from that review which he and his advisers have not yet undertaken. For the reasons noted below, even if Mr Cai is acting in good faith, he is unable to satisfy other essential requirements for the grant of leave under s 237 of the Act.”

4. I also held that Mr Cai had not established the third requirement under s 237(2)(c) of the Act that the grant of leave was in the Company’s best interests and I observed (at Primary Judgment [49], [51]] that:

“… Mr Cai, and those representing him, have also not yet sought to quantify the amount of any recovery that would be available to the Company if it could establish such a breach of duty, so as to allow a view to be formed that it was in the Company’s interests to incur the costs of the proceedings. Indeed, Mr Lee [who appeared for Mr Cai] went so far in closing submissions to assert that, irrespective of the prospect of any recovery by the Company, it was in its best interests to bring the proceedings so as to vindicate matters of corporate governance. I do not accept that proposition where, it seems to me, it would only be in the Company’s best interests to pursue potentially expensive litigation if (consistent with the view I expressed in Imperium Projects) it would obtain an economic benefit from that litigation that warrants the costs involved. For these reasons, in the language of the case law, I am not satisfied that it is, rather than merely that it might be, in the Company’s best interests to bring the relevant proceedings, and that is not a sufficient basis to grant the leave sought. …

I am also not satisfied that Mr Cai has established that it is in the Company’s best interests to grant leave to him to bring the proposed proceedings, where his offer of indemnity does not presently extend to the Company’s costs of the conduct of the proceedings and he has not established that he has the capacity to honour the indemnity which he offers against adverse costs orders. If that were the only difficulty with Mr Cai’s application, I would likely have offered him the opportunity to formulate an adequate indemnity that would better protect the Company’s interests in that respect and lead further evidence of his capacity to provide it, but there is no utility in doing so here given the other difficulties which exist with Mr Cai’s application.”

5. In dealing with the question whether Mr Cai had established a serious question to be tried for the purposes of s 237(2)(d) of the Act, I observed (at [58]) that:

“I am not satisfied that Mr Cai has established a serious question to be tried for the alleged breach of statutory duties, where Mr Lee’s formulation of that claim itself recognises the further inquiries that are required, before a serious question to be tried would be established; and Mr Cai is presently unable to identify the basis on which the possible errors in the Company’s financial statements amount to a breach of duty, and still less to identify the amount at issue in any available claim of fraud or misappropriation on the part of the Defendants.”

6. I also there noted that that Mr Cai sought to have the Company advance serious claims including allegations of false reporting of its financial affairs to the Australian Taxation Office and of misappropriation, and that his claims of fraud or wilful misconduct were not properly pleaded (and arguably not properly made) in their present form.

The parties’ submissions and determination

7. I have had regard to the parties’ submissions in chief and in response as to costs, although it seemed to me that the latter did not significantly advance the resolution of the matter, beyond the issues raised in the former.

8. Mr Steele, with whom Ms Steinhoff appears for Ms Hong and Mr Hong, refer to the well-established principle that costs follow the event and to the circumstances in which the Court may make an order for indemnity costs. The applicable principles are well-established. Section 98(1)(c) of the Civil Procedure Act 2005 (NSW) permits the Court to order costs on an ordinary or an indemnity basis. Rule 42.2 of the Uniform Civil Procedure Rules provides that, unless the Court orders otherwise or the rules otherwise provide, costs payable are to be assessed on an ordinary basis. Rule 42.5 deals with an order for costs on an indemnity basis. Costs are awarded on an ordinary basis unless there are exceptional circumstances: Leichhardt Municipal Council v Green [2004] NSWCA 341. An order for indemnity costs is not made to punish an unsuccessful plaintiff for persisting with a case that fails, but to compensate a successful defendant fully for costs incurred, when the Court takes the view that it was unreasonable for the plaintiff to have subjected that party to the expenditure of costs: Hamod v New South Wales (2002) 188 ALR 659; [2002] FCAFC 97 at [20]. Whether an indemnity costs order should be made depends, at least in part, on whether there was a relevant delinquency on the part of the unsuccessful party: Oshlack v Richmond River Council (1998) 193 CLR 72 at 89; [1998] HCA 11. In Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 7) (2008) 65 ACSR 324; [2008] NSWSC 199, McDougall J observed (at [24]) that there must usually be some special or unusual feature to justify departure from the ordinary rule as to costs, and that delinquency is not necessary for an order for indemnity costs, but is relevant to whether it should be made. The relevant principles were also considered by the Court of Appeal in Cabport Pty Ltd v Marinchek (No 2) [2013] NSWCA 131 at [6], where the Court observed that an order for indemnity costs may be made where a party’s conduct in proceedings is plainly unreasonable or involves an element of delinquency. I have here drawn on my summary of these principles in Sheridan v Colin Biggers & Paisley [2019] NSWSC 621 at [16].

9. Mr Lee, who appeared for Mr Cai in the proceedings, in turn referred to the decision of the Court of Appeal in the Supreme Court of Victoria (dealing with different legislation but similar principles) in Chen v Chan [2009] VSCA 233 for the observation that:

“Usually, an order for costs will be made on a party/party basis. But an order for costs on a solicitor/client or indemnity basis may be made where special or unusual circumstances have been demonstrated, for example, by establishing misconduct in the proceeding, that the proceeding was brought for an ulterior purpose, or that it was patently unreasonable to institute, or maintain, the proceeding. Special circumstances may also include the making of an allegation of fraud which is not proved.”

10. In support of a claim for indemnity costs, Ms Steele and Ms Steinhoff submit that:

“Critical to understanding the extent of the Respondents’ success in opposing the application for leave, and the reasons why costs should be awarded on an indemnity basis is:

(a) the lack of any evidentiary basis underpinning the very serious allegations proposed to be alleged against the Respondents;

(b) the manner in which the basis for [Mr Cai’s] proposed claim changed throughout the proceedings; and

(c) the way in which the proceedings were conducted, including the manner in which the claims for substantive relief changed throughout the proceedings.

11. They also point to the fact that an order for indemnity costs may be made where a litigant makes and persists with allegations of fraud or improper conduct without a proper basis, although I recognise that question arose here in an application for leave to bring derivative proceedings, rather than in a substantive hearing. Ms Steele and Ms Steinhoff also submit that:

“[Mr Cai] brought the application for leave without knowing what fees and charges he was challenging. Indeed, [Mr Cai’s] Amended Proposed Statement of Claim (PSOC) recognised that the Company’s proposed claims were allegations of “possibilities” or “probabilities”, not matters of which [Mr Cai] had any current basis to assert were known facts in the absence of material facts underlying those claims. As observed by this Court, there is, a substantial difference between “inquiry” on the one hand and the commencement of litigation making serious allegations of wrongdoing on the other.

As this Court noted, each of the proposed allegations of False Reporting (as defined) and Misappropriation (as defined) in the PSOC were “plainly allegations of fraud”, which were made “without any adequate identification of the material facts underpinning them”, concluding that the claims of fraud or wilful misconduct were “not properly made in their present form”. [Mr Cai] conceded in closing submissions that that if [he] did not have a proper basis for the allegations in paragraphs 10 and 11 of the PSOC, “perhaps they would be struck out when commencing proceedings,” and accepted that those paragraphs “may not have a basis”. Evidently, such allegations of fraud ought never to have been made.

In addition to the unfounded allegations of fraud, this Court also observed that the allegation of breach of statutory duties, which are also serious allegations, could not presently be established, where they depended on the outcome of an inquiry as to the matters warranting inquiry, which had not yet been undertaken.”

12. Ms Steele and Ms Steinhoff also advance several further criticisms of Mr Cai’s conduct of the proceedings, which it is not necessary to address.

13. Mr Lee responded by repeating criticisms made at the hearing of Mr Hong and Ms Hong’s delay in producing, and failure to produce, documents to Mr Cai in the period prior to and during the conduct of the proceedings. While those criticisms may be well-founded, they do not provide justification for Mr Cai pursuing a claim for leave to bring derivative proceedings where, properly advised, he should have recognised that that claim could not succeed on the evidence that was then available to him. Mr Lee also submits, without evidence, that Mr Cai and his solicitors were “guided by an expert” in crafting or formulating their claims against the Defendants. I will assume, without deciding, that Mr Cai’s legal advisers relied on the expert evidence which they had initially obtained, and then abandoned, in commencing the application. Nonetheless, it was a matter for Mr Cai and his legal advisers to assess the continuing prospects of that application once they abandoned the position put in that initial expert report and their failure to undertake an adequate assessment of that matter also supports and order for indemnity costs against Mr Cai. Mr Lee also submits that, if the Defendants had acted with good faith to resolve the issues in dispute, then Mr Cai would have satisfied the “serious question to be tried” and “best interest of the Company” requirements or not commenced the proceedings. Again, it was a matter for Mr Cai and his legal representatives to assess the evidence which was available to him, in the position that existed, where Mr Cai had received limited access to documents and the Defendants were resisting the leave application.

14. Mr Lee also submits that Mr CaI’s “suspicions” were held in good faith and were not frivolous or “patently unreasonable”; however, that submission does not address the difficulty that Mr Cai’s “suspicions” were not sufficient to support the allegations that Mr Cai sought to make in the Company’s name, for the reasons noted in my Principal Judgment, and that should also have been apparent to Mr Cai and his advisers. Mr Cai also submits that he had “not actually” filed documents that alleged fraud and abandoned the claims for fraud at the hearing of the application for derivative leave, That is no answer to the fact that the application for leave was brought on a basis that alleged fraud and serious wrongdoing, without a proper basis for the Company to advance those allegations, and Mr Cai thereby put the Defendants to the costs of responding to that application.

15. It seems to me that, here, Mr Cai ought to have recognised that he needed to make further inquiries to establish the factual basis of his case, including potentially pursuing the claim for access to documents which he abandoned, before he could succeed in obtaining leave to bring derivative proceedings on behalf of the Company. He therefore put Mr Hong and Ms Hong to costs to which they would not have been put, had he properly conducted the proceedings. This seems to me to be sufficient basis for an award of indemnity costs in their favour.

16. Had I not reached this conclusion, I would have made the alternative costs order sought by Ms Hong and Mr Hong, where it was plainly unreasonable for Mr Cai to advance an expert report, putting Ms Hong and Mr Hong to the costs of preparing an expert report in response, and only then to recognise that the position taken in that report was not well-founded and abandon reliance on that report. That was also sufficient basis to order indemnity costs against Mr Cai, on that alternative basis.

Order

17. For these reasons, I order that Mr Cai pay the Defendants’ costs of the proceedings, on an indemnity basis, as agreed or as assessed.

**********