Live Board Holdings Ltd v Cody Live Pty Ltd

Court of Appeal (NSW)|2017-11-20|Before: Bathurst CJ, Leeming JA, Robb 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

THE COURT: Live Board Holdings Ltd (LBH) seeks leave to appeal from orders made on 31 March 2017 by the primary judge (Robb J) dealing with a variety of interlocutory applications, the most important of which related to security for costs. The notice of motion seeking security for costs was filed so long ago as 15 September 2014. It will be necessary in what follows to say something of the circumstances which led to such extraordinary delay, involving no fewer than six days of hearing time, and two very substantial judgments dealing with that motion and related applications. The "real issues" in the proceedings have nothing to do with the question argued at such length: whether LBH should provide security against the prospect that an adverse costs order is made against it. It is, with respect, difficult to see how there can have been compliance with the obligations imposed by s 56(3) and (4) of the Civil Procedure Act 2005 (NSW) upon the parties, and the solicitors and barristers representing them, to further the overriding purpose of facilitating the just, quick and cheap resolution of the real issues in the proceedings.

Factual and procedural background

Both parties provided the Court with comprehensive chronologies, containing far more detail than was necessary in order to resolve the limited issues arising (for example, LBH's chronology occupied seven single-spaced pages and contained 76 entries).
Insofar as leave is sought to appeal from the ordering of security for costs, it was accepted that LBH was itself unable to meet an adverse costs order. The principal questions which arose were (a) whether the conduct of which LBH sought to complain in the litigation had caused its impecuniosity; (b) whether it had been shown that an order for security for costs would stultify the proceedings; (c) the strength of LBH's proposed claim and (d) the relevance of any such assessment to the exercise of the discretion to order security.
For the purpose of determining this aspect of LBH's application for leave to appeal, the following highly abbreviated summary of the factual background is sufficient. A much more extensive summary is found in the judgment of 1 December 2015 at [17]-[68], to which no objection was taken, and from which the following is largely drawn.
LBH was incorporated in January 2006. It was the registered owner of a patent issued on 21 January 2010 in respect of an invention for a digital real estate signboard. Initially its majority shareholder was Pier Blue Pty Ltd of which Mr Costa Koulis was the sole director. Mr Koulis was the named inventor of the patent and argument proceeded on the basis that he has at all times been the driving force behind the cross-claim.
For some years, LBH was unable to raise funds to support the commercial exploitation of its intellectual property. It appointed Mr Pierce Patrick Cody, Mr Richard Charles Ochojski and Ms Finola Ann Burke (who are now cross defendants) between August 2008 and January 2013, at the same time issuing shares to them or their associated companies.
The first cross-defendant, Cody Live Pty Ltd, was incorporated on 4 March 2014, and its directors are Mr Cody, Ms Burke and Mr Ochojski. In circumstances to be summarised below, in March 2014 Cody Live purchased the assets of LBH, including its books and records, from the Administrators of that company for $305,000. There is one other cross-defendant, Cody Investments Pty Ltd, to which had been issued 30% of the ordinary shares of LBH at the time when Mr Cody became a director.
In December 2012, LBH and its shareholders executed a shareholders' agreement which contemplated the company entering into an agreement with a financier to raise at least $1 million in capital by 1 April 2013. Bligh Capital was appointed by a circular resolution of all directors to conduct the capital raising. Mr Koulis signed the directors' resolution appointing Bligh Capital and further, on 19 April 2013, signed an acknowledgement that, as a director of Pier Blue, he agreed to the issue of securities and shares to an incoming investor.
However, on 31 July 2013, Mr Koulis' solicitors sought to withdraw that consent, and on 29 August 2013, at a board meeting, Mr Koulis expressed disagreement with the legal advice that the consents already given enabled the capital raising to proceed. On that day, over the dissent of Mr Koulis, a majority of the board agreed to proceed with the capital raising. In due course, on 3 September 2013, LBH issued 5,226,550 preference shares to new shareholders in exchange for funds of approximately $1 million, as well as 3,323,324 ordinary shares. The result of the issue was to dilute Pier Blue's shareholding in LBH so that it no longer could cause the passage of an ordinary resolution at a general meeting.
Mr Koulis was removed as a director of LBH by resolution at a general meeting held on 26 November 2013, which was not attended by Pier Blue. On 28 November 2013, Messrs Cody, Ochojski and Ms Burke commenced proceedings in the Corporations List in the Equity Division seeking declaratory relief that LBH had validly issued the 5,226,550 preference shares and 3,323,324 ordinary shares on 3 September 2013. Pier Blue (as a shareholder) was joined as a party, and Mr Koulis and Pier Blue filed an interlocutory process on 6 December 2013 contending that the issue was invalid. Part of the directors' application was heard by Brereton J on 18 December 2013 (the third last day of term) and refused by judgment delivered on 17 February 2014: Cody v Live Board Holdings [2014] NSWSC 78. The record suggests that the only parties who actively participated were Messrs Cody, Ochojski and Ms Burke on the one hand, and Mr Koulis and Pier Blue on the other hand.
Brereton J said at [26] that he was: "unable to accept the plaintiffs' submission that upon the proper construction of the constitution and the shareholders' agreement, the board had power and authority to make the 3 September issue. It follows that the plaintiffs are not entitled to the relief claimed in paragraph 1(a) of the summons."
Brereton J also declined to make other declaratory relief sought. His Honour also noted that the directors had foreshadowed seeking an order validating the purported issue, under s 254E of the Corporations Act 2001 (Cth), but no such application was heard or determined on that occasion. There is a dispute between the parties as to whether the effect of Brereton J's judgment precluded the respondents from making certain submissions as to the validity of the share issue. This is the "estoppel" issue which is relevant to proposed grounds 1 and 2.
Finally, LBH emphasised that the first paragraph of Brereton J's reasons recorded that of the $1 million raised, some $748,000 remained in Live Board Holdings' bank account.
The following day, 18 February 2014, Messrs Cody, Ochojski and Ms Burke purported to resolve that Live Board Holdings was or was likely to become insolvent and to appoint administrators. The administrators sought relief pursuant to ss 447A, 447C, 447D and 1322 of the Corporations Act 2001 (Cth) confirming the validity of their appointment. That application was heard by Brereton J on 28 February 2014, and his Honour delivered a judgment on 3 March 2014: In the matter of Live Board Holdings (Administrators Appointed) [2014] NSWSC 161, in which his Honour recorded that: 1. the capital issue had taken place without the concurrence of 75% of the ordinary shareholders: at [12]; 2. "the necessary corollary of the conclusion that the share issue was not valid is that the subscription monies must be repaid": at [13], 3. there was power to validate a share issue, which, although it had been foreshadowed, had not, at least so far, been brought, "though it remains open to them" to do so: at [14], and 4. LBH was liable to repay the subscription monies and, for that reason, his Honour rejected a submission that the resolution appointing the Administrators was void on the basis that the directors did not genuinely hold the opinion that the company is or may be insolvent: at [16].
In submissions in this Court, LBH made much of the fact that the judgment also recorded at [10] that as at 31 January 2014 there was some $451,000 cash at bank, almost $300,000 less than had been disclosed late the previous year.
The Administrators thereafter conducted a public auction for LBH's assets, following which the first respondent, Cody Live, purchased the assets for $305,000. Neither Mr Koulis nor any entity associated with him placed a bid for those assets. In this Court, it was accepted that there had been a public bidding process for the assets, and that there was no evidence that the administrator could realise funds other than through the sale of assets (Transcript, 20 November 2017, p 7.9-18).
A deed of company arrangement was executed, and the sale proceeds were used to pay certain of LBH's creditors, including Pier Blue; some of the other shareholders had agreed to defer their claims against LBH, others had entered into a deed of release.
It appears that Mr Koulis resumed control of LBH, and on 15 August 2014, LBH, Mr Koulis, Pier Blue and another company controlled by Mr Koulis filed a "first cross-claim statement of cross-claim" joining the present cross-respondents and certain other parties including the Administrators. Earlier, by interlocutory process filed on 6 December 2013, Mr Koulis and Pier Blue had sought declaratory and other relief related to the share issue. However, it seems that this first cross-claim was the first pleading articulating the broader claims of Mr Koulis and entities associated with him. The cross-claim included an allegation of conspiracy by unlawful means and dishonest conduct. The cross-claim was amended on 21 August 2014.
The respondents' motion for security for costs was filed on 15 September 2014, pursuant to a timetable set down by Brereton J on 1 September 2014. It can be seen that the application for security was made relatively shortly after the cross-claim was first pleaded. Before the primary judge, LBH raised delay as a discretionary consideration tending against the grant of security. This was rejected, and formed no part of the application in this Court.
The first phase of the hearing before the primary judge took place on 18 and 19 November 2014. On the afternoon of the second day, Senior Counsel for LBH advised that "there is a need for yet further surgery to the proposed amended cross claim" (Transcript, 19 November 2014, p 104). The proceedings were stood over to 1 December 2014, on which date all cross-claimants except LBH were granted leave to discontinue their claims against all cross-defendants. A new version of the cross-claim, and a motion seeking leave to amend, were served on 11 December 2014. Leave to amend was opposed, and the balance of the proceeding was set down for hearing on 7 and 8 July 2015.
On 7 July 2015, Senior Counsel for LBH again acknowledged the need to amend: "it is fairly obvious that we need to have another go and refine the matter to a basis with which then it becomes absolutely clear" (Transcript, 7 July 2015, p 43).
On 8 July 2015, LBH discontinued its claims against the Administrators, and consented to the dismissal of its claims against other third parties, leaving the present respondents as the only active cross-defendants.
On 7 August 2015, while the primary judge was reserved, LBH filed a notice of motion seeking leave to file a further amended cross-claim. That motion was deferred until his Honour had considered all the other outstanding issues before the Court: see [2015] NSWSC 1790 at [17].
On 1 December 2015, his Honour delivered the first judgment, stating that security for costs should be awarded and making provision for the filing of evidence and hearing of submissions as to the quantum and terms of that security which turned upon the finalisation of LBH's cross-claim. It was at that time that orders were made for the (then) four cross-claimants to pay the respondents' costs of the hearing of 18 and 19 November 2014 and for LBH to pay the respondents' costs of the hearing of 7 and 8 July 2015. His Honour directed that those costs be payable forthwith (this became known as the "costs forthwith" order).
On 1 March 2016, LBH applied for leave to appeal from some of the orders made on 1 December 2015, including the costs forthwith order, but the summons was dismissed by consent on 7 April 2016.
On 19 July 2016, LBH filed another notice of motion in the proceedings in the Equity Division, seeking orders to separate the hearing of liability from quantum (which was agreed) and also, relevantly for present purposes, for leave to adduce further evidence going to whether security for costs should have been ordered and to stay the "costs forthwith" order. That notice of motion, together with the balance of the hearing of the respondents' application for security for costs, was heard on 24 and 25 November 2016, resulting in the judgment delivered on 31 March 2016.
Rather than summarising the evidence and submissions before the primary judge, or his Honour's lengthy reasons (which extend to many matters outside the scope of LBH's application for leave to appeal), it will be convenient immediately to turn to the proposed grounds of appeal, of which all save proposed ground 5 can be resolved succinctly.

Proposed grounds 1 and 2

These proposed grounds are related: "His Honour's finding at [156] of the 2017 judgment that the Respondents did not intend to argue the validity of the 3 September 2013 share issue (the Share Issue) and that the appellants arguments to the contrary raised a false issue was wrong. His Honour's refusal to entertain the appellants' application that the respondents be estopped from claiming that the share issue was either valid, or capable of validation, or that the appellant consented to the share issue was wrong."
Paragraph 156, to which proposed ground 1 is directed, is as follows: "In my view the attempt by LBH to rely upon the alleged estoppels has created a false issue, in that the cross defendants do not intend to contest the issues identified by LBH; rather, they intend to rely upon evidence of additional surrounding circumstances to support a case that their conduct did not involve breaches of duty to LBH. I do not accept that the amount of preparation required, and the length of the hearing, will be reduced in the major way claimed by LBH, because the cross defendants will not be able to contest the validity of the share issue, or that the issue was not authorised by the constitution and the shareholders agreement."
Appeals lie from orders, not from findings. That is sufficient to dispose the first proposed ground. Further, [156] is not, contrary to proposed ground one, a finding at all. Instead, it was a step in a reasoning process directed to the quantification of security. At [145]-[156] of the 31 March 2017 judgment, the primary judge was addressing an aspect of the quantification of security for costs. As noted above, there was and is a debate between the parties as to whether the respondents were estopped from contending that a purported issue of shares was invalid; that was said to have some bearing on the length of the hearing.
Proposed ground 2 was directed to [148] of the 31 March 2017 judgment which stated: "It is not appropriate that the court attempt to resolve, on an application for security for costs, the question whether or not LBH is entitled to assert estoppels against the cross defendants."
In LBH's written submissions it was said that his Honour wrongly stated in the 2017 judgment at [148] that "the issue of estoppel is not a matter that should be raised in a security for costs motion." It may be seen that that submission slightly misstates [148]. More significantly, and as Senior Counsel who appeared both at first instance and in this Court for LBH conceded, promptly and properly when the point was raised, it would have been inappropriate for any question of issue estoppel to be determined on an application for security for costs. The same approach was adopted by the primary judge, who said in terms, at [149], that "the only material question is how the subject matter of the estoppel claim may affect the time necessary for the proper preparation and hearing of the proceedings".
In the present case, the cross-defendants have not yet filed a defence articulating whether and if so how they assert that the share issue was not invalid. It is possible that such a defence might in turn be met by a reply alleging that they are estopped from raising the allegation, which would in turn give rise to an issue. That is entirely academic at present.
The only presently relevant question is how long it will reasonably take to hear and determine LBH's cross-claim, something which has consequences for the amount of security to be ordered. The primary judge heard the submissions, gave reasons at [145]-[156] and resolved that question. No other challenge is made as to that aspect of his Honour's decision.
Neither of these proposed grounds warrants a grant of leave.

Proposed ground 4

Proposed ground 3 was abandoned at the commencement of the hearing. Proposed ground 4 was: "His Honour failed to afford procedural fairness to the appellant in that he denied to the appellant an opportunity to be heard upon whether the appellant intended to abandon its amended cross-claim (ACC) and its application to file a further amended cross claim (FACC) because it believed it was doomed to fail or at all."
Once again, this proposed ground is misconceived. It reflects a procedural history whereby two earlier drafts of the LBH's cross-claim were withdrawn. It is certainly true that his Honour made critical observations as to the merits of the earlier iterations of LBH's cross-claim. His Honour said, in the 1 December 2015 judgment at [69]-[70]: "As I have said above, the cross claimants abandoned their amended cross claim filed on 15 August 2014, and also the draft further amended cross claim that they propounded before the hearing on 7 July 2015, in the face of attacks on those documents made by all of the cross defendants. In my opinion, the cross claimants' abandonment of the documents was the proper course for them to take. The documents were entirely unsustainable on the basis of the rules that govern proper pleadings. The documents should not have been filed or propounded in the first place."
His Honour added at [72]: "As the cross claimants have not sought to support either document in which they have attempted to plead the basis of their cross claim, it is not necessary for the court to examine the deficiencies in the documents in detail. However, it will be appropriate for the court to comment in broad terms on the deficiencies in the documents, because that may have some bearing on the costs orders that should be made, and on whether LBH should be ordered to provide security for costs to the former directors. Furthermore, as there is an outstanding motion in which LBH seeks leave to file a new version of a further amended cross claim, a number of observations concerning the inadequacies in the earlier documents are warranted, to reduce the likelihood that any further application by LBH will be a futile waste of time and money."
Thereafter, at [73]-[86], his Honour identified a number of deficiencies in the pleadings. These included the listing of no fewer than 11 duties said to have been owed by the former directors, most of which were described by his Honour as wholly or at least in part "unconventional" (at [75]). He gave as an example "A duty to act with care and diligence in exercising their powers and duties as directors in making business judgements and to not have a personal interest in the subject matter of the judgment". His Honour then stated that the pleading was followed by a "very substantial number of acts by the former directors, which are baldly alleged to be breaches of the duties pleaded in par 40, or acts to give effect to the unlawful conspiracy alleged in par 52, or both": at [77]. His Honour said at [78] that: "The principal vice of the draft pleading was that it alleged the relevant conduct by the former directors in the form of contentious conclusions, without pleading all of the individual material facts that would be necessary to establish the conclusions, and to prove that the conduct constituted any particular breach of duty. The pleading uniformly alleged that all of the conduct constituted breaches of all of the alleged duties, without it being apparent how particular conduct would fall within breach of one duty or another."
His Honour gave further examples and explained why it did not follow that conduct (such as changing the company's name) was a breach of duty. He concluded that "not only were there many such defects, but it is not unfair to say that there was very little of the draft further amended cross claim that was properly pleaded": at [86].
Those reasons were provided constructively, at a time when LBH had not once but twice withdrawn its cross-claim without being ordered to do so, and was contemplating seeking leave to rely upon a further revision. It may be inferred that they were provided with a view to assisting LBH in formulating a claim which would warrant a grant of leave, and in circumstances in which his Honour had already expressed an in principle conclusion, in a judgment binding LBH, that security would be required as the price of advancing a cross-claim.
LBH's written submissions assert that "the pleadings against the Administrators disclose valid causes of action in the tort of conspiracy against Mr Reay's company, Brain Beyond, which had good prospects of success": submissions of 4 October 2017, [58]. The optimism is in stark contrast with what in fact occurred. Nowhere in the written or oral submissions in this Court was any attempt made to grapple with the defects articulated by the primary judge, or otherwise to justify the assertion.
If there were a failure to afford procedural fairness, then LBH has had ample opportunity, in its written and oral submissions in this Court, to explain why it was unfair for the primary judge to make the statements as to the wisdom of the abandonment of the earlier forms of the cross-claim.
In any event, the transcript records that, far from there being any denial of procedural fairness, the primary judge squarely raised, during the course of the lengthy hearings, his concerns about the pleadings. He did so extensively. For example, on 7 July 2015 at p 21 of the transcript: "Speaking somewhat neutrally … an equity lawyer could plead in a day a claim against the directors and the purchaser company … based upon equitable duties and the oppression sections of the Corporations Act, and possibly the directors' duties section, [by which your client could secure] whatever relief it was ever going to get out of these proceedings. But that's not what they've done. They've added a lot of duties including a conspiracy case ..."
There followed extensive criticisms by the primary judge of the pleading in the form it then took.
It might be thought that there was no connection between any order made by the primary judge and the alleged failure to accord procedural fairness which this proposed ground is directed to. None was advanced by the applicants for leave. However, in a somewhat indirect way, there is a link. As will be seen below, at [187], and expressly in the alternative, his Honour confirmed his predisposition to make an order requiring security for costs to be provided by reason of the unsatisfactory ways in which the cross-claim had previously been pleaded. But that observation was expressly not dispositive or determinative of any of the orders actually made.
Accordingly, the position is that (a) there has not been demonstrated to have been any failure to accord procedural fairness, (b) Live Board Holdings has had full opportunity in its submissions in this concurrent hearing to be heard as to the inadequacies in its earlier cross-claims, and (c) no order made by the primary judge turned on the observations in his Honour's reasons which are the subject of this proposed ground. To that it may be added that although this Court heard no submissions on the adequacy of the parts of the earlier iterations of the cross-claim which were criticised by the primary judge, a review of those documents does not suggest any error on the part of his Honour.
No basis for a grant of leave has been made out.

Proposed ground 6

This proposed ground is: "His Honour erred in failing to read the affidavit of Romeo El Daghl sworn 3 July 2015 on the basis that it was not relevant as it was relevant to the following material issues in the Respondents' security of costs application: 6.1 the value of the Appellant's assets was such that it could pay a cost order; and 6.2 the Respondents knowingly had caused the appellant to lose valuable assets leaving it indebted to the 1st Respondent."
No oral submissions were made in support of this ground. Rather, as was pointed out during the hearing, Senior Counsel for LBH challenged the rejection by the primary judge of its application to rely upon two different affidavits, those of Mr Petros Koulis dated 14 June 2016 and Mr Mark Cusack dated 28 June 2016, which was addressed in the 31 March 2017 judgment at [44]-[55]. No application was made to amend the draft notice of appeal, even after the Court advised the respondents that it was not necessary to deal with submissions outside its scope. Conceivably, the oral submissions which were made fall within the scope of proposed ground 5, and are addressed below.
Mr El Daghl's affidavit of 3 July 2015 was the subject of an ex tempore judgment given by the primary judge on 7 July 2015. Mr El Daghl's affidavit primarily concerned accounts from the administrators which were lodged with ASIC on 31 October 2014, which showed that payments of interim dividends to deferred creditors were in fact paid to Cody Live Pty Ltd, reflecting (on LBH's submission) an assignment of the debt owed by LBH to the deferred creditors. It was submitted at the time that the evidence bore upon the bona fides of the Administrators and the impecuniosity of the cross-claimant. No challenge is made to his Honour's rejection of the first submission. The written submissions maintained that the fact (so it was said) that Cody Live was the deferred creditor was evidence that "the value of the assets of Live Board Holdings [was] greater than the respondents disclosed to the Court" and "Cody Live obtained Live Board Holdings' assets deliberately leaving Live Board Holdings indebted to it." The proposed ground was not otherwise articulated.
LBH's written submissions do not impugn the primary judge's conclusion that the document was irrelevant for present purposes. Still less do they attack his Honour's further basis for rejecting the evidence, namely that it would cause unfairness to the Administrators to permit the affidavit to be read at that stage of the proceeding: at [7] (the documents lodged with ASIC bore a date 31 October 2014, and there is no reason to think they could not have been relied on months earlier). In any event, this is a matter of practice and procedure, challenging the rejection of late evidence more than 2 years ago, served shortly before the third day of an interlocutory hearing on an interlocutory application, which does not come close to warranting a grant of leave.

Proposed ground 7

Proposed grounds 7 is: "His Honour's refusal to stay the costs forthwith order was wrong in that 7.1 it was made on the incorrect finding that the cross-claim had been abandoned because the appellant did not believe it disclosed a cause of action and 7.2 it will stultify the proceedings."
The "costs forthwith" order was order 3 made on 1 December 2015. That order was the subject of an application for leave to appeal to this Court filed on 1 March 2016. However, on 7 April 2016, LBH's summons seeking leave to appeal was dismissed by consent.
True it is that the primary judge was asked to make orders varying those orders. It may be doubted whether, in light of the history, his Honour had power to do so, in the absence of any material change in circumstances, and LBH did not seek to establish that there was any such material change. It is not necessary to pause to explore that question.
LBH does not seek to maintain that the underlying costs order was inappropriate. Instead, it seeks leave to appeal from a decision not to grant a stay of execution of that costs order. And it does so in circumstances where it has already consented to a dismissal of its application for leave to appeal from the same order to this Court. It is not necessary to determine whether this aspect of LBH's application is an abuse of process. It is certainly not one that warrants a grant of leave.

Proposed ground 5

Proposed ground 5 was articulated more elaborately than the other grounds: "His Honour's order for security for costs was wrong in that: 5.1 Mr Koulis' credit was not put in issue and his Honour ought to have accepted that his evidence discharged any onus upon the Appellant to prove its impecuniosity or inability to fund the litigation; 5.2 his Honour failed to give adequate reasons for rejecting the evidence referred to in 5.1; 5.3 insofar as the Appellant sought to remedy any perceived lacuna in the evidence by further evidence, his Honour, in the interests of doing substantial justice between the parties, ought to have admitted such further evidence; 5.4 insofar as his Honour did consider that evidence at [50] to [53] in the 2017 judgment but rejected it upon the basis that it would not have altered his decision at [54], his Honour did so without ascribing any reasons; 5.5 his Honour's finding at [39] of the 2017 judgment that even before the share issue the Appellant was impecunious and would thereby not have been able to meet a costs order even at that time was wrong. His Honour ought to have found that, before the share issue, although it had little liquidity the Appellant held valuable assets and demonstrably was able to raise at least $1,000,000.00 on the basis of those assets; 5.6 his Honour failed to afford neutrality to the strength of the Appellant's case in circumstances where no Defence had been filed and where he anticipated what the Defence may be; 5.7 his Honour wrongly found that material facts had not been pleaded; 5.8 His Honour failed to properly take into account that the insolvency of the Appellant was caused by the deliberate misconduct of the Respondents; and 5.9 His Honour erred in failing to give sufficient weight to the Appellant's evidence as to: 5.9.1 the value of the Appellant's assets; and 5.9.2 the improper purpose of the Respondents."
In his Honour's 1 December 2015 judgment, the primary judge identified the three sources of power for an order for the security of the respondents' costs (UCPR r 42.21, Corporations Act s 1335 and the Court's inherent jurisdiction: at [97]-[100]), noted that it was sufficient to consider UCPR r 42.21 (at [101]), and observed that LBH did not contest that there was reason to believe that it would be unable to pay the respondents' costs or that, as a consequence, the onus was borne by it to establish a reason why security should not be granted (at [102]-[103]).
For present purposes, three aspects of his Honour's reasons must be mentioned. They appear to have been the three most important considerations relied upon by the primary judge.

Were the prospects of success relevant?

First, his Honour rejected a submission that LBH had a strong cause of action with good prospects of success (relying in part upon the deficiencies in the cross-claim, which indeed had been abandoned by LBH in the manner earlier summarised). However, his Honour also accepted the respondents' submission as follows at [109]: "In any event, I accept the submission made on behalf of the former directors that it is not the correct approach for the court to decline to make an order for the provision of security for costs because it takes the view that the case propounded is bona fides and has reasonable prospects of success. The merits of the claim are a neutral factor and, in the cases where a properly pleaded claim has been filed, the court should assume that the claim is bona fide and arguable and should not embark on a more detailed consideration of the merits: Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 764 at [37]-[38]; and Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276 at [83]."
His Honour returned to this point in his 31 March 2017 judgment at [60]ff, concluding at [64] that: "I must therefore be guided by the direction from the Court of Appeal that, if the claimant's case is bona fide and raises real issues to be tried, then unless it is obviously hopeless, the 'strength' of the case is a neutral factor in the exercise of the discretion."
The judgment of 31 March 2017 returned at [180]-[187] to the merits of LBH's case. The primary judge confirmed that it was not necessary to go further than to say that "the strength of LBH's case is no better than a neutral factor, as I would order LBH to provide security for costs in any event": at [182]. However, his Honour then turned, by reference to what had been said by McClellan CJ at CL in Jazabas to "the question as to what is meant by [the] requirement" that the case "raises real issues to be tried". His Honour regarded the manner in which a case had been pleaded as important, and expressed criticisms of the third cross-claim at [184]-[185]. At [186] his Honour observed that the discretion whether or not to make an order for the provision of security for costs is unfettered and to be exercised in accordance with what the circumstances of the particular case required: at [186], but then concluded at [187]: "In my view, were it necessary to do so, it would have been legitimate for the court to take into account, as one of the factors tending to justify the making of an order for security for costs, that the manner in which the third amended cross claim has been pleaded creates a substantial doubt about the reality of the issues to be tried, or at least a substantial proportion of them. That doubt gives rise to an enhanced risk of waste and delay in the preparation of the case and its hearing. It also gives rise to a risk that the cross defendants will incur costs where those costs will not only not be recovered if the cross claim fails, but will be wasted because of the underlying unreality of the claim."

Was the impecuniosity caused by the respondents?

Secondly, the primary judge rejected LBH's submission that its impecuniosity was attributable to the respondents' conduct: at [112]-[119] of the 2015 judgment. LBH had relied on a valuation of its assets of $4,181,237 in an information memorandum directed to "sophisticated investors" for the purpose of raising capital. The primary judge rejected this at [119]: "On balance, LBH's financial position was such that it would have been unable to pay the former directors' legal costs irrespective of any conduct of the former directors. It is highly doubtful that, if the former directors' conduct had not led to the sale of LBH's intellectual property, LBH could have raised the funds necessary to pay the former directors' costs by borrowing against the security of the intellectual property. It is one thing for the directors of LBH to attribute a directors' valuation to the intellectual property for the purpose of raising speculative investment capital; it is entirely another to say that LBH could have borrowed money on the security of the intellectual property solely for the purpose of paying the former directors' legal costs."

Would the litigation be stultified?

Thirdly, the primary judge rejected LBH's submission that the order for security would stultify the litigation. That in turn led the primary to judge to make certain findings of fact relating to the ability of Mr Koulis to obtain funds. During the hearing, Mr Koulis was cross-examined relatively extensively on this issue. Paragraphs [122] and [123] of the 1 December 2015 judgment are as follows: "Mr Koulis was cross-examined on the issue of whether there are parties who stand to gain from LBH's success in these proceedings, who may be in a position to assist it to meet any costs order made against it in favour of the former directors. Mr Koulis did not adduce any adequate evidence of his own asset position, including in relation to his current business called "Innovation Mentors". Mr Koulis did not provide any evidence of his capacity to obtain financial assistance from his family, who have provided some funding to LBH from time to time. That financial assistance was recorded in LBH's accounts as a debt from LBH to Pier Blue. That debt was repaid in full out of the deed fund. The evidence discloses that Mr Koulis may be a beneficiary of the Koulis Family Trust, but no evidence was given concerning the financial position of that trust. Mr Koulis was questioned about the involvement of a company called Solitaire Capital in LBH's affairs. The principal of Solitaire Capital is a Mr Cusack, who was one of the three directors of LBH at the time of the notice of motion for leave to file the draft further amended statement of claim. Solitaire Capital is apparently a moneylending business. It holds 615,400 shares in LBH. Solitaire Capital had previously lent money to LBH, and Mr Koulis said in cross-examination that he owes about $100,000 to that company. If the relief sought by LBH in these proceedings that would involve the cancellation of shares issued to the former directors is granted, then Solitaire Capital's shareholding in LBH would increase from 3.5% to about 5.3%."
At [125], the primary judge recorded that it was likely that the ability of Mr Koulis and Pier Blue to raise funds was limited, and that "it may also be unlikely" that Solitaire Capital would advance substantial funds to pay legal costs, although "on the present state of the evidence, these issues largely lay in the realm of speculation". His Honour concluded at [126] that: "In a case such as the present, in my view, it is incumbent on a plaintiff who seeks to avoid the imposition of an order for the provision of security for costs on the ground that the making of such an order will stultify the proceedings to fulfil the requirement that it identify the parties who might gain from the success of the proceedings, and provide to the court in a candid way adequate evidence to enable the court to evaluate the capacity of those parties to fund the costs of the proceedings, including any adverse costs order made in favour of the defendant. I am not satisfied that LBH has adequately complied with this obligation in the present case."
In the 31 March 2017 judgment, his Honour rejected an attempt to adduce further evidence from Mr Koulis' father and from Mr Cusack, the principal of Solitaire Capital: at [44]-[55]. His Honour took the view that having already decided in principle, following four days of hearing, that security for costs should be ordered, with the need for a further hearing on quantum arising by reason of LBH's decision to abandon its second cross-claim, it was not appropriate to give LBH a further opportunity to "remedy the consequences of its own forensic judgments": see at [43] and [48]. His Honour also observed that in any event the evidence would not have altered his in principle determination: at [49]-[54].
His Honour also did not accept that LBH had been worth in excess of $4 million before the capital raising, by reference to implied values derived from share issues.
Finally, in this Court LBH sought to read a further affidavit of Mr Koulis sworn 14 November 2017. This had been prepared in response to an affidavit of fresh evidence served by the respondents, which was stated in their written submissions as intended to be read. However, at the hearing, the respondents advised that they did not seek to do so. Both affidavits were directed to the fact of payment of part of the "costs forthwith order" by Mr Koulis, when faced with the threat of a sequestration order. Mr Koulis' affidavit gave further evidence of the limited funds available to him.

Consideration

First, there was no error in the primary judge rejecting the submission that LBH's impecuniosity was caused by the conduct complained of. LBH had been unable to raise funds to commercialise Mr Koulis' invention for many years. Prior to the September 2013 capital raising, LBH had very little by way of liquid assets. The direct cause of LBH's impecuniosity a few months later, leading to the appointment of administrators, was Mr Koulis' success before Brereton J in late 2013 and early 2014, requiring LBH to repay subscribers who had paid some $1 million for shares.
True it is that LBH complains of the fact that, after Mr Koulis lost control of LBH, its board spent some hundreds of thousands of dollars of the funds raised, and at a time when it was quite clear that there was a dispute about the validity of the capital raising. But there is no evidence to suggest that the funds were spent on improper purposes. Indeed, it would be natural for any start-up company which had raised capital in order to commercialise its business to spend the funds raised, and rapidly, in the hope that it might generate profits as soon as possible (and, possibly, before some competitor exploited the opportunity identified by the start-up company). At [88] of the 31 March 2017 judgment, the primary judge recorded that LBH's counsel had stated that LBH was unable to say how the funds had been spent. "HIS HONOUR: Did you just tell me that the cross-claimant doesn't know where the $750,000 went? MENZIES: No. Can't find out. HIS HONOUR: So the cross-claimant doesn't know whether it has a good case or a bad case. MENZIES: Well, to that extent, yes. We know it was spent. We know that at the time of the company going into administration, the only creditors were the, I think, legal costs, and other minor creditors ..."
Indeed, in this Court Mr Menzies at one stage acknowledged that there was evidence that the money was spent on promoting the business of the company (Transcript, 20 November 2017, p 5.30-34).
Secondly, there is no error in the decision not to permit LBH to obtain an advantage from serving additional evidence, after there had been four days of hearing, and when the additional hearing days were brought about because of LBH's own decision to rely on a further amended cross-claim. His Honour's course was in no way unfair to LBH, and wholly consistent with the obligation to which the Court was subject imposed by s 56(2) of the Civil Procedure Act 2005 (NSW).
Thirdly, it is one thing for LBH (or for that matter Cody Live) to raise capital from sophisticated investors based on the potential exploitation of a business opportunity. It is another thing entirely for LBH to raise funds to meet a security for costs order. It is one thing for an investor to make a (perhaps speculative) investment in a start-up company; it is another for an investor to provide funds with the certain knowledge that they will be used to provide security for an adverse costs order the company might face in pending litigation. An implied value determined by reference to the subscriptions made by sophisticated investors pursuant to the information memorandum says nothing of the ability of the company to meet an adverse costs order. This point was made clearly and correctly by the primary judgment at [119] of his 1 December 2015 judgment which is reproduced above.
That is sufficient to dispose of proposed subgrounds 5.3, 5.5, 5.8 and 5.9.
Proposed ground 5.4 disappears, because no error is shown in the primary basis for refusing leave to adduce further evidence at the fifth day of the hearing.
Proposed subground 5.6 is wrong. Favourably to LBH, the primary judge proceeded on the basis that he was required to treat as a neutral factor the strength of the case, although his Honour then made, in comments which were expressly obiter, adverse statements about the adequacy of the pleading of the latest cross-claim. For the same reason, the complaint in proposed subground 5.7 is not one which in terms affected the orders which were made.
That said, there are difficulties with the findings made by his Honour in relation to Mr Koulis' means. It is true that Mr Koulis supplied a signally deficient affidavit as to his assets, liabilities and the sources of funds available to him. However, counsel for the respondents (who appeared before the primary judge as well as in this Court) took the course of asking a series of questions in a relatively long cross-examination, occupying (apparently) some thirty pages of transcript (not all of which were reproduced in the appeal books) which had the effect of supplementing the evidence before the Court.
For example, there was nothing in Mr Koulis' affidavit as to the value of the assets held in the Koulis Family Trust. That changed in light of the cross-examination, which his Honour permitted (apparently, with reluctance: "It came as a shock to me that anyone wanted to cross-examine on a motion such as this" (Transcript, 19 November 2014, p 80)). Mr Koulis' answers established that no assets were held on trust, if there was an asset register it was held by the accountants and the trustee did not keep accounts. It was not put that Mr Koulis' evidence in cross-examination on this topic was incorrect, let alone false, nor was further evidence adduced to contradict it. It was not correct, in light of the course taken by the cross-examiner, for the primary judge to state at [122] that "no evidence was given concerning the financial position of the trust", unless that statement is read as a reference confined to the affidavit evidence.
Mr Koulis also was permitted to give evidence in cross-examination that Solitaire was already owed $101,000, that it was a "venture capitalist or money lender" and that "I know he wouldn't lend - he wouldn't lend the company - he normally would lend against assets of the company. He doesn't have any assets to lend against".
The respondents' submission in this Court was that the errors were not material to the assessment of whether the litigation would be stultified. It is to be recalled that his Honour determined the question whether there should be an order for security for costs in his judgment of 1 December 2015, on the basis that LBH had failed adequately to have complied with its obligation, in a case such as the present, to identify the parties who might gain from the success of the proceedings and to provide to the court in a candid way evidence to enable the Court to evaluate their capacity to fund the proceedings. That obligation arises where (as here) the claimant is impecunious and thereby bears the onus to explain why security for costs should not be ordered and where (as here) the claimant seeks to discharge that onus by contending that an order for security will stultify the proceedings.
The primary judge's statement of principle was not challenged by any of the submissions advanced by LBH. It may be doubted that the errors as to aspects of the matters disclosed by LBH altered the ultimate conclusion that such disclosure as there had been was inadequate.
Candour in a case such as this involves the impecunious claimant which seeks to avoid an order for security for costs presenting evidence of those persons who stand to benefit from the litigation and their own capacity to fund it including by meeting any adverse costs orders. The obligation is not satisfied by providing a limited account in an affidavit, and leaving it to the cross-examiner to elicit details (if indeed cross-examination is sought and is permitted). One work states that if it is said that an order will stultify a claim, "the precise financial circumstances of the litigant and of those behind it will need to be set out": J Delany, Security for Costs (Law Book Company Ltd 1989, p 118). Although the primary judge erred in statements as to the absence of evidence, there was no error in the conclusion insofar as it was based upon a finding that LBH had failed candidly to identify those standing behind it and their assets.
That is sufficient to address this proposed ground of appeal. However, there is a further reason, independently of the above, telling against the grant of leave. The respondents also submitted that the mere fact that the litigation would be, or would probably be, stultified, was not in itself a reason to decline to order security for costs. In that they are correct.
"[W]hether an order for security for costs would stifle the proceedings" is but one of the factors to which a Court exercising the discretion under UCPR r 42.21 may have regard, although it is a powerful factor. There are cases in which security is ordered even though the consequence is, or may be, to stultify the claim. In Pacific Acceptance Corporation Ltd v Forsyth [1967] 2 NSWR 402, by a reserved judgment delivered after a two day hearing, Moffitt J (as the President then was) rejected the submission (which had been advanced by M H Byers QC leading D Horton) that security ought not be ordered which "because of the impoverishment of the company, might frustrate its rights to litigate its claim": at 407. In Yandil Holdings Pty Ltd v Insurance Company of North America (1985) 3 ACLC 542, Clarke J stated at 545: "The Court is vested with an unfettered discretion as to whether an order is made and, if so, upon what terms. The fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the Court's discretion in the plaintiff's favour."
In Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497, French J cited that passage and concluded that "the probability or certainty that an order for security for costs will frustrate the plaintiff's claim will not automatically lead to such order being withheld". In Li v State of New South Wales [2013] NSWCA 165, Ward JA, with the agreement of Macfarlan and Gleeson JJA, also cited that passage from Clarke J's judgment and noted that although stultification was a powerful factor in determining whether an order for security was appropriate, impecuniosity was not an absolute barrier, even in the case of a natural person: at [46]-[47]. Clarke J's statement was also applied by Hoeben JA in Starr-Diamond v Diamond [2013] NSWCA 7 at [32], an appeal in which security was ordered in circumstances where his Honour observed that the order "will almost certainly prevent [the appellant] from continuing with her appeal": at [31]. In turn Hoeben JA's decision was endorsed in Partington v Pacific Link Housing Ltd [2013] NSWCA 259 at [72] (Emmett and Leeming JJA and Sackville AJA).
Let it be assumed, favourably to LBH, that the primary judge erred in his determination of stultification, and should have found that the order would, or would in all probability stultify the proceedings. It does not follow that this Court should grant leave.
An impecunious company has brought an elaborate cross-claim against its former directors, who placed the company in the hands of administrators, and who purchased the company's assets following a public bidding process. The company's allegations include serious claims of dishonesty. It is not alleged with any particularity that the company's insolvency was caused by the former directors spending company funds for any improper purpose, and the immediate cause of the insolvency was Mr Koulis' successful objection to the validity of a capital raising he had formerly supported. It is common ground that a trial will take some days. In support of the claim are the facts that the present respondents failed to obtain declaratory relief that the capital raising was valid, and that it has been held in a related but separate proceeding (to which the present respondents were not parties), that the capital raising was unauthorised. Those facts alone do not entail, as is alleged in paragraph 104 of the third cross-claim, that the respondents knew or ought to have known that the share issue was invalid, still less that "they created the debt dishonestly" or that "their failure to prevent insolvent trading was dishonest". As noted above, it is not alleged that the respondents mis-spent money raised by the issuing of shares, save in the sense that it is said that no funds should have been spent at all.
It may be accepted that the likely stultification of the litigation is a powerful reason not to order security. But this is an unusual case. This is a clear case where the former directors, with whom Mr Koulis has for some years now been disaffected, should not have to defend the cross-claim, containing as it does such serious allegations as to their honesty, without any real prospect of recovering a portion of the costs they will be forced to incur in the event that the cross-claim fails. The failure on the part of those acting for LBH properly to plead a case over the last three years coupled with the evident difficulties in establishing a cause of action out of the underlying facts relating to the validity of the issue, the appointment of administrators and the purchase of the company's assets from them, confirms the appropriateness of an order for security.

The relevance of an assessment of the strength of a claimant's case

There is one further matter to be noted. The primary judge seemingly regarded himself as bound by the proposition said to be derived from Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 764 and Jazabas v Haddad [2007] NSWCA 291 that where the claim was not frivolous and there appeared to be real issues to be tried, the "strength of the case is a neutral factor in the exercise of the discretion". It was with that in mind that at [183]-[185] his Honour sought to analyse "whether the claim raised real issues to be tried". Perhaps inconsistently with this, at [186], his Honour observed that whether or not the Court should make an order for the provision of security for costs was unfettered and to be exercised in accordance with the circumstances of the particular case. Then, at [187], his Honour expressed a view that the pleading, at least in large measure, did not give rise to real issues to be tried.
That constrained approach does not reflect the broad discretion conferred by the rules. UCPR r 42.21(1A)(a) entitles the court in terms to have regard to "the prospects of success or merits of the proceedings". It is true that in many cases it will not be possible to form a meaningful view as to the strength or weakness of a plaintiff's claim for the purposes of an application for security for costs. Such applications are ordinarily brought before pleadings are closed and evidence filed. But that does not mean that, for example, there may never be a case in which a court can be satisfied that an impecunious corporate plaintiff has prima facie a very strong case, such as to inform the exercise of discretion on an application for security for costs. The starting point in the exercise of discretion is the legislation conferring the power, not some gloss upon it.
The authorities on which the primary judge relied for the narrower proposition that the strength of a claim was neutral so long as it was advanced bona fide and gave rise to real issues should not be understood as denying an ability on the part of the Court, in an appropriate case, of relying on its assessment of the strength or weakness of the case, in accordance with UCPR r 42.21(1A)(a). In Fiduciary v Morningstar Research [2004] NSWSC 664 at [37] Austin J was speaking of the particular facts of the claim before him, and accepted what appears to have been an uncontroversial submission in the particular application before him that the merits of the underlying claims should be regarded as neutral. That is particularly plain from the closing sentence in [39]. ("In the present case, the merits of the Rich interests' case against the Morningstar interests are a neutral factor".)
Likewise, McClellan CJ at CL at [84] of Jazabas should not be understood as articulating a generally applicable proposition. It is revealing in that respect that White J's judgment in Litmus Australia Pty Ltd (In Liq) v Canty [2007] NSWSC 670 at [28] was quoted, stating that "it is a rare case in which a court is able to form any view as to the strengths of the respective parties' cases on an application for security for costs, so as to influence its discretion in ordering security for costs." There is no reason to think that McClellan CJ at CL was disagreeing with what White J had said, and White J's judgment is inconsistent with the rule of general application applied by the primary judge.
In any event, the entitlement to have regard to the strength of a party's case found in UCPR r 42.21(1A)(a) post-dates all of those cases. It was inserted by the Uniform Civil Procedure Rules (Amendment No 61) 2013, Sch 1, item 4 with effect from August 2013. It seems that when the respondents made the submission that the strength of the case was neutral, his Honour was not directed to the fact that the authorities on which they relied pre-dated the insertion of the new rule.
Ordinarily, it may be very difficult to express a meaningful view as to the strength of a case. However, this is not an ordinary case. The history of this matter is quite unsatisfactory. LBH has continued to propound claims, including claims of dishonesty, notwithstanding criticism from the respondents and from the court, in ways that are deficient. In his 31 March 2017 judgment, the primary judge concluded at [91]: "The result, for the purposes of the present application, is that the third amended cross claim in reality only implies that the cross defendants who were its directors breached their duties to the company, and thereby caused its impecuniosity. The cross claim contains express allegations that they did so, but the want of particularity in support of that claim is not merely a result of inadequate pleading. LBH apparently does not know the facts that would enable it to show that it had a real claim that its former directors breached their duty to the company, and also would enable it to particularise its claim in a way that would give it apparent substance."
The Court specifically directed Mr Menzies' attention to this paragraph, and he made no complaint as to the accuracy of his Honour's description of the pleading, although it was said that the defects were a consequence of an inability to obtain documents: transcript, 20 November 2017, p 15.14-32.
The doubts expressed by the primary judge at [187] of his Honour's 31 March 2017 judgment appear to be well-founded. In light of the approach taken by his Honour to Jazabas (which was a submission put to him by the respondents), his Honour appears to have been unduly constrained in the exercise of his discretion, although in a way which was favourable to LBH.
For those reasons, even if it be accepted there was error in his Honour's assessment of stultification, if there were a grant of leave and the appeal allowed, there should still be an order for security. No issue was raised as to the quantum of security (and indeed it appears from his Honour's reasons that LBH's own solicitor had regarded $200,000 as an appropriate order for security, if security were to be ordered). It follows that LBH has failed to make out a case of injustice sufficient to warrant the grant of leave.
It remains necessary to deal with the further application in this Court to adduce fresh evidence. The fact that Mr Koulis has, in the course of the applications in this proceeding, incurred liabilities in the form of costs orders which he has (under threat of bankruptcy) discharged, is not relevant to the grant of leave. To the extent that the most recent affidavit contains better evidence of his impecuniosity, the same reasons which prompted the primary judge to refuse leave to rely on the late evidence served at first instance apply to the application in this Court. It was accepted, with respect properly, that to that extent it was evidence which was available at the hearing, rather than fresh evidence (Transcript, 20 November 2017, p 22.17).

Orders

Only one aspect of the judgment below discloses any question of principle. That question - whether the strength of the plaintiff's case should be regarded as a neutral factor (so long as it was bona fide made and gave rise to real issues) - was resolved in a way that was favourable to LBH.
At no stage has this application raised any question of public importance.
Most of the proposed grounds of appeal are close to hopeless. It is true that LBH can point to errors of fact in the findings as to whether an order for security for costs would stultify the litigation, and taking the most favourable view to LBH, at least one of those errors is made out. However, it remains for LBH to demonstrate a reasonably clear case of injustice. This it has failed to do. Nothing in the hundreds of paragraphs of reasons of the primary judge, or in the three volumes of materials relied on in this Court, suggests anything other than this is a plain case for the ordering of security for costs as the price of an impecunious corporate claimant bringing serious allegations against its former directors. The failure on the part of LBH to appreciate this in 2014 has led to a very large, and highly regrettable, consumption of private and public resources.
For those reasons, leave should be refused, with costs. The respondents sought an order that those costs should be enforceable forthwith. No such order is required; the proceeding in this Court is at an end.
The Court makes the following orders:
Application to read the further affidavit of Mr Koulis sworn 14 November 2017 refused.
Summons seeking leave to appeal filed 30 June 2017 dismissed, with costs.

Amendments 29 November 2017 - [98] and [99] - "r 42.21(1A)(2)" corrected to "42.21(1A)(a)"

[100] - first sentence - "[184]" corrected to "[84]"

[100] - quote in second sentence - "party's" corrected to "parties'" 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: 29 November 2017

At a glance

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