The issues which were resolved by the primary judge were whether the shareholders' agreement was a "void and ineffective contract, in consequence of the absence of consideration and/or uncertainty," that being the form of the surviving agreed issue in the document entered into on around 13 March 2018. The argument before the primary judge took around an hour, with the plaintiffs not being called upon. The other matter of present relevance which happened on around 13 March 2018, following the mediation, was that, on the evidence before me, in the form of para 19 of Mr Xu's affidavit, on which Shield relies, LSKF paid the sum of $530,500 to Shield, by way of repayment of Litestone's debt to Shield.
I return to the terms of the agreement reached at the mediation. The agreement made express provision for what was to occur in the events which have occurred to date (namely, Litestone Holdings not being wound up, but LSKF's submissions about absence of consideration and uncertainty failing.) Speaking generally, the parties agreed that in those circumstances, a valuer be appointed to determine the fair market value of the shares in Litestone Holdings, following which (a) LSKF had an option to purchase Shield's shareholding at (50% of) that valuation; (b) if LSKF did not exercise the option, then Shield have the option to acquire LSKF's shares at the same price, and (c) if neither shareholders acquired the other's shares, then the parties, "Irrevocably agree that [Lifestone Holdings] should be wound up pursuant to s 461(k) of the Corporations Act." Other provisions of the agreement addressed transfers of money in the working out of the various permutations. Presently relevant is cl 8, which provides:
"The parties agree that if there is a share acquisition, the sum of $250,000 shall be retained by the vendor's solicitors, pending costs arguments and costs assessment."
In support of its application for security of costs, Shield has tendered various searches establishing that LSKF holds no assets in its own right. The shareholders' agreement and an ASIC search both suggest that the 50% shareholding in Litestone Holdings, the subject of this litigation, is an asset held on trust. In fact, the shareholders' agreement provides, on its covering page identifying parties, that LSKF Holdings Pty Ltd is the trustee of two trusts: the LSKF family trust, and LSKF No 2 family trust. The evidence does not suggest how the shares in Litestone are held, whether they are held as assets of either or both of those family trusts. LSKF has tendered no evidence of assets held in its own right, or on trust, or otherwise going to its capacity to pay an adverse costs order.
The solicitor's affidavit of Mr Xu estimates that the costs of the first and third respondents, collectively, will be either $60,000 (the amount he states in para 39) or "No less than $74,100" (the amount he states in para 27), both amounts exclusive of GST. Mr Xu identifies, by reference to hourly rates and briefing junior and senior counsel at hourly and daily rates - none of which strikes me as unreasonable - and the amount of hours required in preparation (to which I shall refer) as to how he reaches those totals. Broadly speaking, (a) this application for security for costs is itself said to cost some $10,000, (b) it is said that $6,500 will be spent reviewing a white folder, appeal books, list of authorities, and filing a supplementary white folder; (c) written submissions will occupy two days of junior's counsel's time, one and a half days of senior counsel's time, and six hours of solicitor's time, making some $18,000; and (d) there will be some $36,000 for the hearing, and preparation for hearing.
Mr Xu concludes his affidavit with an attempt to reconcile para 39 and the last paragraph (which is actually numbered 28) by saying that a 20% reduction of $74,100, which is his estimate, will result in security of approximately $60,000.
[2]
Consideration
The applicable principles are not in dispute. The applicants move under s 1335 of the Corporations Act, which relevantly provides:
"Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given."
First, the section involves a precondition, namely, it appearing by credible testimony of a risk of a corporate plaintiff being unable to meet an adverse costs order, and a discretion if that precondition be satisfied to order security to be provided.
Secondly, it is now clear that notwithstanding the reference to plaintiff and defendant in the section, s 1335 applies to proceedings in this Court: Pioneer Park Pty Ltd (In Liq) v Australia and New Zealand Banking Group Limited [2007] NSWCA 344 at [20]. The consequence is that, unlike the powers governing the provision of security under the rules, the power sought to be invoked today is not one which is constrained by the requirement for "special circumstances": see Pioneer Park at [22].
Thirdly, where the moving party does not suggest that the appeal is manifestly hopeless, and Ms Young who appears for the applicants has made it plain that that is not her submission, a position which is consistent with a notice of contention filed last week, it is not appropriate to embark on any consideration of the likely strength of the grounds of appeal: see for example Swift v McLeary [2013] NSWCA 173 at [55]; Reddy v C&P Syndicate Pty Ltd [2013] NSWCA 425 at [34].
Fourthly, Ms Young relies, in relation to the precondition to the power, on a line of authority commencing with decisions of the Federal Court and the Supreme Court of Victoria, but applied in this Court in Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 and Funds First Pty Ltd v Owners Corporation Strata Plan 66609 [2008] NSWSC 428. In the latter decision, Brereton J at [5] stated:
"Where a plaintiff is a trustee and its only asset is its right of indemnity as trustee against the trust assets, an applicant for security will be taken to have satisfied the onus of establishing that there is reason to believe that the plaintiff will be unable to pay a costs order if so ordered, unless the plaintiff can establish that it will have recourse to property or assets held by it on trust."
Mr Bedrossian, who appeared for the appellant/respondent to the application for security for costs LSKF, accepted the applicability of that proposition, and, as a consequence, that the precondition to the power under s 1335 was made out. There was no argument, accordingly, on how that proposition fell to be worked out in any practical case. In particular, no submissions were addressed to the sort of evidence which would be sufficient to be adduced on behalf of a trustee/appellant to sustain the inference that it could avail itself of the ordinary right of recourse to trust assets in discharge of liabilities incurred by it following an adverse costs order. The gravamen of Ms Young's submissions seemed to be directed not so much as to whether any such liability would have been properly incurred as to whether there was, in the case of those particular trusts, such a right in the first place. But most trust deeds contain such a right, which may also be found in s 59(4) of the Trustee Act 1925 (NSW). However, in light of the concession , I put that issue entirely to one side.
I turn to the question of discretion. That has essentially two components: the binary question whether any security ought be ordered, and the question as to the appropriate quantum, in the event that security be ordered. In most cases it is convenient to address those two issues in that order. This is an unusual case, for reasons that will shortly become plain.
The evidence adduced by Mr Bedrossian in opposition to the application was confined to the question of quantum. His solicitor's affidavit was to the effect that the estimate of aggregate costs, of some $74,000 plus GST, was excessive. Mr Glinatsis, LSKF's solicitor, was of the view that this proceeding did not require both junior and senior counsel, that the appeal was based on a narrow and discrete point, as to the proper construction of the shareholders agreement, that many of Mr Xu's estimates were too high, and in particular ought not involve senior counsel at all, or alternatively to the extent anticipated by Mr Xu. There are other matters mentioned by him, but his conclusion was an estimate of about $23,000 plus GST, and, in any event, not more than $30,000 plus GST.
Broadly speaking, I accept the force of the points made by Mr Glinatsis. Mr Xu provided no affidavit in response, and there was no application to cross-examine either of the solicitors on their divergent opinions as to likely costs.
Ordinarily, one aspect of the maxim that applications for security for costs should be made promptly is that security will not be ordered in respect of costs that have already been incurred: see for example Sagacious Procurement Pty Ltd v Symbion Health Ltd [2007] NSWCA 205 at [51]-[55]. As of today, what remains to be done in the preparation of this matter for hearing is (a) supplementing the application book with the pleadings, (b) replacing the respondents' submissions supplied in answer to the application for leave with fuller submissions on an appeal, (c) filing and serving the appellant's submissions in reply and in answer to the notice of contention, and (d) hearing the appeal.
For reasons that need not be gone into, it appears the respondents have taken the course, notwithstanding the ordering of a concurrent hearing, of supplying not one but two sets of written submissions. It is common ground between the parties that the appeal can be heard and determined in no more than half a day.
Accepting, as I do, the appropriateness of Shield and Mr Ye's retaining senior counsel who will be involved in the preparation of the final submissions, but noting that the same counsel were retained to appear at the final hearing of this litigation, which was as recent as mid-March 2018 - some eight weeks ago - and noting that the arguments are pure questions of law, based upon the single document which was tendered at first instance, namely, the shareholders' agreement, I consider that the estimate provided by Mr Glinatsis, in the order of $25,000, is a realistic estimate of what the applicant's future costs of this appeal should be.
The reason that this is an unusual case where it is desirable, first, to identify the order of magnitude of the quantum of any security that might be ordered, flows from the considerations in the mechanism agreed to by the parties following the mediation on 13 March 2018:
1. If the appeal is allowed, the question of security goes away.
2. If the appeal is dismissed, then the mechanism for valuation with options on both parties to acquire the other's parcel of shares will be activated.
3. First, LSKF has the option of acquiring Shield Holdings' parcel of shares for half of the valuation. If LSKF exercises that right, then it is difficult to see that it will be impecunious, in the sense of being unable to pay the adverse costs order.
4. If LSKF does not exercise the option, then Shield has the right to acquire LSKF shares. Ms Young accepts, very properly, that Shield would have a right of set-off for the costs order in its favour in this Court. It follows that Shield already enjoys, through the mechanism of the right to reduce the price payable in the exercise of its option, a measure of security for its costs.
That is not the end of the matter. I am conscious of the possibility that neither party seeks to acquire each other's share, and the company be wound up. I am also conscious of the fact, as Ms Young points out, that it may be that the valuation of the shares is so small that the rights pursuant to the exercise of the options do not completely or adequately provide security to Shield and Mr Ye. However, against this, as Mr Bedrossian submitted, there is cl 8. Clause 8 very much suggests that the likely value of Litestone will exceed $250,000. Of course, there is no evidence before me whatsoever as to its likely value, but I accept Mr Bedrossian's submission that I can have regard to the agreement in cl 8 by the parties some eight weeks ago as evidence that it is unlikely to be trivial.
There is another matter supporting the same inference. That is the fact that at the same time, or immediately after on 13 March 2018, LSKF paid $530,500 to Shield, by way of repayment of Litestone's debt to Shield. Two things seem to me to flow from that payment. The first is that LSKF, some eight weeks ago, was of the view that the value of the shares in Litestone was not trivial; why else pay more than half a million dollars to its co-shareholder in reduction of debt in order to avoid a winding-up application? Secondly, it is plain that in recent times LSKF, although a trustee, has been able to obtain funds of $530,500, which is an order of magnitude more than the amount of security to which, on any view, the applicants are entitled.
There was a minor complaint as to delay. The consequence of such delay as there has been in bringing this application - which, I emphasise, is small, in a matter of a few weeks - has had the result that, as already indicated, a deal of such limited work as is this required in this very small appeal, has in part already been undertaken. I think that I am obliged to have regard to the issue of delay in the exercise of discretion, but in the circumstances, it is a very minor consideration, in light of the matters to which I have already referred.
[3]
Conclusion and orders
In summary, accepting in light of the agreed positions of the parties that the discretion in s 1335 is engaged, I do not consider that this is a case where security should be ordered. That comes about for two principal reasons. The first is the practicalities and the working out - in the unusual circumstances of this case - of the valuation and series of options that will be triggered in the event that any favourable costs are ordered following the dismissal of the appeal. The second is that the 13 March agreement, and the actual payments made by LSKF immediately after execution of that agreement, suggest that the solvency risk in enforcing a favourable order as to costs is considerably less than would otherwise be the case.
As I have said, I place little regard upon delay, but I do also rely upon the fact that this is, in substance, as small an appeal as may be in this Court: two pure questions of law arising out of a written agreement, being brought from a judgment at first instance which occupies eight pages, including a cover sheet. For those reasons, I will dismiss the notice of motion filed 4 May 2018.
[Discussion about the form of orders, expedition, and directions readying the appeal for hearing.]
[4]
Orders
I make the following orders:
1. Dismiss the notice of motion filed 4 May 2018.
2. The applicants on the motion, Shield Lifestone Holdings Pty Ltd and Mr Feng Ye, pay LSKF Holdings Pty Ltd's costs of the notice of motion.
3. Dismiss the notice of motion filed 14 May 2018, with no order as to costs of that motion.
4. Respondents to file and serve any further submissions by 22 May 2018.
5. Applicants to file and serve any submissions in reply and in response to the notice of contention by 29 May 2018.
6. Set down the matter for concurrent hearing at 10.15 on 31 May 2018.
[5]
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: 21 May 2018
Jurisbridge Legal (First and Third Respondents/ First and Second Applicants)
File Number(s): 2018/00117785
Decision under appeal Court or tribunal: Supreme Court of New South Wales
Jurisdiction: Equity Division
Citation: [2018] NSWSC 335
Date of Decision: 20 March 2018
Before: Pembroke J
File Number(s): 2017/382211