Nature's Care Holdings Pty Ltd v Chen

Supreme Court of NSW|2024-04-03|Before: Stevenson J, Rees J

Solicitors: Clifford Chance (First, Fourth, Fifth and Sixth Plaintiffs) Norton Rose Fulbright (First and Second Defendants) Lander & Rogers (Third Defendant) Hamilton Locke (Respondents) File Number(s): 2024/23372

JUDGMENT

The background to this matter is set out in my judgments of 15 February 2024, [1] and of 13 March 2024. [2] I will use the same abbreviations here.
I dismissed, with costs, the plaintiffs' application to continue the interlocutory injunction granted by Rees J on 23 January 2024 restraining the defendants from enforcing any rights under the Syndicated Facility Agreement. I ordered the plaintiffs to pay the defendants' costs of the application.
The defendants have now filed amended notices of motion seeking orders under s 98(1) of the Civil Procedure Act 2005 (NSW) that the Majority Shareholders of the plaintiffs, JIC Nature Capital Pte Ltd and Tamar Alliance Health Ltd, be jointly and severally liable with the plaintiffs forthwith to pay those costs.

The plaintiffs' financial position

Turning to the matter at [9(e)(i)], the evidence before the Court suggests that the plaintiffs' financial position is not strong.
In the principal judgment I found: [17] "The Syndicated Facility Agreement matured on 8 August 2023 and, in default of their obligations under that facility, the plaintiffs have failed to repay their debts. The facility remains in default, with the plaintiffs owing some $138 million; now to ASIV. Default interest is continuing to accrue. The most recent consolidated group of accounts show that the group had a net current asset deficiency of approximately $123 million as at 31 December 2022. The financial accounts for the year ended 31 December 2023 are not available, but there is no evidence to suggest that the position has improved. The presentation given by FTI Consulting, the proposed receivers, to JIC and Tamar on 10 November 2023 predicted that $20 million in additional funding would be required upon their appointment. This was due in part to the perceived adverse impact that the termination of the employment of the Wu Parties' representatives would have on the business and this time was due to volatile trading additions. The presentation also spoke of the need for $3.9 million in borrowings 'to maintain the solvency' of the operating companies and 'to bring all overdue creditors within the payment terms'."
This led to my conclusion that the undertaking as to damages given by the plaintiffs was of doubtful value. [18]
Further, and relatedly, were the plaintiffs to themselves meet the order for costs that I have made, the Wu Parties would, in effect, bear 25% of that burden by reason of their shareholding in the plaintiffs, and ASIV's interest as secured creditor of the plaintiffs would be adversely affected.
Each of these factors favours the making of a third party costs order.

JIC's and Tamar's interest in and control over the litigation

Argument before me focused on the Wu Parties' and ASIV's submissions that JIC and Tamar had a vital interest in the litigation and caused the plaintiffs to commence the proceedings to prevent what I described in the principal judgment as the "Strategy" from being thwarted. I see this as the principal matter to be considered on this application.
The expression "Strategy" was coined by Mr Niu, a director of the plaintiffs appointed by JIC and Tamar. [19]
I made these findings about the Strategy in my principal judgment: [20] "Thus, the Strategy was that the Senior Lenders appoint receivers and managers to the plaintiffs, to enable a sale to take place without regard to the Wu Parties' rights under the Shareholders Agreement; and to dismiss Mr Wu as General Manager and Ms Chen as Chief Executive Officer, notwithstanding that Ms Chen had been appointed Chief Executive Officer by reason of the 15 September 2022 amendment to the Shareholders Agreement. As Mr Niu was to later observe, this would enable the Majority Shareholders 'to take over the company'. On the face of it, that appears to have been the precise object of the Strategy. It is clear from the evidence before me that an essential part of the Strategy was that it be kept secret from the Wu Parties. In cross-examination, Mr Niu agreed that he could not recall whether he told Ms Chen or Mr Wu about the Strategy. It is clear that he did not." (footnotes omitted.)
The plaintiffs commenced these proceedings as a result of a circular board resolution made on 19 January 2024. The board members representing JIC and Tamar voted in favour of the resolution. Mr Rabbitt, the independent board member, did not vote, nor did Mr Chen, the director then representing the Wu Parties. Thus, in effect, the proceedings were commenced at the instigation of JIC and Tamar as majority shareholders of the plaintiffs.
The proceedings were commenced immediately after 93% of the Senior Lenders had assigned to ASIV their entitlements under the Syndicated Facility Agreement, and after Clifford Chance, for the first time, had requested full details of the Wu Parties' proposed "Debt Acquisition". [21]
I found that the offer made by the Wu Parties to acquire the rights of the Senior Lenders under the Syndicated Facility Agreement: "… had the effect of thwarting the Strategy with the result that only one of its three elements was put into effect. That element was the removal of senior management of the plaintiffs; Ms Chen, Mr Wu as well as three senior managers. The second and third elements of the Strategy, the appointment of a receiver and the entry into a standstill agreement between the plaintiffs and the Senior Lenders could not be implemented, no doubt because the Senior Lenders were giving close attention to the obviously attractive offer from the Wu Parties to purchase their interest in the Senior Debt at par." [22]
Part of the relief sought by the plaintiffs in the proceedings was interlocutory relief preventing Ms Chen and Mr Wu from "[enforcing] any rights against the Nature's Care Group [they] may have as a Lender, as the Agent or the Security Agent under the [Syndicated Facility Agreement]". [23]
By their Commercial List Statement filed on 25 January 2024, the plaintiffs also asserted that "the rights against the plaintiffs acquired by ASIV under the [Syndicated Facility Agreement] and the Finance Documents are held on constructive trust for the plaintiffs". [24]
Mr Elliott SC, who appeared for JIC and Tamar on this application, submitted that, in substance, what divided the parties was the identity of the party entitled to appoint receivers to the plaintiffs; and that what the plaintiffs were seeking to vindicate in the proceedings was their ability to determine that matter for themselves.
I think this oversimplifies the position. Ultimately, what the plaintiffs seek is a finding that such rights as ASIV now has under the Syndicated Loan Facility are held by it on trust for the plaintiffs. No doubt the plaintiffs have, themselves, an interest in procuring that result. But such a result is also very much in the interests of JIC and Tamar as majority shareholders as, to adopt the language of Mr Williams SC and Mr Riordan, who appeared for ASIV, it would "keep alive their ability to implement the strategy" and would "prevent the 'strategy' from being thwarted".
Mr Elliott appeared to accept that proposition in this exchange: "That's why we say prima facie, on the face of it, the submission about the strategy being the purpose of the proceeding doesn't fly. There may well have been - or your Honour has found a strategy. There's nothing I can do about that now coming at the heel of the hunt. But it doesn't begin to follow that that strategy is the reason for the proceeding in that dynamic. Prima facie, of course it would be in the plaintiff company's interest to have as much control as it could over its own destiny. It would want to have the power and as much power as it could have to influence and control a sale of its own assets. HIS HONOUR: Without regard to the interests of the minority. ELLIOTT: That interest, that is the ability to sell above or below, everyone at this point is talking about there being a receiver. We're not talking about the possibility of the Wu parties selling their shares above a certain price. HIS HONOUR: Well, receiver appointed by the majority or receiver appointed, in effect, by the minority. ELLIOTT: Yes. And-- HIS HONOUR: Weren't the proceedings started to thwart the latter? ELLIOTT: Yes. Yes, the proceedings were started because the plaintiff company had-- HIS HONOUR: There we go. ELLIOTT: This is what we've accepted. I accepted my learned friend Mr Williams' submission. The purpose of the proceeding was to stop the minority from appointing a receiver. That's not controversial. That was a relief we sought. HIS HONOUR: So that this-- ELLIOTT: I'm not hiding from that. That is the relief the plaintiff company sought, was to prevent the minority from appointing a receiver through the third defendant."
It may be true, as Mr Elliott submitted that: "The vast majority of companies have a majority shareholder who will, by virtue of that majority ownership, have a majority of directors on the board. The decisions made by that company's directors are those of that company. It does not become otherwise just because they have been appointed by shareholders. Further, it is an everyday occurrence that majority shareholders will have a view as to what is in the interests of the company. Those circumstances are not exceptional".
However, I do not think that it follows, as Mr Elliott then submitted that: "If such matters gave rise to an entitlement to non-party costs orders, applications and orders would be made on a daily basis".
That is because, here, JIC and Tamar, as majority shareholders of the plaintiffs, appear to have devised the Strategy in order to override the rights of the Wu Parties, as minority shareholders, in the Shareholders Agreement. They have also caused the plaintiffs to commence these proceedings for, I would infer, the purpose of seeking to ensure that that Strategy was implemented, notwithstanding ASIV's acquisition of the rights of the Senior Lenders under the Syndicated Facility Agreement.
I feel more readily able to draw that inference in the absence of any evidence on this application from the plaintiffs, or from any directors of the plaintiffs, or from JIC and Tamar themselves. [25]
I also think it reasonable to infer that Clifford Chance, who continue to act for the first, fourth, fifth, and sixth plaintiffs, remain subject to "[their clients'] marching orders from China … to get the business sold for the best price possible" so as to achieve the "sort of price discovery that comes from running a sales process", [26] and that these proceedings had been commenced and are being prosecuted in compliance with those "marching orders". Once again, I feel more confident in drawing that inference in the absence of any evidence from the plaintiffs or from JIC and Tamar on this application.

Conclusion as to third party costs

In those circumstances, I am satisfied that this is case where it is appropriate to make a third party costs order. The circumstances are "exceptional" in the relevant sense and, including for the reasons set out at [13] above, the interests of justice require that the order be made.

Should the costs be payable forthwith?

The defendants seek an order that the plaintiffs and JIC and Tamar be jointly and severally liable for pay the costs of the plaintiffs' unsuccessful application. That is the usual position. [27]
The defendants also seek an order that such costs be assessed and payable forthwith.
There is no dispute that the defendants will be able to have their costs assessed forthwith. That is the default position in this List. [28] I have observed on an earlier occasion that there would usually be little point ordering that costs of an interlocutory application be assessed forthwith unless those costs were also payable forthwith. [29]
The starting position is, however, set out in UCPR r 42.7(2) that: "[u]nless the court orders otherwise, costs [of an interlocutory application] do not become payable until the conclusion of the proceedings."
In MTR Corporation (Sydney) NRT Pty Ltd v Thales Australia Ltd (No 2), [30] I reviewed the authorities dealing with the question of when the Court would "order otherwise" under UCPR r 42.7. The effect of those authorities is that those circumstances include where the interlocutory decision represents "the determination of a separately identifiable matter or may be viewed as the completion of a discrete aspect" of the proceedings and where there is a "considerable distance to go in litigation so that it may be appropriate that the successful party obtain the fruits of its costs order now". [31]
There is no dispute that there is a "considerable distance to go" in these proceedings.
I also see that my determination of the plaintiffs' application for a continuation of the interlocutory injunction granted by Rees J as being a "separately identifiable matter" and a "discrete aspect" of these proceedings.
It is true, as Ms King submitted for the first, fourth, fifth, and sixth plaintiffs, that many of the issues agitated before me on the interlocutory application will also be issues at the final hearing of these proceedings. It may be that the trial judge will take a different view about some of those matters and generally as to the strength of each side's case.
But the plaintiffs have fought and lost the question of interlocutory relief. That question will not be revisited.
Ms King pointed out that in the principal judgment I said: "If and when they take steps that might be seen to be contrary to the interests of the plaintiffs and beyond the steps that an arm's length secured lender (such as the syndicate banks) might take, then the plaintiffs, or the Majority Shareholders, directly or derivatively, may approach the Court." [32]
But those observations were directed to a different question, namely whether ASIV might be restrained from taking particular steps to enforce its entitlement under the Syndicated Facility Agreement.
Ms King also submitted that, were I to order that the costs be payable forthwith, the effect of the plaintiffs', JIC's, and Tamar's obligation being joint and several is that the defendants can seek to recover their costs from any one of these parties.
In that regard, Ms King submitted: "The consequences of this for the Plaintiffs is that, if [ASIV] is successful, they will be faced with an order to pay [ASIV's] costs 'forthwith'. The Plaintiffs will have no choice but to do so well before [ASIV] finishes investigating the appropriate course of enforcement [as against JIC and Tamar], seeks recognition and then actually enforces an order in Singapore and the Cayman Islands."
However, the reality of the matter is that JIC and Tamar, as majority shareholders in the plaintiffs, will be in a position to control this process and, by reason of the matters I have set out at [13] above, are likely to cause the plaintiffs to pay the costs in question long before any enforcement process reaches their shores.
Looking at the matter more generally, at this remove, it is hard to see on what basis the current costs order against the plaintiffs, and thus the order I propose to make against JIC and Tamar, will be revisited, let alone set aside; otherwise than on appeal.
However, as Ms King submitted, if the plaintiffs are ultimately successful and obtain an order that the defendants pay the costs of the proceedings, absent an order that the subject costs be paid forthwith, the plaintiffs could seek to set off the costs of this interlocutory application against the costs of the proceedings. As the costs of the proceedings will likely exceed the costs of the interlocutory application, the result would be that the plaintiffs' costs entitlement would be the difference between the former and the latter.
It may be, as Ms King submitted, that the plaintiffs would be "denied" this "opportunity" if the subject costs are payable forthwith. But, unless the costs order I make now is set aside, the result would be the same in that the plaintiffs' net costs entitlement would be the difference between the costs of the proceedings and the costs of the interlocutory application.
Ms King submitted, however, that there is reason to think that the plaintiffs would have significant difficulty recovering from ASIV any costs paid now. That issue would arise if the order I make now is set side after the costs are paid. It may also affect the practical result, were the plaintiffs ultimately to succeed and be awarded an order that ASIV pays all or part of their costs of the proceedings.
Ms King drew attention to evidence that shows that ASIV has granted an all assets security interest to a company known as Aussie Source Investments Pte Ltd, a company incorporated in Singapore on 19 January 2024. Mr Chan, who is the director and sole shareholder of ASIV, is also the director and sole shareholder of Aussie Source Investments. I have found that there is a serious question to be tried that ASIV is the nominee of the Wu Parties. [33] Mr Chan's position as director and sole shareholder of Aussie Source Investments, and the date of incorporation of that company, suggests that it is also a nominee of the Wu Parties. It may well be the vehicle through which Ms Chen funded ASIV's acquisition of the Senior Debt. [34]
The security granted by ASIV to Aussie Source Investments is expressed to be over "all present and after-acquired property - no exceptions" which, as Ms King submitted, appears to include ASIV's entitlement to repayment of its proportion of the Senior Debt as well as ASIV's cash and bank account, including monies received by way of interest and monies representing repayment of the Senior Debt to ASIV.
In that regard, Ms King submitted: "ASIV was incorporated on 27 December 2023, had (at 24 January 2024) $500 in its bank account, has no source of income (other than the interest on the [Senior Debt] and its future entitlement to repayment of its proportion of the [Senior Debt], each of which is the subject of the charge), and has paid up capital of only $100. Further, [Ms Chen] was the source of the funds paid to acquire the [Senior Debt], and there is presently no restraint on ASIV divesting itself of the proceeds of any further debt trade (other than whatever restraints may be imposed by the security referred to above)." (Footnotes omitted.)
Although in oral argument Mr Williams submitted that any payment by the plaintiffs, JIC, or Tamar to ASIV "could be undone", the evidence to which I have referred shows that the plaintiffs may have difficulty achieving that outcome. In written reply submissions, Mr Williams and Mr Riordan did not seek to engage with Ms King's submissions concerning ASIV's financial position, save to submit that Ms King's submissions assumed that the plaintiffs would ultimately be successful, a conclusion described as a "bold prediction".
In all those circumstances, and taking into account my observations in G&S Engineering Services Pty Ltd v MACH Energy Australia Pty Ltd (No 2) set out [34] above, the appropriate way to balance the parties' interests in this case is to order that the costs of the interlocutory application be payable by the plaintiffs and by JIC and Tamar forthwith, but on the condition that the Wu Parties give an undertaking to the Court sufficient to protect the plaintiffs' reasonable interests.
Such an undertaking may be one to the effect that if an order is made setting aside such an order, or if the plaintiffs ultimately obtain an order that ASIV pay all or part of their costs of the proceedings, the Wu Parties will procure that ASIV repay the funds to the plaintiffs.
The parties should confer and endeavour to agree a form of undertaking.
I am disinclined to adjudicate on the form of any undertaking. If agreement cannot be reached, I will go no further than ordering that JIC and Tamar forthwith pay the defendants' costs of the interlocutory application, that their obligation to do so be joint and several with the plaintiffs' existing obligation to pay those costs, and that such costs may be assessed forthwith.

Conclusion

After the Wu Parties have had an opportunity to consider whether or not they will give the undertaking to which I have referred, and the form of any such undertaking, the parties should confer and agree as to the orders necessary to give effect to these reasons.
I note that the matter is listed for directions on 31 May 2024.

Endnotes

Nature's Care Holdings Pty Ltd v Chen (No 2) [2024] NSWSC 107.
Nature's Care Holdings Pty Ltd v Chen (No 3) [2024] NSWSC 245.
At [3(a)-(b)].
Civil Procedure Act, ss 98(1)(b), 98(2).
Yu v Cao (2015) 91 NSWLR 190; [2015] NSWCA 276 at [136] (McColl JA; Sackville AJA and Adamson J agreeing).
Vestris v Cashman (1998) 72 SASR 449 at 467 (Lander J; Doyle CJ and Olsson J agreeing); Kebaro Pty Ltd v Saunders [2003] FCAFC 5 at [103] (Beaumont, Sundberg and Hely JJ).
Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39 at [25]; [2005] 4 All ER 195 at 203 (Lord Brown; Lord Nicholls, Lord Hutton, Lord Rodger, and Dame Sian Elias agreeing).
Yu v Cao at [137], [139] (McColl JA; Sackville AJA and Adamson J agreeing).
Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 193 (Mason CJ and Deane J; Gaudron J agreeing); [1992] HCA 28.
FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 at [210] (Basten JA; Beazley and Giles JJA agreeing).
Ibid.
Payton Securities Pty Ltd v Bertacco Ferrier Pty Ltd (No 2) [2023] VSC 456 at [9] (Osborne J).
Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) [2012] FCAFC 50 at [88] (Keane CJ, Lander and Foster JJ).
Payton Securities Pty Ltd v Bertacco Ferrier Pty Ltd (No 2) at [9] (Osborne J).
Knight v FP Special Assets Ltd at 193 (Mason CJ and Deane J; Gaudron J agreeing).
FPM Constructions Pty Ltd v Council of the City of Blue Mountains at [210] (Basten JA; Beazley and Giles JJA agreeing).
At [165]-[166].
At [169].
See [107] of the principal judgment.
At [108]-[112].
See [154]-[155] of the principal judgment.
At [215].
Summons at pars 10(j) and 11(j). I note a Second Further Amended Summons has since been filed on 5 February 2024, but the assertion has been retained in substance.
At [C61(a)]. An Amended Commercial List Statement, retaining this assertion, has been since been filed.
For example, Carter v Caason Investments Pty Ltd [2016] VSCA 236 at [44]-[45] (Weinberg, Ferguson and Kaye JJA).
See the principal judgment at [91].
Rushcutters Bay Smash Repairs v H McKenna Netmakers & Ors [2003] NSWSC 670 at [2] (Gzell J) referring to Ryan v South Sydney Junior Rugby League Club Ltd [1975] 2 NSWLR 660 at 663 (Bowen CJ in Eq).
Practice Note SC Eq 3 at [57].
G&S Engineering Services Pty Ltd v MACH Energy Australia Pty Ltd (No 2) [2019] NSWSC 463 at [7].
[2020] NSWSC 1222.
Referring to Fiduciary Ltd v Morningstar Research Pty Ltd (2002) 55 NSWLR 1; [2002] NSWSC 432 at [11], [13] (Barrett J); Pavlovic v Universal Music Australia Pty Ltd (No 2) [2016] NSWCA 31 at [15] (Bathurst CJ, Beazley P and Meagher JA).
At [225].
See [176]-[177] of the principal judgment.
Ibid [154]. 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: 11 April 2024

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