Plaintiffs v Defendants

1 By notice of appeal filed 11 October 2021, the second plaintiff / appellant appeals from the following orders for security for costs made by Associate Justice Gardiner on 21 September 2021 ('the Security Order'):

1. By no later than 4.00pm on 21 October 2021, the second plaintiff provide, by way of payment into Court, security for the defendants' costs of and incidental to this proceeding up to and including the second mediation in the sum of $135,000.

2. If there is a default of payment or provision of security as provided for in paragraph 1, the proceeding shall be stayed forthwith.

3. The second plaintiff pay the standard costs of the defendants' summons filed on 25 November 2020, such costs to be taxed in default of agreement.

4. There be liberty to apply, including in respect of whether further security ought be provided and the amount thereof for the period following the second mediation.

2 By originating process filed 15 July 2020, the plaintiffs made an application under:

(a) sections 175, 232, 233, 461(1)(k), 1041H(1), 1324(1) and 1325 of the Corporations Act 2001 (Cth) ('the Act');

(b) sections 12DA and 12GM of the Australian Securities and Investments Commission Act 2001 (Cth) ('the ASIC Act');

(c) Sections 237 and 243 of the Australian Consumer Law, being Schedule 2 of the Competition and Consumer Act 2020 (Cth) ('ACL'); and

(d) the inherent jurisdiction of the Court.

3 The relief sought was substantially the same as that in the points of claim filed 14 September 2020, being in summary:

(a) declarations under s 1325 of the Act, s 12GM of the ASIC Act and ss 237 and 243 of the ACL that the Separation Agreement dated 11 November 2016 ('the Separation Agreement') and the Intellectual Property Assignment Agreement dated 11 November 2016 are void; and

(b) orders consequent upon a declaration that the defendants had engaged in oppressive conduct including that the first respondent be wound up.

4 By their points of claim, the plaintiffs respectively sought the following substantive relief:

(a) The first plaintiff ('Mr McKendrick') sought to be reinstated as a director of the first respondent ('Credit Clear').

(b) The appellant sought the following relief:

1. Declarations and or orders under s 1325 of the Act, alternatively s 233(1)(c) and or (j) of the Act, s 12GM of the ASIC Act and or ss 237 and 243 of the ACL, that the Separation Agreement dated 11 November 2016 and Intellectual Property Assignment Agreement dated 11 November 2016 (by which the plaintiffs were forced to give up their interests in the first defendant together with the intellectual property rights owned by the first plaintiff) are void on the grounds they were procured under duress, undue influence, unconscionable conduct and or misleading and deceptive conduct in contravention of 1041H(1) of the Act, s 12DA of the ASIC Act and or s 18 of the ACL;

   1. A declaration that the second plaintiff is entitled to hold 20% of the issued ordinary shares in the first defendant;

   2. Rectification of the share register of the first defendant pursuant to s 175 of the Act to reinstate the second plaintiff as a member and to record that it holds a number of fully paid ordinary shares representing 20% of issued shares in the first defendant alternatively that it holds 6,805,555 fully paid ordinary shares in the first defendant;

   3. A declaration that the affairs of the first defendant are being conducted contrary to the interests of the members as a whole and or are oppressive to, or unfairly prejudicial to, or unfairly discriminatory against the second plaintiff, or in the interests of and to the benefit of the second to third defendants and not the first defendant or its members;

   4. An order that the second and or third defendants purchase the second plaintiff's shareholding in the first defendant at fair value;

   5. Alternatively to paragraph F, an order that the first defendant purchase the second plaintiff's shareholding at fair value with an appropriate reduction of the first defendant's share capital;

   6. Alternatively to paragraph F or G, an order that the first defendant be wound up under s 233 or alternatively under s 461(1)(k) of the Act;

   7. An order that the first defendant compensate the plaintiffs for their loss and damage pursuant to s 175(2) of the Act;

   8. Alternatively to paragraph I, compensation pursuant to ss 1041I and or 1325 of the Act, s 12GM of the ASIC Act or ss 237 and 243 of the ACL.

5 In summary, the relief was sought on the basis of the following allegations in the points of claim:

(a) In 2014, Mr McKendrick created a digital debt management and collection system to be owned and operated by Credit Clear, of which Mr McKendrick was the sole director and chief executive officer between 17 March and 8 October 2015.

(b) On 17 March 2015, Credit Clear was registered with the Australian Securities and Investments Commission ('ASIC'), with the appellant recorded on the register of shareholders as the sole shareholder, holding 5 million fully paid ordinary shares (100% interest).

(c) In March 2015, Mr McKendrick and Mr Mark Casey (who is associated with the second respondent ('Casey Consulting')) agreed that:

(i) Mr Casey or his related entities would invest working capital of $1 million with half to be paid up capital and the other half to be unpaid and linked to the achievement of milestones that were to be agreed between them; and

(ii) Mr McKendrick would be the chief executive officer of Credit Clear.

(d) In or about May 2015, Mr Casey informed Mr McKendrick that Mr Julian Gallin and Mr Chris Carron would be investing and taking shares in Credit Clear and there would be a board of Credit Clear. Mr Casey did not inform Mr McKendrick that Mr Gallin and Mr Carron had criminal histories.

(e) On 8 October 2015, there was a meeting of the board of Credit Clear, during which Mr McKendrick was informed that he would no longer be the chief executive officer and would be replaced by Mr Lewis Romano (who is associated with the third respondent ('Romano Holdings')), with which Mr McKendrick complied because of threats made to him by Mr Casey and Mr Gallin.

(f) After the meeting, and without the knowledge of Mr McKendrick, Mr Romano caused a notice to be electronically lodged with ASIC removing Mr McKendrick as director and appointing himself as director. From that time, Mr McKendrick has been excluded from the management of Credit Clear.

(g) By a Shareholders Agreement signed 11 November 2015 ('the Shareholder Agreement'), it was agreed that the shareholding in Credit Clear was as follows:

(h) Mr McKendrick signed the Shareholder Agreement because, on the basis of the earlier threats, he formed the view he could lose all of his interest in Credit Clear.

(i) On 30 March 2016, without notice to Mr McKendrick, Credit Clear purported to issue a further 57.5 million ordinary shares, with 13,750,000 issued to Romano Holdings and 43,750,000 issued to Casey Consulting, thereby diluting the interests of Mr McKendrick and the appellant in Credit Clear to 8%.

(j) On 19 May 2016, Credit Clear purported to issue a further 509,259 ordinary shares to Romano Holdings and 1,805,555 to the appellant.

(k) By the Separation Agreement between Credit Clear, Mr McKendrick, the appellant and Casey Consulting, it was noted by way of 'Background' that Mr McKendrick would 'separate from [Credit Clear] as per the terms set out in this Agreement'. The terms of the Separation Agreement included that:

(i) the appellant agreed to transfer 'all of its 5,000,000 ordinary shares in [Credit Clear] to [Casey Consulting]' for a consideration of $1,000;

(ii) Casey Consulting agreed to forgive loans to Mr McKendrick of up to $120,000 contemporaneous with payment of the consideration for the shares referred to in (i) above;

(iii) Casey Consulting agreed to transfer to Mr McKendrick 1,666,666 shares in Intergroup Mining Limited, held on bare trust by Casey Consulting for Mr McKendrick, contemporaneously with payment of the consideration for the shares referred to in (i) above;

(iv) Mr McKendrick agreed to transfer all of Credit Clear's intellectual property in his possession to Credit Clear and execute a separate agreement entitled Intellectual Property Assignment Agreement;

(v) Mr McKendrick agreed to a restraint of trade and non-compete clause for a period of 12 months in Australia; and

(vi) the parties agreed to a mutual release and indemnity in the following terms:

Except for any matters that occur after the execution of this Agreement (including a breach of this Agreement), in consideration of the obligations of the parties under this Agreement, the parties agree to release and forever discharge the other parties, including the members, directors, officers and employees of the parties, from all actions, suits, obligations, sums of money, causes of action, proceedings, accounts, costs, charges, expenses, claims and demands both at law or in equity and/or arising under any statute which may arise out of, or in any way relate directly or indirectly to:

(a) [Credit Clear]; and

(b) Any other written agreement between the parties relating to [Credit Clear].

(l) On 27 October 2016,[1] Mr McKendrick signed the Separation Agreement and collected $30,000 in cash. The Separation Agreement was executed by Credit Clear and Casey Consulting on 11 November 2016.

(m) Mr McKendrick signed the Separation Agreement as a result of:

(i) threats that he might be physically harmed by Mr Gallin; and

(ii) concerns that Mr Casey would further dilute his interests in Credit Clear or cause him to lose his interests entirely.

(n) On 14 November 2016, Mr Casey purported to lodge with ASIC a form stating that the appellant's 6,805,555 shares in Credit Clear had been transferred to Casey Consulting ('the November share transfer').

(o) The Separation Agreement and the November share transfer were procured by duress, undue influence, unconscionable conduct and/or misleading and deceptive conduct and should be set aside. The alleged conduct was oppressive within the meaning of s 233 of the Act.

6 By points of defence filed 20 October 2020, the respondents in substance admit the Separation Agreement and the issuing and transfers of shares as alleged by the plaintiffs. However, they say that each was with the knowledge and consent of Mr McKendrick. The respondents further allege that Mr McKendrick's shareholding was diluted from 20% to 10.5% because, on 13 November 2015, Mr McKendrick agreed to transfer from the appellant's shareholding:

(a) 7.5% of issued shares in Credit Clear to Mr Gallin; and

(b) 2% of issued shares in Credit Clear to Mr Carron,

in order to settle outstanding liabilities he owed to each of Mr Gallin and Mr Carron.

7 By summons filed 25 November 2020, the respondents sought security for costs from the appellant pursuant to:

(a) r 62.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) ('the Rules');

(b) s 1335(1) of the Act; or alternatively

(c) the inherent jurisdiction of the Court.

8 On 20 May 2021, Associate Justice Gardiner delivered his reasons in respect of the defendants' summons and found that an order for security should be made.[2] On 21 September 2021, following further submissions and reasons on quantum,[3] he made the Security Order.

9 For present purposes, it is sufficient to note that the relevant part of r 62.02(1)(b) of the Rules provides that the Court may order that a plaintiff give security for a defendant's costs of the proceeding where:

(a) the plaintiff is a corporation; and

(b) there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so ('the threshold condition').

10 If the defendant satisfies the threshold condition, the Court has an unfettered discretion to award security for costs, which must be exercised judicially, having regard to all of the circumstances.[4]

11 The factors commonly considered to be relevant in the exercise of the discretion have included the following:

(a) the merits of the claim;

(b) whether the orders being sought would stultify the claim;

(c) whether the defendant was the cause of the company's impecuniosity;

(d) whether there was delay in making the application;

(e) whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security;

(f) whether the persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking; and

(g) whether the company is in substance a defendant, as an order ought not be made against parties who are defending themselves and thus forced to litigate.[5]

12 The burden of satisfying the Court that the threshold condition has been met and that the Court should exercise its discretion to order security for costs rests on the defendant 'from first to last'.[6] However, matters that are peculiarly within the knowledge of the plaintiff, such as:

(a) whether an order for security would stultify its capacity to conduct the litigation or be oppressive; and

(b) whether the plaintiff's impecuniosity was caused by the defendant,

13 In exercising its discretion, the Court is called upon to balance the risk of a successful defendant being unable to enforce a costs order against the prospect of an impecunious corporation being prevented from pursuing a bona fide claim.[8]

14 This appeal was brought under r 77.06 of the Rules. The nature of such an appeal is now by way of rehearing rather than rehearing de novo which, in the absence of further evidence or a change in the law, ordinarily requires the appellant to show error (factual, legal or discretionary) on the part of the Associate Judge before appellate power may be exercised.[9]

(a) The Associate Judge erred in finding that there is reason to believe that the appellant will be unable to satisfy an adverse costs order if ordered to do so.

(b) The Associate Judge erred in failing to appropriately consider the following grounds in the exercise of his discretion:

(i) The impecuniosity of the appellant was caused by the respondents.

(ii) The presence of a natural person standing behind the appellant.

(iii) The resources of persons standing behind the appellant.

(iv) The effect that the order for security would stultify the proceeding.

(v) The application was an instrument of oppression.

(c) The Associate Judge erred in not halving the quantum of security awarded in consideration of the presence of a natural person co-plaintiff.

The Associate Judge erred in finding that there is reason to believe that the appellant will be unable to satisfy an adverse costs order if ordered to do so

16 The appellant submitted that the Associate Judge erred in law in failing to find that it had assets in the hands of the respondents that could be applied to an adverse costs order, for the following reasons:

(a) The appellant has a strong claim to be reinstated to the register at least in respect of the 1,805,555 shares in Credit Clear because the Separation Agreement only provided for the transfer of 5 million shares and the respondents caused the transfer of the appellant's entire shareholding of 6,805,555 shares.

(b) The Associate Judge relied upon the broad denial of this claim by the respondents, and referred to the entitlement to the shares as being 'controversial'. The facts relevant to this claim are included in paragraphs 34, 37(a) and 46 of the points of claim, and the respondents did not raise any defence.

(c) Although the claim was not pleaded, Mr McKendrick and the appellant notified the respondents of their intention to rely upon this point in the application for security for costs as follows:

(i) In his affidavit sworn 15 July 2020 made in support of the application for relief from oppression filed 15 July 2020, Mr McKendrick deposed:

I did not execute a share transfer form for the transfer of 5,000,000 shares (or for any other amount of shares). In fact, at about that time, C Capital held 6,805,555 shares in Credit Clear.

(ii) By letter dated 24 November 2020 to the second and third respondents' solicitors, the appellant's solicitors responded to a request for particulars of the remedies sought, by including the following as the third alternative:

Alternatively, the Second Plaintiff claims the value for the 2.785% shareholding (1,805,555 shares) which it held in Credit Clear, the value of which is:

Post the IPO 2.785% of the total issued capital of 23,697,108 represents 6,285,376 shares which based on today's share price of $0.70 represents a value of $4,399,763.20.

The Second Plaintiff has bona fide claims with reasonable prospects of success, in particular in relation to its claim that your clients have wrongfully transferred 20% of the Second Plaintiffs shares, or the 6,805,555 shares or alternatively at the very least the 1,805,555 shares, in circumstances where it was done under duress, undue influence, unconscionable conduct and misleading and deceptive conduct. Moreover, your clients have not put forward a viable and logical defence to the claim for the 1,805,555 shares. Therefore, it will be asserted in response to any claim for security that may be made against the Second Plaintiff that its assets include at the very least the 1,805,555 shares for which your client have [sic] no genuine defence.

(iii) In his affidavit in opposition to the application for security for costs sworn 21 December 2020, Mr McKendrick deposed:

Even if the Separation Agreement is held to be binding insofar as it relates to the 5,000,000 shares of C Capital in Credit Clear (which I dispute as identified in my First Affidavit and my Points of Claim), there is no defence to the claim for the 1,805,555, remaining shares held by C Capital in Credit Clear.

(iv) The appellant's written submissions in opposition to the application for security for costs filed 2 October 2021 included the following:

[A] threshold condition for the exercise of the power for the making of an order for security for costs is not made out. C Capital has a valuable asset that will allow it to pay the costs of the defendants if they are successful. That valuable asset is the right to be reinstated to at least 1,805,555 shares in Credit Clear which are worth approximately $1.2M dollars. The defendants have no answer to this claim;

... [and later]

It should be dismissed firstly on jurisdictional grounds namely that C Capital has a meritorious claim for return of at least 1,805,555 shares from the defendants. This is worth approximately $1.26M which is more than sufficient to cover the claim for costs of the defendants. This is the 'notional security' that should be taken into account by the Court.

(d) Accordingly, the respondents did not satisfy the threshold jurisdictional condition before the discretionary power to award a security for costs is enlivened.

17 The respondents submitted that the Associate Judge did not err in finding that the appellant had insufficient assets to pay the costs of the respondents if ordered to do so, for the following reasons:

(a) The appellant conceded that it held insufficient assets to pay such costs.

(b) The Associate Judge was correct to reject the appellant's argument that its claim to the 1,805,555 shares in Credit Clear constituted an asset, because:

(i) as it was conceded at the hearing before the Associate Judge,[10] the claim had not been pleaded or advanced in the originating process or the points of claim; and

(ii) it was apparent that there was a real issue as to whether the appellant, in fact, held 6,805,555 shares at the time of the Separation Agreement. The Shareholder Agreement supports the fact that the appellant held 5 million shares as at the dated 11 November 2015. Although it is admitted on the pleading that a further 1,805,555 shares were issued to the appellant on 19 May 2016, there is evidence that on 13 November 2015, Mr McKendrick agreed to transfer a total of 9.5% of Credit Clear's shares to Mr Romano and Mr Carron.

18 Accordingly, the Associate Judge was correct to observe that this assertion made by the appellant invited the Court to impermissibly predict with confidence that the appellant would succeed on this part of the claim.

19 The Associate Judge found that the respondents had satisfied the threshold condition.[11] With respect to the appellant's submission as to its claim for the 1,805,555 shares ('the additional shares claim'), the Associate Judge noted:

In order to accept Capital's submission that it has a valuable asset in the form of the shares and therefore that the jurisdiction for the Court's discretion as to awarding security is not enlivened, the Court is required to assume that it is clear that that part of its claim, at least, will be successful but the Court cannot speculate on the outcome of this proceeding.[12]

20 The Associate Judge rejected the submission on the basis that the points of claim and amended originating process made no claim for restoration of the 1,805,555 shares and it was not at all clear that the appellant would succeed in the additional shares claim. Further, senior counsel for the respondents said that the claim would be the subject of strong opposition.[13]

21 In my opinion, it was open to the Associate Judge to find that there was reason to believe that the appellant would be unable to pay the costs of the respondents if successful in its defence because it was accepted that, except for any amount recovered in this proceeding, the appellant had no assets.

22 The finding was open despite the appellant's contention that the additional shares claim was strong, for the following reasons:

(a) The additional shares claim was not pleaded.

(b) Despite the fact that the appellant had given notice of its intention to make the additional shares claim, it was open for the Associate Judge to accept the respondents' submissions that:

(i) 'we plead to what we are required to plead to, and no case has been made out', as an explanation for why the respondents had not filed affidavit material in response to the proposed claim; and

(ii) the additional shares claim would be the subject of strong opposition on the basis of the mutual release in the Separation Agreement and the 'threshold question' of whether the appellant did, at the date of the Separation Agreement, hold 6,805,555 shares.

23 The Court was entitled to proceed on the basis that the additional shares claim was bona fide and, when pleaded, had reasonable prospects of success.[14] However, in my opinion, if a plaintiff contends that an application fails on the threshold condition on the basis of a claim it has against the defendant, it would be necessary for the Court to be satisfied that any defence to the claim has no real prospect of success. Usually the Court will not go into the merits of a claim because 'it will not ordinarily be possible - or practicable - to reach any very clear view about the merits of the plaintiff's claim and on that account it is sometimes said that a detailed examination of the merits is scarcely warranted'.[15]

(a) the Separation Agreement on its terms provided that:

(i) Mr McKendrick had agreed 'to separate from [Credit Clear] as per the terms set out in this Agreement'; and

(ii) the appellant agrees to transfer all of its 5 million shares; and

(b) the appellant made serious allegations of misconduct,

it was open to the Associate Judge not to speculate as to the ultimate outcome of the additional shares claim at trial.

25 It would have been possible for the points of claim to have been amended and the matter adjourned to allow the respondents to file a defence to the amended points of claim and evidence with respect to the contention. Neither party requested that to be done and it was open to the Associate Judge to proceed and deal with the matter as he did.

The Associate Judge erred in failing to appropriately consider that the impecuniosity of the appellant was caused by the respondents

26 The appellant submitted that, contrary to the findings of the Associate Judge, the appellant had provided sufficient evidence to the Court to establish that the appellant's financial impecuniosity was caused by the respondents. The appellant pointed to the evidence that it:

(a) did not trade; and

(b) was established for the sole purpose of operating as an investment vehicle to hold Mr McKendrick's shares in Credit Clear.

27 Accordingly, it was not necessary for the appellant to produce the financial accounts or audits referred to by the Associate Judge. By reason of Casey Consulting's oppressive conduct, all the 6,805,555 shares in Credit Clear were appropriated by the second respondent. It was therefore irrelevant to produce evidence to show the value of the shares at the time of the oppression.

28 The respondents submitted that the Associate Judge correctly found that the appellant failed to adduce any evidence regarding:

(a) its financial position prior to the events giving rise to this litigation, other than that it held shares in Credit Clear (and of which it contends it has been wrongfully deprived); or

(b) the value of the appellant's shares in Credit Clear at the time of the alleged conduct the subject of the appellant's claims (which preceded the entry of Credit Clear on the Australian Securities Exchange).

(a) The authorities recognise that caution is required before the Court embarks on a detailed analysis of the merits of a plaintiff's claim.

(b) The central allegations advanced by the appellant are contradicted by contemporaneous documentary records.

(c) The appellant has delayed for some five years after the relevant events before making a complaint.

(d) Accordingly, the appellant has failed to establish a strong evidentiary foundation for the proposition that the respondents' conduct was a material contributor to, or cause of, the appellant's impecuniosity, and not merely a contributing factor.

30 I do not consider that the Associate Judge erred in finding that the appellant had not discharged its onus of establishing that the respondents' conduct was the cause of its impecuniosity, for the following reasons:

(a) It was open to the Associate Judge to find, as he did, that there was no evidence as to the value of the appellant's shares in Credit Clear at the time of the alleged conduct.

(b) The extent of Mr McKendrick's evidence with respect to the value of the shares was as follows:

In about May 2016, I was told by Romano that it was proposed that I would soon be bought out of my 10.5% holding in Credit Clear by Mondos Group. Given the threats that had been made to me by various members of the board I felt I had no choice but to agree to a buy out for fair value. I had become aware about this time that Romano had sold 142,593 shares in Credit Clear for $25,000, representing a price of $0.175 per share. I was further told by Casey in a conversation had in September 2016 that I would receive the same or an even better price for the purchase of my shares.

(c) This evidence suggests the appellant sold its shares for 'fair value'. Further, the evidence about Mr Romano's sale of shares was not in admissible form and was at best vague and unspecified as to time or circumstance, as the Associate Judge found.[16]

(d) Accordingly, it would not have been practicable for the Associate Judge to attempt to make any assessment as to whether the consideration received by the plaintiffs in the Separation Agreement for the transferred shares was other than fair or whether the real cause of the appellant's impecuniosity was that the consideration for the sale, including the $30,000 cash, was retained by Mr McKendrick.

The Associate Judge erred in failing to appropriately consider the presence of a natural person standing behind the appellant

31 The appellant submitted that the presence of Mr McKendrick as a party was a discretionary ground to dismiss the respondents' security for costs application, for the following reasons:

(a) His Honour accepted that the appellant was a mere corporate vehicle to hold Mr McKendrick's interests in Credit Clear and therefore, it is Mr McKendrick's interests that were being pursued in Court through the appellant.

(b) The Associate Judge accepted that, given Mr McKendrick's involvement in the proceeding, it was more than likely that a joint and several costs order would be made.

32 The respondents submitted that the Associate Judge correctly found that the fact of overlapping claims was, in the context of this case, not a weighty consideration in the ultimate exercise of discretion, for the following reasons:

(a) The principal claim in the proceeding is brought by the appellant. Mr McKendrick's claims ride on the coat tails of the appellant. In fact, Mr McKendrick's claim to be reappointed as a director of Credit Clear is hopeless given Credit Clear's constitution and the fact that Credit Clear is now a publicly listed company.

(b) The appellant's position is that its claim is, in reality, Mr McKendrick's claim for oppression. However, Mr McKendrick is not prepared to indemnify the appellant in respect of an adverse costs order.

(c) The Associate Judge recognised that it is impossible to predict whether a joint and several costs order would ultimately be made against the plaintiffs. However, it is again telling that Mr McKendrick refused to indemnify the appellant against any adverse costs consequences.

33 The Associate Judge did not err in failing to consider the presence of a natural person standing behind the appellant or the resources available to him. The Associate Judge:

(a) accepted that the appellant was merely the vehicle by which Mr McKendrick's interest in Credit Clear was held; and

(b) took into consideration that, although it was more than likely in his opinion that a joint and several order for costs would be made, Mr McKendrick was not prepared to give an undertaking to accept the liability for any costs ordered against the appellant.

34 He accepted that the fact that Mr McKendrick's claim overlapped with the appellant's claims was a feature which weighed against the grant of security, but did not extinguish it.[17]

35 While it was open to the Associate Judge to conclude that it was more than likely that Mr McKendrick would be jointly and severally liable for the respondents' costs, it is difficult to be confident in any prediction as to costs orders at the end of trial, as the Associate Judge himself observed.[18] This is especially so in the following circumstances:

(a) Mr McKendrick's claim arises from his removal as a director of Credit Clear in October 2015.

(b) The appellant's principal claims relate to the execution of the Separation Agreement in November 2016.

(c) The result of the trial could be a finding that Mr McKendrick was improperly removed as a director, but that the appellant's claims with respect to the transfer of the shares fail.

36 No satisfactory explanation was offered to the Associate Judge as to why Mr McKendrick would not remove the doubt about a joint and several liability costs order by giving an undertaking to accept liability for any costs ordered against the appellant.

37 In summary, the Associate Judge did consider the presence of a natural person standing behind the appellant but did not consider it to be determinative. It was open for him to do so.

The Associate Judge erred in failing to appropriately consider the resources of persons standing behind the appellant

38 The appellant submitted that the Associate Judge erred in failing to consider Mr McKendrick's resources, for the following reasons:

(a) The implied suggestion that Mr McKendrick was using the appellant to avoid personal responsibility for costs was inconsistent with his finding that:

(i) Mr McKendrick was the true plaintiff in the proceeding; and

(ii) the appellant is merely the corporate vehicle by which Mr McKendrick is pursuing his interests,

because he found that it was most likely that there would be a joint and several costs order.

(b) Mr McKendrick's income is relatively modest and did not support the assumption that he had the capacity to both fund the litigation and offer security to the respondents.

39 The respondents submitted that the Associate Judge did not err in failing to consider Mr McKendrick's resources, for the following reasons:

(a) On the one hand, the appellant contends that it is likely there will be a joint and several costs order, but on the other, Mr McKendrick is the sole person who stands to benefit by the litigation and is not prepared to indemnify the appellant in respect of adverse costs. Accordingly, there is no inconsistency in the Associate Judge's findings that the proceeding is, in substance, Mr McKendrick's claim for oppression and that he has failed to provide an indemnity in respect of adverse costs against the appellant.

(b) The Associate Judge correctly observed that the Court could have regard to the financial circumstances of the individual who is likely to benefit should the claim succeed.

(c) The allowance for a third party to finance the plaintiffs' proceeding addresses the concern regarding injustice of a successful defendant not being able to recover its costs.

40 The Associate Judge did consider the resources of Mr McKendrick and found that, by community standards, he had a substantial income.[19] He noted Mr McKendrick had deposed to an income of approximately $240,000 and that he was financially supporting his partner and ill mother; but he had not 'elaborate[d] further as to his outgoings or provide independent substantiation of his position'.[20]

41 The Associate Judge referred to the fact that Mr McKendrick had not offered to indemnify the appellant, which is without any assets and is otherwise unable to meet any adverse costs orders; and concluded, as it was open for him to do, that such an income would enable him to procure funding to offer security.[21]

42 The Associate Judge considered this was unfair and quoted the following statement of Ormiston J in Ariss v Express Interiors Pty Ltd:

[I]t seems unfair, where this insolvent company has not considerable assets, that, if the defendants are successful, they should be at risk for their costs when substantially all the available assets may well have been expended on the plaintiff's unsuccessful case.[22]

43 It was open for the Associate Judge to consider this to be a persuasive factor weighing in favour of an order for security.

The Associate Judge erred in failing to appropriately consider the effect that the order for security would stultify the proceeding

44 The appellant submitted that the Associate Judge erred in finding that the claim would not be stultified by an order for security, for the following reasons:

(a) Mr McKendrick is a man of limited means and cannot afford to sustain the litigation if he is required to pay security for costs.

(b) Prior to the Security Order, on 4 June 2021, he filed an affidavit as to quantum ('the Quantum Affidavit') which further articulated his financial circumstances, being:

a) his salary has reduced to $75,000;

b) he has combined monthly expenses of $16,507.67 (including tax);

c) he has combined assets of $80,000;

d) he has a credit card debt of $18,800;

e) as of 4 June 2021, [he has] legal costs of approximately $68,562.42; and

f) he is financially supporting his partner and gravely ill mother.

(c) Accordingly, his income and financial position is not substantial by community standards and neither plaintiff can afford to prosecute the claim if an order for security is granted.

45 The respondents submitted that the Associate Judge did not err in concluding that the appellant had failed to discharge its onus of establishing that the order for security would stultify the litigation, for the following reasons:

(a) Proof of stultification requires evidence.

(b) The Associate Judge characterised Mr McKendrick's annual income of $240,000 as high by community standards and stated that he was in a position to procure funding to offer security.

(c) Mr McKendrick did not provide independent substantiation of his financial position, nor did he provide evidence of attempts to obtain third party funding.

(d) With respect to the Quantum Affidavit, which was filed four months after the hearing of the security for costs application:

(i) whilst it was admitted into evidence for the purpose of the assessment of quantum, it failed to provide details of the redundancy package Mr McKendrick received from his previous employer;

(ii) it did not provide supporting documentation in relation to his alleged expenses; and

(iii) it did not detail any attempts to obtain third party funding.

46 The Associate Judge did consider whether an order for security would stultify the proceeding.[23] It was open for the Associate Judge, on the evidence before him as set out in paragraphs 40 and 41, not to accept that the appellant had established that its claims would be stultified.

47 The appellant's submission on this question was based on the evidence of Mr McKendrick, being the Quantum Affidavit, filed after the Associate Judge had determined the liability for security for costs on 20 May 2021. The Quantum Affidavit was with respect to the quantification of the Security Order. Counsel for the appellants accepted that no application was made to revisit the Reasons with respect to liability and that it could not be relied upon in support of this appeal.

The Associate Judge erred in failing to appropriately consider that the application was an instrument of oppression

48 The appellant submitted that the Associate Judge should have found that 'something more' did exist between the two different sized companies, such that the application for security for costs was oppressive, being:

(a) Mr McKendrick was forcefully excluded from Credit Clear by two sophisticated businessmen. His life was threatened and he was told he would lose everything if he did not sign the Separation Agreement. As a result, he was deprived of his invention;

(b) the parties were not on an equal footing in a commercial relationship; and

(c) the Associate Judge erred in refusing to draw an inference that the respondents had substantial assets.

49 The respondents submitted that the Associate Judge correctly observed that in this context, oppression is closely related to the stultification ground, and that the Associate Judge was correct to reject the contention of oppression, for the following reasons:

(a) The appellant's attempt to characterise security for costs as an instrument of oppression depended entirely upon the acceptance of the allegations denied by the respondents.

(b) At the time of the relevant offence, the parties were engaged in a commercial enterprise on somewhat of an equal footing.

(c) There is no basis to find oppression where the respondents have meritorious defences and there is no suggestion they have conducted the litigation in a manner which has brought about unnecessary delay or costs.

50 The appellant's contention that the Associate Judge should have concluded that the application was oppressive because of the threats made to Mr McKendrick should be rejected. It was open and appropriate for the Associate Judge not to determine the allegations, on a security for costs application, that are the substance of the proceeding.

51 The Associate Judge found that '[t]he parties were formerly involved in a commercial relationship and were on something of an equal footing prior to the appellant and Mr McKendrick departing the enterprise'.[24] I consider that his Honour was referring to the plaintiffs being on an equal footing with the other investors, being the second and third respondents. In my opinion, for the reasons submitted by the respondents, it was open for him to so conclude.

52 The Associate Judge found the application was not oppressive for substantially the same reasons he had found that it would not stultify the claim. It was open for the Associate Judge to do so.

The Associate Judge erred in not halving the quantum of security awarded in consideration of the presence of a natural person co-plaintiff

53 The appellant submitted that the quantum of security should have been reduced by half because any costs order against the appellant and/or Mr McKendrick will be paid by Mr McKendrick. Accordingly, the practical result of not halving the quantum is that the Court is awarding security against the natural co-plaintiff who has limited means.

54 The Associate Judge further erred by splitting the quantum on a 90/10 basis without an explanation.

55 The respondents submitted that the Associate Judge was correct in not halving the quantum of security, because:

(a) on the one hand, the appellant accepts that Mr McKendrick is the true plaintiff such that a joint and several costs order will be made; but on the other hand,

(b) refuses to accept that each plaintiff will be equally liable for the entirety of the respondents' costs.

56 In my opinion, the quantum of security as ordered was well within the discretion of the Associate Judge. The appellant's claims are the principal claims to be determined in the proceeding. Counsel for the appellant was unable to direct me to any authority in support of the proposition that, in ordering security for costs the amount should be divided by the number of plaintiffs.

57 It may be accepted that a reduction would be appropriate to the extent that costs will be incurred with respect to the personal plaintiff's claims which would not otherwise have been part of the proceeding.[25] On the evidence of Mr Grisenti, the costing expert, this was the basis of the 10% reduction allowed by the Associate Judge.

58 I do not consider that there was any error by the Associate Judge in not reducing the quantum of the security for costs order by 50%.

59 Accordingly, the appeal should be dismissed with costs.

[1] Paragraph 41 of the points of claim mistakenly states '2015'.

[2] Re Credit Clear Ltd [2021] VSC 287 ('Reasons').

[3] Re Credit Clear Ltd (No 2) [2021] VSC 545.

[4] Trility Pty Ltd v Ancon Drilling Pty Ltd [2013] VSC 577, [11] (Croft J) ('Trility').

[5] Trility [2013] VSC 577, [15]-[16], citing Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497, 505-512 (French J) and KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189 (Beazley J). See also 20 UP Pty Ltd v Llewellyn [2019] VSC 282 (Lyons J); Harmonious Blend Building Corporation v Keene [2014] VSC 649 (Dixon J).

[6] Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377, 383 [21] (Maxwell P and Buchanan JA).

[7] Ibid 383-4 [22], quoting Bell Wholesale Co Ltd v Gates Export Corporation (No 2) [1984] FCA 34; (1984) 2 FCR 1, 4 (Sheppard, Morling and Neaves JJ).

[8] Buckley v Bennell Design and Constructions Pty Limited (1974) 1 ACLR 301, 304 (Street CJ with whom Moffitt P and Hutley JA agreed); Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311, [19] (Derham AsJ).

[9] Oswal v Carson [2013] VSC 355, [11] (Ferguson J), citing Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission [2000] HCA 47; (2000) 203 CLR 194, 203-4 [14] (Gleeson CJ, Gaudron and Hayne JJ).

[14] KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189, 197 (Beazley J).

[15] Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] VSCA 43; [1999] 2 VR 191, 199 (Winneke P and Phillips JA with whom Callaway JA agreed); also see Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All ER 534, 540 (Peter Gibson LJ), cited in Mecrus Pty Ltd v Industrial Energy Pty Ltd [2015] FCA 103; (2015) 327 ALR 523, 532 (Murphy J).

[17] Ibid [82]-[83], citing Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621, 625 (Ormiston J).

[22] [1996] 2 VR 507, 508, quoted in Reasons [91].

[25] Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564, 596 [138] (Austin J).