Ren Nominees Pty Ltd v MS Cognosis Pty Limited

Was REN almost certain to win? 12 This litigation concerns a fall out between two men involved in efforts commercially to exploit a cancer diagnostic system based on work done by Professor Mountford and Dr Lean at the Institute for Magnetic Resonance Research. It appears that the intellectual property associated with the system came to be owned by MS Cognosis. It had two equal shareholders REN and Mr Kennedy and each held 500,000 shares. REN, in ways which it is not necessary presently to relate, is associated with a Mr Tony Noun. Mr Noun and Mr Kennedy then became the two directors of MS Cognosis and began the business of getting the system into a form which might allow its commercial development. One of the important assets of MS Cognosis was the intellectual property associated with the system. 13 There is some controversy as to the role played by Professor Mountford and those around her involved in the research. Mr Kennedy was planning to testify in the present case that he and Mr Noun had agreed that they would hold half of their respective interests in MS Cognosis on trust for Professor Mountford and her researchers and half for themselves. The trust was oral and was designed, or at least was thought, to save Professor Mountford some embarrassment with Harvard University. Whether the trust existed is an issue I do not need to resolve. I should say this is not an issue upon which Professor Mountford has been heard and the fragmented factual record before me, consisting as it does of remnant evidentiary shards leftover following a settlement, would provide no basis for forming any view about it. I expressly do not. 14 The venture seems to have been going well until 2011. Various trips to the United States had been undertaken and a presentation was made to the United States Food and Drug Administration as well as to a company known as Agilent. Then a problem emerged. Mr Kennedy says that until 2011 he had understood that Mr Noun was both a doctor of medicine and a clinical oncologist not the least of the reasons for which was that he had called himself 'Dr Noun.' During 2011 Mr Kennedy says he received information, and caused inquiries to be undertaken, which revealed that Mr Noun was not in fact a doctor at all. Mr Noun contests that he held himself out in the manner which Mr Kennedy suggests. In any event, Mr Kennedy demanded that Mr Noun resign as a director of MS Cognosis. Mr Kennedy did this ostensibly because, so he says, it would not have been possible to pursue the exploitation of the intellectual property while MS Cognosis was associated with a person who made false claims about his qualifications. 15 As it happens, Mr Noun agreed to stand aside as a director. This had some practical consequences. It left Mr Kennedy as the sole director of MS Cognosis and potentially, therefore, able to exercise complete control over its affairs although Mr Noun, through REN, continued to own 50% of the shares. It also potentially left unresolved how MS Cognosis might be administered into the future. These matters were dealt with, at least in part, by an agreement between MS Cognosis and Mr Noun called the Resignation Agreement which was dated 15 April 2011 and under which Mr Noun was to resign as a director ('the Resignation Agreement'). It foresaw the making by the parties of a shareholders agreement which would see the intellectual property owned by MS Cognosis devolved into a Delaware company called Cognosis LLC. This would occur at a fee which would be agreed between Mr Kennedy and Mr Noun. 16 Unfortunately, the Resignation Agreement never substantially came into operation because a number of events upon which it was premised (such as the appointment of an independent director) did not take place. Mr Kennedy and Mr Noun are at odds about whose fault this was but, regardless of where the blame should fall for that, the expected shareholders agreement never came to be. 17 In June 2011, not very long after Mr Noun's resignation from the board, Mr Kennedy engaged a firm of valuers to value the intellectual property. They reported to him in November 2011 that the intellectual property was worth between $165,000 and $185,000. It then appears that Mr Kennedy made arrangements to sell the intellectual property at the price of $185,000 to an entity called Cancer Spectroscopy of America LLC in which Mr Kennedy says Professor Mountford had an indirect interest. This sale took place under an asset sale agreement dated 27 February 2012. 18 The sale of MS Cognosis' principal assets took place without any notice by Mr Kennedy to its 50% shareholder REN or Mr Noun. 19 On 3 August 2012, many months later, REN's solicitors enquired of MS Cognosis whether there had been any activity in the company in relation to the intellectual property because the public records suggested that there had not. On 14 August 2012, MS Cognosis' solicitors delivered the explanation for this apparent inactivity which was that the intellectual property had been sold for $185,000 to Cancer Spectroscopy of America LLC and there was nothing left for MS Cognosis to do. 20 The basic contention pursued by REN was that by disposing of the intellectual property, which was after all the principal asset of MS Cognosis, without first consulting with its 50% shareholder REN - and in circumstances where the purchaser appeared to have some connexion with Professor Mountford - Mr Kennedy had conducted the affairs of the company in his own interests rather than the interests of the members as a whole thereby engaging the grounds specified in ss 461(1)(e), 461(1)(f) and 461(1)(g) of the Corporations Act. 21 In their defence Mr Kennedy and MS Cognosis pursed two broad lines of resistance: (a) Mr Kennedy had obtained a valuation of the intellectual property at $185,000 and as sole director there could be nothing wrong with him disposing of the intellectual property at that price; and (b) the business of MS Cognosis was imperilled by its association with Mr Noun and the intellectual property needed to be saved from him. 22 I have no doubt that Mr Kennedy's actions were inflammatory, possibly incendiary. I have little difficulty in envisaging, at least at a theoretical level, an outcome for this litigation in which Mr Noun succeeded in showing that the valuation was suspect and that Mr Kennedy somehow knew of this. On that view of affairs, REN would almost certainly win. The difficulty is that this is not the only possible outcome. Another equally plausible outcome may be that a trial would establish that the valuation obtained by Mr Noun was significantly overstated. More importantly, regardless of what the correct valuation of the intellectual property is, it may transpire that Mr Kennedy, in good faith, relied on it when he disposed of the intellectual property. I emphasise these matters because they show that one simply cannot be dogmatic about the likely outcome of the case. 23 This conclusion is not altered by the fact that Mr Kennedy did not propose to call his valuer. Forensically his point was that he held a valuation and he would be entitled to succeed, even if the valuation was incorrect, so long as he was acting in good faith. This does not mean, as was submitted on REN's behalf, that Mr Kennedy was not defending his valuation. Rather it underscores that the correctness of the valuation is not the main issue. REN's real point is that it wishes to allege that Mr Kennedy acted oppressively in bad faith. For that argument to be developed it would be necessary to train REN's guns on the process by which Mr Kennedy obtained the valuation. What were the instructions? Who provided what assumptions to the valuer? It may perhaps have rested on Mr Kennedy's side to prove these matters in order to make good his bona fides (about this I make no comment). Regardless of whether Mr Kennedy bore that onus or whether this was a positive case for REN to make out, the fact is that it was an inquiry into how the valuation came into being and not as to its correctness. 24 For that reason, I decline to conclude that REN would almost certainly have won.

Did Mr Kennedy act reasonably in defending the proceedings? 25 For largely similar reasons, it was, in general, reasonable for Mr Kennedy to defend the case. 26 During the course of the hearing two topics emerged under the rubric of this heading which were, I think, red herrings. These were: (a) REN's allegation that it was entitled to a winding up order because there had been a management deadlock; and (b) Mr Kennedy's decision to consent to the winding up order in light of certain events in the New South Wales Court of Appeal. 27 The issue raised by (a) was of little relevance to the question of whether REN was bound to win or whether Mr Kennedy acted reasonably in defending the case. This was a peripheral allegation to which Mr Kennedy had a perfectly good answer - there was no deadlock since Mr Noun has resigned. It was peripheral because it was entirely independent of the allegations of oppressive conduct. Since there had been no management deadlock - Mr Noun having resigned - it is difficult to see what REN obtained from making this allegation apart from the irrelevant forensic bloody nose it caused itself when Mr Kennedy pointed out this could not be correct. 28 The issue raised by (b) was also irrelevant. Even if it were shown that Mr Kennedy's nominated reason for consenting to the winding up was unconvincing this could not alter whether his defence of the proceedings was reasonable if the grounds advanced in that defence otherwise deserved that appellation. 29 Lest I be wrong in that conclusion I should record that I did not find his explanation for discontinuance convincing. The reasons for this are as follows: At a time which I cannot directly determine Mr Noun commenced a proceeding in the Equity Division of the Supreme Court of New South Wales. I do not know what relief was sought in this proceeding by Mr Noun. But I do know that Mr Kennedy cross-claimed for what he said were his expenses in having to investigate and deal with the consequences of Mr Noun's alleged impersonation of a doctor. 30 On 7 August 2012 Macready AsJ heard an application by Mr Noun summarily to dismiss Mr Kennedy's cross-claim for those losses on the basis that the proper plaintiff was MS Cognosis. His Honour refused the application and Mr Kennedy's cross-claim remained on foot. On 12 December 2012 this conclusion was reversed by Gzell J in Noun v Pavey [2012] NSWSC 1644. Gzell J, therefore, struck out the cross-claim. 31 Whilst the cross-claim was struck out (a state of affairs which was not to prove permanent) these proceedings were commenced on 27 February 2013 and shortly afterwards REN delivered a statement of claim. 32 The burden of that pleading was to show that Mr Kennedy had stripped MS Cognosis of its principal asset without consulting its 50% shareholder at what was alleged to be a gross undervalue to a related party. Mr Noun saw the matter as involving a sale at an undervalue because a valuation obtained by him suggested the intellectual property was worth between $7.6 million and $19.4 million. 33 Other than obliquely referring to Mr Kennedy as having made 'disparaging remarks' about Mr Noun, the statement of claim omitted any reference to Mr Noun having been accused of not being a doctor or of the connexion between those allegations and Mr Noun's subsequent resignation from the board. 34 Pleadings are, of course, a two sided affair and it will come as no surprise that Mr Kennedy's defence spent some little time connecting his (that is Mr Kennedy's) actions in disposing of MS Cognosis' intellectual property with Mr Noun's alleged pretence to be a doctor. 35 The particular procedural path by which this occurred is of some relevance. REN had alleged that Mr Noun had resigned due to a management deadlock. Mr Kennedy denied there was any such deadlock explaining in some little detail Mr Noun's resignation from the board in the face of allegations that he had falsely posed as a doctor. 36 On 3 June 2013 REN filed a reply in which it withdrew the allegation that there had been a management deadlock presumably to render irrelevant the question of whether Mr Noun had been holding himself out as a doctor. However this was after 14 May 2013 which was the date on which Mr Kennedy and MS Cognosis delivered proofs of evidence which dealt extensively with that issue. 37 It is necessary now to take a brief rest from the Federal Court proceedings and to return to Mr Kennedy's summarily dismissed cross-claim in the NSW Supreme Court. On 7 May 2013 the NSW Court of Appeal, with no great enthusiasm, granted Mr Kennedy leave to appeal the judgment of Gzell J: Kennedy v Noun [2013] NSWCA 129. On 22 May 2013, the parties reached an agreement that that judgment should be set aside and that of Macready AsJ restored. In consequence, the cross-claim was revived. 38 According to Mr Kennedy, this changed everything in the winding up case. The effect of the judgment of Gzell J had been that only MS Cognosis could pursue Mr Noun for damages caused by his misrepresentations. Now that the NSW Court of Appeal had set that aside (this was not strictly true: it had only granted leave to appeal; the subsequent appeal was allowed by consent) he, Mr Kennedy, could pursue the matter in his own name without need of MS Cognosis. This was of significance because it meant that MS Cognosis could be allowed to be wound up without threatening Mr Kennedy's cross claim in the Supreme Court proceedings. 39 Accordingly, on 7 June 2013 Mr Kennedy's solicitors wrote to REN's solicitors and indicated, in light of the reinstatement of the cross-claim, that Mr Kennedy would now consent to the winding up of MS Cognosis. 40 The point of all of this, for present purposes, was to establish that Mr Kennedy's defence of the proceedings up until 22 May 2013 (when Mr Kennedy's cross-claim was reinstated) and, as I understood the argument, probably until 7 June 2013 (when the offer to allow the winding up to proceed was made), was reasonable. 41 But the reasonableness of Mr Kennedy and MS Cognosis' defence emerges from its own terms and not Mr Kennedy's motives. As I have already said, the fact that Mr Kennedy held an appropriate valuation was sufficient to render his defence prima facie reasonable. If it had mattered I do not think that Mr Kennedy's rationale for consenting could have rendered his conduct in defending the proceeding reasonable if his defence had not already had that quality. 42 To accept otherwise, it would be necessary that Mr Kennedy's desire to pursue the cross-claim in the NSW Supreme Court could provide a legal basis for defending the winding up in the Federal Court, rather than merely a motive to do so. I can understand how, if the cause of action to recover the money spent by Mr Kennedy in investigating Mr Noun's credentials were vested in MS Cognosis, its winding up would have presented practical difficulties in the pursuit of Mr Noun. But that practical observation is about an incentive for Mr Kennedy to keep MS Cognosis out of the hands of the liquidator and is not a statement of some principled basis for resisting the winding up. Unsurprisingly, therefore, Mr Kennedy's desire to pursue the cross-claim in his own name could not have been pleaded as a defence to REN's claim that MS Cognosis should be wound up and, indeed, it was never so pleaded. 43 Accordingly, even if this was the reason that Mr Kennedy had originally defended the winding up, I do not accept that it provided a reasonable basis for his doing so. Whilst it may have explained his motives, it was not any form of defence. As it happens, I think it more likely that the invocation of the result in the Court of Appeal was opportunistic and that Mr Kennedy wished, for other reasons, to bring the litigation to an end. 44 In any event, his defence, was for the reasons already given, reasonable. 45 I therefore conclude: (a) it was not almost certain that REN would obtain the winding up order that it sought; and (b) Mr Kennedy's defence of the proceedings was reasonable. 46 In those circumstances there should, in principle, be no order as to costs.

Particular costs orders 47 REN then sought a particular order that it should have costs on an indemnity basis from 7 June 2013. That was the day, it will be recalled, that MS Cognosis and Mr Kennedy's solicitors had indicated that they were prepared to consent to a winding up order although not to the appointment of Mr Jones as its liquidator. The precise terms of the letter were as follows: [T]o pursue litigation against Mr Kennedy, it is appropriate that a neutral liquidator be appointed to bring an impartial mind to the question of what litigation if any the company should pursue. Consequently, our clients propose that the proceedings be settled on the following basis: (a) The company be wound up. (b) An independent liquidator be appointed, determined either by agreement of the parties, or by an independent arbiter (such as the President of the Insolvency Practitioners Association of Australia), or by the Court. (c) Each party bear its own costs of the proceedings. 48 I consider that this was most likely an unwise statement. Section 532(9) of the Corporations Act requires a liquidator to consent in writing to his appointment prior to being appointed and r 5.5 of the Federal Court (Corporations Rules) 2000 (Cth) ('the Corporations Rules') facilitates that requirement by prescribing the form in which this must occur at least one day before the hearing. The operation of this well known procedure inevitably required REN to contact an official liquidator to get his or her consent. That fact could in itself provide no basis for doubting a liquidator's neutrality. 49 The matter came before me on 9 July 2013. In the face of Mr Kennedy's rejection of Mr Jones, REN's solicitor had nominated a second liquidator, a Mr Smith, but at a directions hearing on 12 July 2013 I was told from the bar table that he was not acceptable either and it was at that time that I took the decision to appoint, with the consent of the parties, my own choice of liquidator to end the impasse which had evidently been reached. 50 Challenging the independence of two perfectly good liquidators simply because they had been nominated by the plaintiff was, in my opinion, unsound. The fact that the liquidator was nominated by the plaintiff was the inevitable, and entirely ordinary, operation of the Corporations Act and the Corporations Rules. 51 An allegation against an official liquidator of a lack of impartiality or even an apprehended lack of impartiality is an allegation of a serious kind against a third party to the litigation and I do not think, in this case, that it should have been made. Although the general position is that there should be no order as to costs, it seems to me that the plaintiff was put to unnecessary cost by this posture. Whilst I do not think an indemnity costs order is warranted, as REN suggested, I do think that Mr Kennedy ought to pay the costs associated with his refusal to accept the nominated liquidators by the plaintiff. 52 This is not the complete end of the matter. After the letter of 7 June 2013 was sent further correspondence ensued. This correspondence culminated in REN's solicitors letter of 21 June 2013 to Mr Kennedy's solicitors which is written in language best described as intemperate. For example, it included such statements as: • First, the first paragraph of your letter is a false assertion. • Secondly, such a ground of defence to the winding-up application would be absurd. • Fourthly, the attack on Mr Jones independence is equally absurd. • The proposition in your letter as specious as the proposition… • The attack on Mr Jones' reputation is as egregious as the unfounded allegations of fraud and perjury you and your Counsel instructed by you have made against Mr Noun. • Fifthly, the vast bulk of evidence… is nothing short of a gross abuse of process. 53 Whilst I accept that the general thrust of much of this letter was correct (in that I do not think that there was any good reason not to accept Mr Jones as a liquidator) the manner and tone of this letter are wholly inappropriate for the conduct of civil litigation in any court. The statement of principles in rules 25-31A of the New South Wales Revised Professional Conduct and Practice Rules 1995 says: In all their dealings with other practitioners, practitioners should act with honesty, fairness and courtesy, and adhere faithfully to their undertakings, in order to transact lawfully and competently the business which they undertake for their clients in a manner that is consistent with the public interest. 54 Further, rule 25 provides: A practitioner, in all of the practitioner's dealings with other practitioners, must take all reasonable care to maintain the integrity and reputation of the legal profession by ensuring that the practitioner's communications are courteous and that the practitioner avoids offensive or provocative language or conduct. 55 These professional conduct rules reflect the need for litigation to be conducted by officers of the Court in an adult fashion. It is not adult for grown lawyers to accuse each other of lying in correspondence and it is not edifying for anyone involved. Correspondence of this kind ought not to be tolerated: cf. Garrard (T/AS Arthur Anderson & Co) v Email Furniture Pty Ltd (1993) 32 NSWLR 662 at 667 per Kirby ACJ. I should say for the benefit of the solicitor for Mr Kennedy that I have detected not the slightest behaviour on her part to deserve the opprobrium poured upon her. I have not accepted as correct the position adopted by her client as to the identity of the liquidator. Was it an error therefore on Mr Kennedy's part to veto the liquidators nominated by REN? I think so. Did this mean his solicitors had engaged in misconduct? Plainly not. Would it be better that letters like this were not written? Certainly. 56 What I propose to do is to accede partially to REN's argument and to order Mr Kennedy to pay REN's costs on a party-party basis for the period from 7 June 2013 through to 12 July 2013 (when I suggested Mr Gothard) save that I will disallow the recovery of any costs with respect to Turner Freeman's letter of 21 June 2013 which should not have been written in the terms it was. 57 It will be implicit in these reasons that I reject Mr Kennedy's argument that he should have his costs on an after 7 June 2013. His counter proposal that an independent liquidator should be chosen was not reasonable because it was contrary to the procedure contemplated by the Corporations Rules and because there was no reason to doubt the independence of the liquidators who had been nominated. That his proposed solution of using an independent third party to choose the liquidator was adopted reflects not the reasonableness of his own position, but rather a stubbornness against accepting the correct outcome. It is certainly not to be rewarded. 58 That leaves unresolved Mr Kennedy's argument that he ought to have his costs of dealing with REN's subsequently withdrawn allegation that there was a management deadlock. REN withdrew the allegation that there had been a management deadlock on 3 June 2013. However, by then Mr Kennedy and MS Cognosis had served their evidence explaining that there was no management deadlock because Mr Noun had resigned. The explanation spent a good deal of time explaining the circumstances of Mr Noun's resignation, i.e., Mr Kennedy's allegations concerning Mr Noun's not being a doctor. I do not consider that Mr Kennedy needed to prove more than that Mr Noun had resigned which was all that was needed in light of the allegation of deadlock. In those circumstances, I will make no order as to costs in relation to the preparation of that evidence. 59 Having drawn these conclusions it seems to me that I should order under s 466(2) of the Corporations Act that the liquidator not reimburse REN out of the assets of the company. REN has elected to pursue Mr Kennedy instead and it should not, in those circumstances, be entitled to recover from MS Cognosis. 60 Finally, both parties' having had a measure of success on the present application, there should be no order as to costs in relation to it. 61 I make the following orders: 1. For the period from 7 June 2013 to 12 July 2013, the second defendant pay the plaintiff's costs on a party-party basis. 2. The plaintiff not be entitled to any costs in relation to its solicitors' letter of 21 June 2013. 3. There otherwise be no order as to costs. 4. The liquidator of the first defendant is not to make any payment under s 466(2) of the Corporations Act. I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.