Solicitors:
Blueprint Law (Plaintiffs/Respondents)
Armstrong Law Partners (First, Third and Eighth Defendants/Applicants)
Bridges Lawyers (Second and Fourth Defendants/Applicants)
File Number(s): 2020/00365677
[2]
Judgment
These reasons are concerned with notices of motion filed by two groups of defendants in which they seek orders that the corporate plaintiffs provide security for their costs pursuant to s 1335 of the Corporations Act 2001 (Cth) and Uniform Civil Procedure Rules 2005 (NSW) r 42.21 (UCPR).
The notices of motion were heard on 6 August 2021, and I published my principal reasons for judgment on 26 August 2021: Sun Asia Group Pty Ltd ATF Sun Asia Group Trust v Invigor Group Ltd [2021] NSWSC 1082 (J).
As I explained in the principal judgment, the plaintiffs make three separate and distinct claims in these proceedings. I considered the defendants' applications for security for costs separately in relation to the three claims.
In these reasons I will assume that the reader is aware of the terms of the principal judgment.
As I will explain below, I determined in relation to the plaintiffs' most substantial claim that a particular order for security for costs was appropriate in the circumstances of the case. However, I did not immediately make that order. The reason was that in respect of the two lesser claims made by certain of the plaintiffs, which were only made against one group of defendants, I considered that the issues relevant to the question whether the relevant plaintiffs should be ordered to provide security for costs did not arise with sufficient clarity out of the statement of claim or the evidence provided to the Court at the hearing of the notices of motion. I found that it was reasonable in the circumstances for the Court to defer its decision as to whether to order the provision of security for costs in relation to the two lesser claims until the relevant defendants had filed their defences. Essentially, that was because it was not sufficiently apparent that the two lesser claims would be contentious, so that it was difficult for the Court to decide whether additional security for costs was warranted as well as the security for costs that the Court proposed to order in respect of the principal claim made by the plaintiffs.
The Court did not make any orders at all on the notices of motion as it contemplated that defences would be filed by the relevant defendants in the timeframes required by the UCPR and that the Court would then be asked to complete its consideration of the matter and make appropriate orders.
As it has happened, the parties then embarked upon an exercise of seeking particulars of the plaintiffs' statement of claim, which led to the filing of a further amended statement of claim on 13 December 2021, defences and cross claims on 14 March 2022, and defences to the cross claims on 23 and 24 May 2022.
The parties caused the notices of motion to be relisted and the further hearing took place on 10 June 2022.
I will deal first with what I described in the principal judgment as the plaintiffs' first claim.
It will be appropriate that I repeat here the conclusion that I reached in the principal judgment concerning the provision of security for the defendants' costs in respect of the first claim:
[141] The evidence would, in my view, justify the Court in making an order against the corporate plaintiffs that they provide an appropriate amount for the security of the defendants' costs - albeit only on the basis of representation by a single set of lawyers - were it not for the unresolved question of the value of SAG's shares in Invigor. The concessions made by the corporate plaintiffs concerning their impecuniosity were subject to the possibility that the shares may have a sufficient value to enable SAG to pay any costs orders that may be made in favour of the defendants against the corporate plaintiffs.
[142] The position that Invigor has taken on this issue is extraordinary. SAG paid to Invigor the sum of $1,000,000 for the issue of the shares in Invigor. In the manner explained above at [42], the $1,000,000 may be taken to be the price paid by SAG for the shares. The $1,000,000 was borrowed by SF10 from Nehoc, but on the express condition that it be used to pay the price for the issue of the shares. Invigor has therefore had the benefit of the $1,000,000 from that time. Invigor's shares on the ASX were subject to a trading halt at Invigor's request on 28 October 2019, and quotation was suspended on 30 October 2019. That was little more than 4 months after the $1,000,000 was paid over to Invigor. The evidence of the circumstances in which SAG lost its ability to realise the value of its shares in Invigor is referred to above at [86]. At that time the shares had a market value of about $364,500.
[143] Invigor has declined to concede that the shares held by SAG in Invigor are worthless. Invigor and its executives, who include Gary and Gregory Cohen, are the only parties in possession of information relevant to the true value of SAG's shareholding in Invigor, and whether and in what circumstances SAG may be able to realise that value by the reinstatement of Invigor for quotation on the ASX.
[144] The defendants want the Court to determine their applications for security for costs on the basis that SAG is impecunious, but Invigor at least will not accept that it is impecunious and will not shed light on the true position. It would therefore be unfair for the Court to decide the applications for security for costs on the basis that SAG is devoid of assets capable of meeting costs orders against the corporate plaintiffs in favour of the defendants.
[145] If SAG fails in its claim against Invigor, it will retain the shares that it holds in Invigor. In the absence of evidence that the shares are worthless or that Invigor's shares will not be reinstated for quotation on the ASX, I will proceed upon the basis that, in the event of failure of its claim, SAG will retain an asset whose value could be applied to meeting costs orders made against the corporate plaintiffs.
[146] Further, if SAG's claim fails, the likelihood is that the other corporate plaintiffs' claims will also fail, as the plaintiffs other than SAG rely upon the same representations by silence that SAG has pleaded. SAG's case may be stronger than those of the other corporate plaintiffs because it also relies upon alleged express representations.
[147] If SAG's claim succeeds, it is possible that relief will only be granted to it on the basis that the issue of shares to it by Invigor is set aside in order to ensure the restoration of the status quo before the transaction occurred. That would only happen concurrently on Invigor returning the purchase price of $1,000,000 to SAG. The consequence is that it is possible that, as a result of the proceedings, SAG's shareholding in Invigor may be replaced by the return of the price by Invigor.
[148] Although it may appear to be an unlikely outcome, it is possible that SAG's claim based upon the alleged express representations will succeed, and the claims of all of the corporate plaintiffs based upon the alleged representations by silence will fail. In that case, the other corporate plaintiffs' capacity to pay any costs orders made against them would require the application by SAG of the fruits of its successful claim against Invigor in payment of those costs.
[149] There remains a possibility that, even if SAG succeeds in its claim against Invigor, either its shareholding in Invigor or any relief that it obtains against Invigor may ultimately prove to be worthless. In that event, SAG may not be able to meet any costs orders made against the other corporate plaintiffs in favour of the defendants. While that is a possibility, in the absence of evidence from the defendants as to the likelihood of it occurring, it would not in my view be just to require the corporate plaintiffs to provide security for the defendants' costs on the basis of a mere possibility.
[150] These considerations in principle cause me to conclude that the appropriate course will be for the Court to give SAG the opportunity to grant a security over the shares it holds in Invigor, as well as any replacement asset for those shares that it acquires as a result of these proceedings, to secure payment to the defendants of all costs orders made in the proceedings against the corporate plaintiffs.
[151] During the course of the hearing, counsel for the plaintiffs advised the Court that SAG was prepared to grant a security over its interest in its shareholding in Invigor, if the Court was otherwise not prepared to dismiss the defendants' applications for security for costs outright. When I enquired whether SAG was prepared to take this course, I had not realised that it would be necessary for SAG also to charge any alternative asset that it acquired as a result of these proceedings.
[152] As, apparently, Mr Shannon loaned to SAG the $1,000,000 that SF10 borrowed from Nehoc, it would be necessary for Mr Shannon to enter into an agreement subordinating any rights that he has against SAG in favour of the defendants. For more abundant precaution, the other plaintiffs should do the same thing.
[153] It appears that SAG is a special purpose vehicle established for the purpose of holding Mr Shannon's interests in Invigor, and that it otherwise has not traded. A submission was made to that effect by counsel for the plaintiffs at the hearing. However, as I do not consider that the evidence tendered by the plaintiffs is adequate to prove that fact, the defendants are entitled to an order that SAG prove by affidavit that its interest in the shares in Invigor is unencumbered.
In essence, I found that the defendants had established the requirements for an order against the plaintiffs that they provide security for the defendants' costs in respect of the first claim in the conventional manner by payment into court or by bank guarantee, save for one matter. That was that the subject matter of the first claim was the issue by the defendant Invigor to the first plaintiff, SAG, of a parcel of shares in Invigor for a price of $1,000,000 paid by SAG using a sum of $1,000,000 borrowed by SAG through a related company from Nehoc. That $1,000,000 parcel of shares remained the property of SAG at the date of the hearing. It had a market value of about $364,000 at the date trading in Invigor's shares on the ASX was halted at Invigor's request on 28 October 2019 and quotation was suspended on 30 October 2019. As at the date of the primary judgment, I was not prepared to treat SAG's Invigor shares as having no value. Invigor was the only party in a position to explain the circumstances of the trading halt and suspension and the likelihood that the suspension would be lifted. It did not do so.
Consequently, I determined that, while the defendants had established an entitlement to security for costs in relation to the plaintiffs' first claim, it would be fair to require the plaintiffs to provide that security by means of a charge granted by SAG over its shares in Invigor. To ensure that any such charge would be effective, I added the requirements at J [152]-[153].
As I noted at J [154], the Invigor defendants had not provided separate estimates of their costs of defending the consultancy agreement claim by SAG and the debt claim by the EAA, being the second and third claims considered in the judgment. For the reasons explained at J [155]-[162], I deferred making a separate decision as to whether security for costs should be ordered in respect of those claims until after the relevant defendants had served their defences.
The evidence before the Court on the 10 June 2022 hearing was that the suspension of Invigor's shares was lifted by the ASX on 21 April 2022, and that, as of 31 May 2022, SAG had 1,458,334 shares in Invigor that had a market value of $86,041.71. There was no evidence that this amount was not representative of the value of the shares since the trading suspension was lifted.
I understand that the plaintiffs accepted at the hearing that the fact that there had been a consolidation of Invigor's share capital was immaterial as the consolidation did not affect the value of the shareholding of each shareholder in the company.
Because of an obscure observation made by Mr Shannon in his affidavits that the company called SAF10, which borrowed the $1,000,000 from Nehoc to on-lend it to SAG, "may have an interest in some of the Invigor Shares which were issued to SAG as a result of monies raised under the Nehoc Agreements" the possibility arose that SAF10's possible interest may take priority to any charge granted by SAG to the defendants to secure their costs of the proceedings. That led to a flurry at the hearing, but the defendants ultimately did not read the evidence that they initially proposed to lead to demonstrate the consequences of receivers and managers having been appointed over SAF10.
For the reasons that follow, it is not necessary to consider whether this obscure observation by Mr Shannon should be taken, by itself, to make the proposed charge over the Invigor shares inappropriate.
As a matter of procedure, in cases where the Court has determined that there is a risk that the plaintiff will not be able to meet a costs order in favour of the defendant such that it is appropriate to make an order for security for costs, the Court may make an order for the provision of additional security where it is satisfied that circumstances have changed in a way that warrants additional security being provided: Misthold Pty Ltd v NSW Historic Sites and Railway Heritage Company Pty Ltd [2022] NSWSC 42 at [17]-[18] (Payne JA). That may be appropriate where the defendant can demonstrate that, in some manner that was not reasonably anticipated at the time the initial order was made, the defendant's costs can be expected to have increased in a manner that will not adequately be protected by the original security that was ordered to be provided. In my view, a similar consideration applies to a case where the Court has ordered that security be provided in the form of a charge over an asset owned by the plaintiff, and the defendant can demonstrate that the value of the asset has declined in a manner that will make it improbable that the charge will serve the initially expected purpose of providing the level of security contemplated by the Court.
The simple fact is that now that it is demonstrated that the suspension of trading of the Invigor shares has been lifted and their market value as of 31 May 2022 was $86,041.71, the assumptions upon which I was initially prepared to consider that the provision of a charge over those shares would be adequate security for the defendants' costs has been undermined. As it has happened, the time taken by the parties to complete the pleadings has had the effect of demonstrating that the provision of security for costs by means of the proposed charge will be wholly inadequate, and that change of circumstance has occurred before the Court has actually made any order for the provision of security for costs.
The first cross claim filed by Nehoc on 14 March 2022 seeks orders to enforce the transaction documents under which Nehoc made the $1,000,000 loan to SAF10. It should follow that Nehoc is entitled to the relief that it seeks if the plaintiff's' case against Nehoc fails. The existence of the first cross claim does not affect my conclusion that the plaintiffs are the effective claimants in the proceedings.
It is arguable that the second cross claim filed by Invigor on 14 April 2022, under which it seeks damages against a number of the plaintiffs and other cross defendants in respect of the circumstances in which the parties entered into a heads of agreement, is a separate claim that may have the effect of enlivening in the cross defendants an entitlement to the provision for security for costs by the cross claimant, Invigor. Whether or not that is true is not a question that is now before this Court.
Now that I have had the opportunity to review the defences filed by the Invigor defendants in response to the second and third claims considered in the principal judgment, I am satisfied that those defendants raise genuine justiciable issues that warrant the Court accepting that it was reasonable for those defendants to include the costs of the forensic effort necessary to defend those claims in the calculation of the amount of the security for costs that they seek.
I noted at J [1] that the two groups of defendants had sought security for their costs in the amounts of $180,000 and $198,867.14 respectively. The Nehoc defendants have conceded that the latter amount should be reduced to $161,817.14 by reason of an error in the original calculation.
Particularly in view of the procedural history of the proceedings since the date of the principal judgment, I am satisfied that the amounts sought by each group of defendants as security for their costs is clearly reasonable, and in fact relatively modest.
At J [136]-[140], I considered the question of whether the defendants had established that the corporate plaintiffs should be ordered to provide almost identical amounts of security for costs for the separate legal representation of the two groups of defendants. I said at J [136] that I was not satisfied that that matter had been established. I reached that conclusion in part on the basis of an analysis of the solicitors' tax invoices for the two sets of defendants that showed that Gary Cohen and Gregory Cohen were personally involved in the preparation of the other group of defendants' cases in a way that was not consistent with the two sets of defendants conducting their defences in an arms' length way that would be expected if they recognised a real risk that a conflict of interest would develop that would cause the defendants embarrassment in relation to their legal representation. It had seemed to me on the evidence that each of Gary and Gregory Cohen had become so involved in the preparation of the defence of the other's group of defendants that the defendants must have made a judgment that the likelihood of a real conflict arising in the future was sufficiently remote that it could be ignored.
Consequently, I concluded at J [140] that I would not order the corporate plaintiffs to provide the double amounts of security for costs sought by the defendants, and that the quantum of the security for costs that the Court might order should be substantially reduced.
The defendants made submissions at the recent hearing directed at persuading the Court that it should now make orders that the plaintiffs provide security for the costs of each group of defendants in the amounts sought by them. The defendants relied upon the circumstance that the plaintiffs pleaded that the Invigor defendants made certain positive representations to the general effect that the Invigor share price would increase in certain circumstances. However, the relevant representative of the Nehoc group of defendants, Gregory Cohen, was not alleged to have been at the meetings at which positive representations were made, and the only allegation of misleading or deceptive conduct against the Nehoc group of defendants was that representations by silence were made that Invigor, in effect, was not in a bad financial position.
The Nehoc group of defendants relied upon the claim that those defendants have a causation defence. Counsel for the Nehoc defendants made the following submission [T 8.4-9.37]:
My client, Gregory Cohen, was [not?] said to make express positive representations that the share price would increase in certain circumstances. My client, Gregory Cohen, was expressly not said to be at those meetings. The only representations he was said to make was representations by silence that the company in effect wasn't in a bad financial position. The very real problem arises - and we've pleaded a causation defence which I'll take your Honour to in a moment - if it turns out to be the case that Gary is found to have made those positive representations, that might be a complete answer to Gregory.
Because if the misleading and deceptive conduct was the positive representations, they were relied upon and they caused Mr Shannon loss and Mr Shannon seeks his loss, it very well may be at the trial or after the evidence comes on that I want to make submissions supporting the plaintiff's case about that and saying, well, if those representations were made, they were the true cause of any loss and nothing that my client did was causative. That's just one circumstance which gives rise to a very real problem of joint representation, both at this point, but at trial, and it really placed me in an impossible position should that arise at the trial, if I was acting for both of them. It's in those circumstances that the ordinary process whereby different defendants who potentially have different interests are separately represented, in my submission, is appropriate.
…
Turning to para 34 then just to finish off the defence, what your Honour sees at paras 34 and 35 is the causation defence that I said divides my clients and Gary's interests, and in particular Mr Shannon, his interest, entered into agreements with Invigor that require them to make payments to Invigor. Now if they were misled into those agreements, it's got nothing to do with my client because there was not said to be any express representations at that time.
My client's case is that as a result of entering into those agreements, Mr Shannon, his interest, had outstanding financial liabilities that they had to satisfy, and the true cause of them incurring a debt to my client, the million dollar loan, is simply to fulfil those financial obligations. So there's a real divergence between my client's case and Gary's interest case on that point.
Counsel's explanation assists me in understanding that the allegations in pars 34 and 35 of the Nehoc defendants' defence to the effect that Invigor's alleged conduct caused SAG to borrow the $1,000,000 from Nehoc through SAF10, because SAG's agreements with Invigor had the effect that SAG had to acquire that amount of money, were intended to have the effect of excluding Nehoc's conduct as being causative of SAG's loss.
While I remain concerned about the level of apparent cooperation by Gary and Gregory Cohen with the other's legal representatives, I am satisfied upon reflection that the two groups of defendants are justified in having separate legal representation, and that at the hearing these proceedings there is a real possibility that the Nehoc defendants may be able to avoid liability to the plaintiffs by establishing that only the conduct of Invigor was causative of any loss suffered by any of the plaintiffs. Whether or not that outcome will eventuate will depend upon the course of the proceedings.
In any event, now that I have had an opportunity to consider the pleadings, I am satisfied that the amount of the security for their costs sought by each group of defendants is moderate, and there is no justification for the Court to make an arbitrary reduction in the amount of the security to be provided by the plaintiffs to one or other group of defendants.
As there was no application by the corporate plaintiffs that the amounts of security be paid in tranches, I will order that they be provided in single amounts.
The Invigor defendants sought an order that the proceedings be dismissed pursuant to UCPR r 42.21(3) if the corporate plaintiffs fail to comply with the order for provision of security for their costs within the time stipulated. That rule permits the Court to order that the proceedings on the corporate plaintiffs' claim for relief in the proceedings be dismissed if they fail to comply with the order for security for costs. I will not make that order now in advance as a guillotine order. The Nehoc defendants sought an order that the proceedings be relisted before the Court on the date that is 14 days after the date that the orders are made for consequential orders, or, in the event that the security has not been provided in accordance with the orders, for consideration as to whether it is appropriate for an order for the dismissal of the corporate plaintiffs' proceedings to be made. I propose only to make an order relisting the proceedings before the Registrar about 14 days after the corporate plaintiffs will be required to provide the security, so that the parties may then seek such directions as may seem appropriate upon the basis of the circumstances as they then appear.
Both groups of defendants seek orders that the corporate plaintiffs pay their costs of the notices of motion. I accept that it is common practice for the Court to make an order that the plaintiff pay the defendant's costs of a successful application for security for costs, even though it may happen that in fact the plaintiff succeeds in the proceedings. However, such an order is not always made. A recent case in which the Court has ordered that the costs of the application be the parties' costs in the cause is Interslice Pty Ltd v CCA Investments - Bass Hill Pty Ltd [2021] NSWSC 1578 (Ward CJ in Eq, as the President then was) where both parties had enjoyed mixed success on the application (see [103]). In the present case the position is different, but the corporate plaintiffs substantially succeeded at the first hearing in only being required to provide security for the costs of the first claim by a charge over the Invigor shares to be granted by SAG. The defendants ultimately succeeded at the second hearing in obtaining an order for the provision of more conventional security, but that was only because of a change in circumstances since the first hearing. It would not be fair to the corporate plaintiffs for the Court to treat them as being wholly unsuccessful on the defendants' applications. The appropriate order in this case is that the costs of the applications be the parties' to the notices of motion costs in the cause.
The Court's orders will be:
1. Order pursuant to s 1335 of the Corporations Act 2001 (Cth) and Uniform Civil Procedure Rules 2005 (NSW) r 42.21(1)(d) that the first, second, third, fifth and sixth plaintiffs:
1. provide security for costs of the first, third and eighth defendants in the sum of $161,817.14: and
2. provide security for costs of the second and fourth defendants in the sum of $180,000.
1. Order that such security be provided by way of bank guarantee or payment into Court within 14 days of the making of order 1.
2. Order that until such security is provided in accordance with orders 1 and 2 the proceedings be stayed.
3. Order that the costs of the defendants' notices of motion filed on 4 and 12 February 2021 be the parties' to those notices of motion costs in the cause.
4. Stand the proceedings into the Registrar's list on 19 July 2022 for directions.
[3]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 21 June 2022