Sykes v Intermediate Capital Asia Pacific 2008 GP Limited

Background and Relevant Principles 3 The starting point for the applications is whether there is reason to believe that the applicants will be unable to pay the respondents' costs if so ordered. That is the criterion in r 19.01(3) which the respondents rely upon (affidavit affirmed by Ms Orfhlaith Maria McCoy on 23 August 2018, paragraphs 72 and 74 for the ICG Respondents; affidavit of Mr Alexander Boyd Haslam sworn on 21 September 2018, paragraphs 40 and 59 for AET Structured Finance Services Pty Limited). The issue involves a consideration of the likely costs of the respondents of the proceeding and the net assets of the applicants. 4 On the hearing of the application, I received affidavits from solicitors who had expertise in the assessment of costs. For the ICG Respondents, I received three affidavits of Ms Debra Vine-Hall, a solicitor and legal costs consultant, sworn on 19 September 2017, 18 October 2017 and 19 October 2017 respectively. For the applicants, I received an affidavit of Ms Elizabeth Harris, solicitor and costs lawyer, sworn on 13 October 2017. There was a correction to Ms Harris' affidavit resulting in a figure for the costs of the ICG Respondents if an order for costs was made in their favour against the applicants of $550,000 approximately. For AET Structured Finance Services Pty Limited, I received an affidavit from its solicitor, Mr Haslam. 5 The possible liability for costs of the applicants to the respondents, including AET Structured Finance Services Pty Limited, is $750,000 approximately on the applicants' figures, and $1.2 million on the respondents' figures. No party made detailed submissions to me about resolving the difference between the two figures. It did not seem to make a material difference to their respective arguments on these applications. I should mention that there was a suggestion by the applicants that an allowance of $200,000 for the costs of AET Structured Finance Services Pty Limited was excessive in view of its likely minor role in this proceeding. There is something to be said for that proposition, but I think that I should proceed on the basis that the applicants' own costs expert, Ms Harris, has and that is that an allowance of $200,000 approximately is appropriate. 6 As far as the assets and liabilities of the applicants are concerned, there was no real dispute that Mr Woodward, the second applicant, had $435,000 approximately in available assets, and Mr Dunn had $430,000 approximately in available assets. There is a dispute about Mr Sykes' financial position. It seems that a number of his assets are held by various trusts. The applicants' submission is that Mr Sykes had assets available to him worth $576,000 approximately. I prefer the respondents approach to the effect that there is no certainty that Mr Sykes (and the respondents) can access the trust assets and, in those circumstances, I should proceed on the basis that his assets have a zero value or, alternatively, a value of between $50,000 and $60,000. It is to be borne in mind that the applicants will have to meet their own costs of the proceeding. It seems to me that, in all these circumstances, even if one proceeds on the basis of the lower figures advanced by the applicants, there is reason to believe that the applicants will be unable to pay all of the respondents' costs if so ordered. 7 The applicants are private individuals, not corporations. In Pearson v Naydler [1977] 3 All ER 531; [1977] 1 WLR 899, Megarry V-C said (at 902): The basic rule that a natural person who sues will not be ordered to give security for costs, however poor he is, is ancient and well established. As Bowen LJ said in Cowell v Taylor (1885) 31 Ch D 34 at 38, both at law and in equity, 'the general rule is that poverty is no bar to a litigant'. This passage was cited with approval by Toohey J in James v Australia and New Zealand Banking Group Ltd (No 1) (1985) 9 FCR 442. 8 As I understood the respondents' submissions, they accept that for them to succeed it is not sufficient that there is reason to believe that the applicants will not be able to pay the respondents' costs. Something more must be shown before the power to award costs against private individuals is engaged. In any event, whether they accept it or not, that is the correct approach. 9 The respondents referred to the following passage in Rajski v Computer Manufacture & Design Pty Ltd [1983] 2 NSWLR 122 at 128 per Moffitt P: The general or overriding power of the court to order a stay of proceedings is a power, the boundaries of which have not been precisely defined, except that in the many different situations in which it has been exercised it can be seen as directed to preventing a person pursuing litigation or doing so in a way which is oppressive so as to be unjust to another party. The power is one which has been exercised where the unjust situation has been produced by a course of action which the plaintiff was entitled to take eg before another court, tribunal or body, or has been produced by improper means. There is no ground to conclude that such a power is taken away by an Act such as the Legal Services Commission Act. A stay can be granted in terms directed to a party to ensure that the proceedings are stayed unless and until the unjust situation is rectified. The purpose of the present discussion is to emphasize that the general jurisdiction or power to grant a stay of proceedings or to do so in conjunction with an order for security for costs remains unimpaired, so that the real question in any case is whether it is appropriate to exercise either power. 10 They also referred to the discussion by Applegarth J in Mbuzi v Hall & Anor [2010] QSC 359 at [57]-[70] and, in particular at [68]-[69]: As a general rule, the law requires defendants to accept the risk that natural persons who litigate viable claims in good faith for their own benefit might not be able to satisfy an order for costs. However, a claimant who "has adopted a vexatious mode of conducting the litigation" may fall outside the general rule. There may be other processes by which such vexation may be remedied, including a stay of proceedings. Still, where a party has adopted a vexatious mode of conducting the proceedings, the interests of justice in the case may justify an order for security for costs. The non-payment of existing costs orders may constitute vexation, particularly where the prior costs orders relate to a previous case involving similar disputes. The core element of vexation may be readily identified since "allowing the second case to proceed risks increasing the financial burden upon the defendant, who has already suffered the detriment of unpaid costs orders". The circumstances in which the previous costs orders were made, and the steps taken to have them quantified, assessed and enforced may be relevant. Naturally, any costs orders in favour of the claimant may need to be taken into account. (Citations omitted.) 11 I did not understand the respondents to allege that the circumstances were such that this proceeding was to be characterised as an abuse of process and liable to be dismissed on that ground. They submitted that they did not need to go that far. They submitted that, having regard to the circumstances, there would be injustice to them if they were required to defend this proceeding without the applicants providing security for their costs. The circumstances were that the applicants had adopted a two-case strategy which involved the following steps: the first step was to cause the Popeye companies to commence proceedings and seek an interlocutory injunction against the ICG Respondents in respect of certain transactions that occurred in May 2012; the second step involved the fact that the ICG Respondents would incur costs in respect of those proceedings, but the applicants would not incur costs in respect of those proceedings; the third step was that after costs had been incurred in the Popeye proceedings, the applicants would cause the senior management team of the SCF Group, that is to say, the applicants and eight others, to commence their own proceedings in respect of the May 2012 transactions; the fourth step involved the consideration that they would thereby create a situation whereby the ICG Respondents were faced with accrued costs from the Popeye proceedings, further costs in respect of the present proceedings, and the prospect of having no senior management team left at the SCF Group; and the final step involved the consideration that that would thereby put pressure on the ICG Respondents in relation to stalled negotiations with senior management (including the applicants). 12 Before turning to consider this submission, I will identify the other factors which are relevant on an application for security for costs. In Equity Access Ltd v Westpac Banking Corporation [1989] FCA 361; (1989) ATPR 40-972 at 50,635, Hill J identified the following factors as relevant: the chances of success, being merely whether the applicant has an arguable or triable case; whether an order for security would shut the applicant out from pursuing the case; whether impecuniosity arises out of the breaches alleged against the respondents; the public interest; discretionary matters peculiar to the case; and the quantum of risk that the applicant cannot satisfy an order for costs.

The Two-Case Strategy 13 The ICG Respondents relied on the alleged two-case strategy in the company proceeding in relation to their claim for costs against the non-parties. As I have said, the non-parties were the first and second applicants in this proceeding. An affidavit of another management shareholder, Mr Jamie Driscoll, was tendered by the ICG Respondents in the company proceeding and he was cross-examined by counsel for the non-parties. The same affidavit was tendered on the applications in this proceeding, but Mr Driscoll was not cross-examined. 14 In the company proceeding, I decided that an order for costs should not be made against the non-parties. I should make it clear that the company proceeding never went to trial and it has now been discontinued. The costs that were in issue on the application for an order for costs against the non-parties were, in essence, the costs of a failed application for an interlocutory injunction. 15 I made findings in the company proceeding about the two-case strategy. I see no reason not to make similar findings in this proceeding. Although lengthy, the passages which contains my findings are as follows: 31 I turn now to the evidence of Mr Driscoll. He, like the non-parties and others, was a management shareholder. By December 2016, it was apparent to all concerned with the group that it could not survive without a major restructure. The management shareholders were trying to negotiate a favourable deal with the respondents and Mr Sykes was involved in negotiations with the respondents' representatives. Mr Sykes was also trying to rally the management shareholders to support the negotiations and then, as events transpired, to take legal proceedings. 32 Mr Driscoll gave evidence of discussions he had with Mr Sykes. At some point, it is clear that Mr Sykes considered that having two actions against the respondents could result in a favourable settlement for management shareholders because of the costs to the respondents of defending two actions. I do not think that this conclusion could be contentious. Nor could it be contentious that, from January 2017, if not before, legal proceedings by the management shareholders were a possibility. The critical issue is whether an action by the applicant companies was part of a formulated strategy prior to 22 February 2017 or was no more than a reaction to the notice served by the respondents. If the former, that would be a powerful reason in favour of an order for non-party costs. If the latter, that might affect the long-term costs of these proceeding if they are continued, or perhaps aspects of the shareholder proceedings, but not the present application. 33 There was correspondence between Mr Sykes on the one hand, and Dr Heine or Mr Shelswell on the other, in late 2016, with a view to deciding upon a restructure, including a Management Incentive Package, which would be acceptable to the management shareholders and the respondents. Proposals were put by the respondents, but they were not acceptable to Mr Sykes who, on 13 December 2016, wrote that the respondents' offer did not "address the small shareholders along with a fairly poor result for myself". It seems that Mr Sykes sought legal advice as to the position of the management shareholders before 16 December 2016 and had not yet received it when he wrote to Mr Shelswell on that date. 34 At or about the same time, Mr Sykes was communicating with a group of management shareholders about his discussions with the respondents. On 19 December 2016, Mr Driscoll received a notice of a shareholders' meeting to be held on 21 December 2016. He attended the meeting and he gave unchallenged evidence that either Mr Sykes or Mr Woodward said the following: We received an offer from ICG. It does not sufficiently deal with my shareholding, and it completely overlooks Brett and Kym [referring to Brett Carthew and Kym Dunn, former employees of SCF]. ICG is acting outside of the terms of its contract. It is trying to revalue our shareholding and reset everything at $0. We [that is, Richard Sykes and Nicholas Woodward] are trying to strike a new deal with ICG, to try and recover some of our funds [I took that as a reference to the Management Shareholders' investments in Holdco]. Management would seek to make you [that is, Management Shareholders] whole. You will get an update from us later on. 35 By the time Mr Sykes wrote to Dr Heine on 19 January 2017, he had received some initial advice that there may be a number of causes of action associated with the transactions in 2012 and, in particular, that aspect of the transaction which involved the issuing of the Preferred Loan Notes. The tenor of the letter is that the causes of action were vested in the "non-ICG shareholders". Evidence of Mr Sykes confirms that in that he refers to rights "in our capacities as shareholders, against ICG and entities in the ICG Group". 36 Returning to Mr Driscoll's evidence, as I have said, there was a meeting of management shareholders on 21 December 2017. There was a second meeting on 14 March 2017. Although I did not deliver judgment on the application for an interlocutory injunction until 10 April 2017, all the costs which are the subject of the present application were effectively incurred up to and including the hearing on 7 March 2017, save and except for the costs of handing down judgment on 10 April 2017. 37 Mr Driscoll gave evidence of numerous telephone conversations and other conversations with Mr Sykes between 21 December 2016 and 14 March 2017 wherein Mr Sykes was urging Mr Driscoll to join a proposed class action by management shareholders against the respondents. Mr Driscoll thought that during the last week of February and the first week of March 2017, he was receiving at least three telephone calls a day from Mr Sykes. During those telephone conversations, Mr Sykes said words to the following effect: ICG's offer is not sufficient. We will seek to apply financial pressure on ICG to force a settlement. We will commence law suits against them. We are launching two Court proceedings. The first is on behalf of the business. The second will be a class action on behalf of all the Management Shareholders. The first proceeding is to get an injunction to stop ICG from taking over the business and resetting our shareholding at $0. The second action is to get a better outcome for the Management Shareholders and it will flow straight after the first. The entire management team needs to band together to force a negotiated outcome. You have nothing to worry about. I am very confident that we will win. This [the second action] will never go to Court. ICG will fold before that. It's 100% given that ICG will fold. If we all band together, ICG will have to blink. They will have no option but to settle. They will not want this in the press, and they cannot afford to have a business without a management team. Your job is safe if you stick with the management team. 38 I have considered Mr Driscoll's evidence very carefully. As I have said, the critical question is whether the two-case strategy was in place at the time the applicant companies brought this proceeding on 22 February 2017. I have taken into account as a significant factor that neither Mr Sykes nor Mr Woodward gave evidence refuting Mr Driscoll's evidence. Nevertheless, having regard to the cross-examination of Mr Driscoll, I am not satisfied that the two case strategy was in place before the institution of this proceeding. Of importance in reaching this conclusion is the fact that the proceeding seems to have followed as a matter of urgency from the service of the notice by the respondents. Proceedings in those circumstance would not be unexpected. In saying that, I am not making any assumption about the merits. One of the perhaps unusual features of this application is that it is made before a final determination of the merits of the substantive issues in either this proceeding or the shareholders' proceeding. … 40 I am not satisfied that the two-case strategy was in place prior to the commencement of this proceeding on 22 February 2017. Up until that date, the non-parties certainly seem to have been contemplating some form of shareholders' action. They did decide fairly soon after that they would institute a shareholders' action in the hope that the costs of the two actions to the respondents would result in a settlement. (Popeye Bidco Pty Limited (Receivers and Managers Appointed) v Intermediate Capital Asia Pacific 2008 GP Limited (No 3) [2018] FCA 1597.) 16 I am not satisfied that there was a two-case strategy in place at the time the company proceeding were instituted. Those proceedings were a not unexpected result of the notice which the Popeye companies received (see [24] of the reasons referred to above). 17 Thereafter, the applicants appear to have had in mind that a combination of the company proceeding, a shareholder proceeding and the management team refusing to continue with the companies was likely to force a settlement because of the costs of two actions and the prospect of the companies being left without a management team. I should add that this strategy failed with the company proceeding going no further than the application for costs against non-parties and a number of the management team whilst initially joining in this proceeding, discontinuing shortly thereafter. 18 In this proceeding, the applicants bring shareholder claims, if I can put it that way, including claims for breaches of promoters' duties and claims for oppressive conduct. It is undoubtedly true that there is a substantial overlap in terms of the facts between this proceeding and the company proceeding, but what is important, in my view, is that a number of the claims brought in this proceeding could not have been brought in the company proceeding. I will come to consider the merits of the claims to the extent appropriate at this stage, but at this point, I record that I have reached the view that it cannot be said that the claims are clearly without merit or are unarguable. 19 In my opinion, the matters identified by the respondents and discussed above are not sufficient to warrant an order for security for costs against private individuals. I would make the point that the position may well have been different had there not been a notice from the ICG Respondents or there was an ongoing attempt by the applicants to maintain two proceedings. I mention these matters to highlight the basis of my decision. 20 I turn to consider whether there is anything in the other relevant factors which would warrant an order for security for costs against private individuals.

Other Factors 21 The first factor is the chances of success, being merely whether the applicants have an arguable or triable case. The respondents point to my conclusion in the company proceeding that the applicant companies did not have a strong prima facie case (Popeye Holdco Pty Limited v Intermediate Capital Asia Pacific 2008 GP Limited [2017] FCA 369 at [56]). They point to the fact that the factual basis for the claims in this proceeding are similar to the factual basis in the company proceeding. That is largely true, although the matter is not as straightforward as suggested with some of the legal problems in the company proceeding not arising, or not arising in the same form, in this proceeding (e.g., the attribution problems). 22 The applicants emphasised the fact that they were raising a new claim relating to a sum of $23 million approximately. It is argued that the loan under the PLNSA was increased from approximately $63.6 million to $86.6 million contrary to the terms of a contract constituted by a Term Sheet. The contract was said to reflect and incorporate the "Interim HoldCo Debt" arrangement as pleaded in the Fifth Statement of Claim. I was taken by the applicants to documents which were said to support this case. In like fashion, the respondents took me to a spreadsheet which counters this case and shows the Interim HoldCo Debt as being in addition to the amount of $86.6 million relating to the preferred loan note. Clearly, it is not possible to make a decision about these matters on an application such as this. 23 I have considered the matter carefully and I am of the opinion that, on the evidence and arguments presented to this point (which are of necessity limited), the applicants have an arguable or triable case. 24 The second factor is whether an order for security for costs would shut the applicants out of pursuing their case. Even on the applicants' figures as to the respondents likely costs and, assuming the applicants' solicitors would be seeking periodic payment of their costs, the applicants would not be able to pursue their case to finality if they were ordered to provide security for costs. 25 The third factor is whether the applicants' impecuniosity arises out of the breaches alleged against the respondents. At this stage, the questions of causation of loss and the quantum of loss seem likely to be highly contentious at trial. On one view, what has happened in this case is that the business did not do as well as expected and that has been the cause of the problems. Nevertheless, the applicants do plead a case that but for the representations, they would not have entered into the original transactions or would have pursued a transaction with an alternative purchaser. In those circumstances, there is a pleaded case of the respondents being responsible for the applicants' present financial circumstances. 26 The fourth and fifth factors are public interest considerations which weigh in the balance against an order for security and discretionary matters peculiar to the case. The policy of the law includes a disposition not to make an order for security for costs against private individuals. That has already been discussed. Other than that, there are no obvious factors either way. 27 The final matter is the quantum of the risk that the applicants cannot satisfy an order for costs. There is a substantial risk that the applicants will not be able to satisfy fully the respondents' costs should they be ordered to pay the respondents' costs. 28 In my opinion, there is nothing in the other factors of sufficient weight to suggest that orders for security for costs should be made.

Conclusion 29 The respective applications of the ICG Respondents and AET Structured Finance Services Pty Limited will be refused. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko.

SCHEDULE OF PARTIES SAD 96 of 2017 Respondents Fourth Respondent: INTERMEDIATE CAPITAL GROUP PLC Fifth Respondent: AET STRUCTURED FINANCE SERVICES PTY LIMITED Sixth Respondent: INTERMEDIATE CAPITAL AUSTRALIA PTY LIMITED Seventh Respondent: HARTLAND INVESTMENTS PTE LIMITED Eighth Respondent: RYAN SHELSWELL Ninth Respondent: NICHOLAS SCHWARTZ Tenth Respondent: JONATHAN COAD Eleventh Respondent: LMPACT PTY LTD AS TRUSTEE FOR THE LMPAC FAMILY TRUST