[1997] HCA 6
Re New Cap Reinsurance Corporation Holdings Ltd (1999) 32 ACSR 234
[1999] NSWSC 536
Tickle v Crest Insurance Co of Australia Ltd (1984) 2 ACLC 493
Zempilas v JN Taylor Holdings Ltd (No 2) (1990) 55 SASR 103
Source
Original judgment source is linked above.
Catchwords
Ex parte Lai Qin (1997) 186 CLR 622[1997] HCA 6
Re New Cap Reinsurance Corporation Holdings Ltd (1999) 32 ACSR 234[1999] NSWSC 536
Tickle v Crest Insurance Co of Australia Ltd (1984) 2 ACLC 493
Zempilas v JN Taylor Holdings Ltd (No 2) (1990) 55 SASR 103
I am confronted with the familiar and often difficult problem of determining what orders should be made for the costs of an application, now settled, where there has been no adjudication on the merits of the application.
The principles are well established: [1]
1. the court cannot try a hypothetical action between the parties;
2. nonetheless, in an appropriate case, the court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action;
3. an example of such a case is where the court is able to conclude that one of the parties has acted so unreasonably as to justify a costs order against it;
4. in other cases, the court may be able to conclude that one party would almost certainly have succeeded or that one party has had a substantial victory and the other a substantial loss;
5. a distinction needs to be drawn between a case in which one party, after litigating for some time, effectively surrenders to the other on the one hand; and cases where some sort of supervening event or settlement so removes or modifies the subject of the dispute that no issue remains between the parties except as to costs, although no party can be said to have won; and
6. if both parties have acted reasonably in commencing and defending proceedings, and the conduct of the parties continued to be reasonable until the litigation was settled or the further prosecution became futile, the proper exercise of the court's discretion will usually mean there should be no order as to costs.
Here, the plaintiff, Wonderful Pty Limited, moved for the interim relief sought in its Further Amended Summons filed on 29 September 2023 for the appointment of a provisional liquidator to the first defendant, Faithful Pty Limited and a receiver to the Faithful Unit Trust ("the Trust"), of which Faithful is the trustee ("the Interim Relief").
During argument on that application on 2 April 2024, Mr Hughes, for Wonderful made a number of criticisms of Faithful's conduct as trustee. Mr Hughes submitted that the controllers of the second defendant, Sandu Pty Limited, had caused Faithful to engage in that conduct. Near the conclusion of argument, I enquired of Mr Condon SC, who appeared with Ms Buncle for Faithful, whether Faithful was able to offer an undertaking to the Court as to the role it would henceforth play in these proceedings, and more generally as trustee of the Trust, that might answer these criticisms. Over the following days, Mr Condon and Ms Buncle formulated a proposal. There was debate between the parties about that proposal. Ultimately, an agreement was reached that resulted in what Mr Hughes has now described as "a less drastic interlocutory regime … acceptable to [Wonderful]" than the appointment of a provisional liquidator and receiver. On 16 April 2024, I made orders by consent giving effect to that agreement. I return to these below.
In that context, although Wonderful no longer presses for the appointment or a provisional liquidator to Faithful, nor for the appointment of a receiver to the Trust, it seeks from Sandu, or alternatively from Faithful, its costs of its application for that relief. Sandu seeks an order that Wonderful pay its costs of the application.
There is also an argument about the costs of Wonderful's application to amend its List Statement to join three directors of Faithful as defendants. I will deal with that argument at the conclusion of these reasons.
Consideration of the parties' contentions concerning the costs of Wonderful's application for the Interim Relief requires an examination of the background to this dispute and the manner in which events unfolded in the days leading up to the hearing of Wonderful's application for Interim Relief on 2 April 2024.
[3]
Background
From around 1990 to September 2003, corporate entities associated with Kam Wah Wong (Mr Wong) and Yin Ling Kam (Mrs Wong) operated a restaurant known as The Golden Century Seafood Restaurant at an address in Sussex Street, Sydney.
Until July 2002, those premises were leased to entities associated with Mr and Mrs Wong by the then owners of the property.
In early 2002, Mrs Wong, Choi Kook Fun Lui (Mrs Lui) and Mrs Wong's brother, Chi Oh Kam (Mr Kam), came to an arrangement the result of which was that:
1. Faithful was incorporated;
2. Mrs Wong and Mrs Lui were appointed directors of Faithful;
3. shares were allotted in Faithful as follows:
1. Wonderful, an entity associated with Mr and Mrs Wong, as to 30%;
2. Sandu, an entity associated with Mrs Lui and her husband, Chu Fan Lui (Mr Lui) as to 65%; and
3. the third defendant, GPA Investment Pty Ltd, a company associated with Mr Kam, as to 5%;
1. Faithful was appointed trustee of the Trust;
2. units in the Trust were allotted to Wonderful, Sandu, and GPA in proportions corresponding to their shareholdings; and
3. Faithful purchased the Sussex Street premises.
Between 2002 and 2011, Faithful leased the premises at market rates to companies controlled by Mr and Mrs Wong. Companies controlled by Mr and Mrs Wong operated the restaurant in the premises.
Between 2002 and 2020, Mrs Wong and Mrs Lui were the joint signatories to the bank accounts held by Faithful and, on Wonderful's case, during that period all payments made by Faithful were jointly authorised by Mrs Wong and Mrs Lui.
In March 2020, as a result of public health orders issued in connection with the Covid-19 pandemic, the restaurant closed.
The restaurant later reopened. A dispute arose as to the rent that the Wong entities should pay Faithful under the existing lease.
On 23 June 2021, at a general meeting of the members of Faithful, Sandu exercised its majority voting rights to appoint Mrs Lui's son, Michael Bing Kin Lui (Mr Michael Lui) as a director of Faithful. This was done over the objection of Wonderful. Mr Michael Lui's appointment as director gave Sandu board control of Faithful.
The restaurant closed permanently in August 2021 as a result of disputes between Wonderful and Sandu about the amount of rent that the Wong entities should pay in the context of the pandemic.
There has now been an irrevocable breakdown of trust between the Wong interests, who stand behind Wonderful, and the Lui interests, who stand behind Sandu and presently control Faithful.
In July 2022, Faithful sold the Sussex Street premises for $50 million plus GST.
It is against that background that Wonderful commenced these proceedings in December 2022 seeking, amongst other things, the Interim Relief.
On 15 December 2022, the Court made a series of orders ("the Injunctions") restraining Faithful from:
1. withdrawing monies from identified bank accounts;
2. disposing of or dealing with or in any way diminishing the value of Trust assets, subject to a carve out for "bona fide and reasonable payments" made with Wonderful's consent in respect of these and other identified proceedings and "regulatory fees"; and
3. paying or incurring such "bona fide and reasonable payments" without giving specified notice to Wonderful's solicitor.
On 15 March 2024, Wonderful's application for the Interim Relief was set down for hearing before me on 2 April 2024.
On that application, Wonderful alleged that the Lui interests had caused Faithful to mismanage the Trust, exclude the Wong interests from the management of the Trust, and behave in a manner that was not impartial and favoured the Lui interests. Wonderful contended that Faithful's conduct showed that the Injunctions did not provide adequate protection for its interests as beneficiary of the Trust.
In particular, Wonderful alleged that the Lui interests had caused Faithful to:
1. fail to have accounts prepared for FY2021, FY2022 and FY2023;
2. fail to make distributions required by the relevant Trust deed;
3. use Trust assets to prosecute their interests in these proceedings; and
4. otherwise act partially and in a manner favouring the Lui interests.
Wonderful also alleged that the Lui interests had caused it damage by reason of the circumstances in which the Sussex Street premises were sold, [2] and the alleged failure of Faithful to rent the premises following the closure of the restaurant in September 2022. These allegations raised wide factual questions, which I would not have been able to resolve on Wonderful's application for the Interim Relief.
[4]
Events evidently precipitated by the fixing of the hearing
After Wonderful's application for Interim Relief was, on 15 March 2024, set down for hearing, Faithful took a number of steps evidently designed to blunt the criticisms inherent in Wonderful's application for the Interim Relief and to demonstrate that, whatever may have happened in the past, it could now be relied on to behave impartially and appropriately as trustee of the Trust.
I will deal with these steps in the context of considering Wonderful's contentions concerning Faithful's conduct.
I should, however, mention at this stage that in their submissions on Wonderful's application for the Interim Relief, Mr Condon and Ms Buncle stated that "Faithful's position is that it neither consents to, nor opposes, the [Interim Relief] sought by Wonderful" and that its submissions on the application were "to assist the Court in understanding recent developments in the proceeding and in the affairs of Faithful". That laudable and appropriate position represented a significant and recent change to the position hitherto adopted by Faithful.
[5]
Principles
The relevant principals concerning an application to appoint a provisional liquidator were summarised by Barker J in Australian Securities and Investments Commission v Continental Coal Ltd: [3]
"(1) The Court has a wide and complete discretion whether or not to appoint a provisional liquidator. [4]
(2) The power is by no means limited, the grounds are infinite, and all that really has to be shown is that there is a bona fide application constituting sufficient ground for the making of the order. [5]
(3) Nonetheless, the appointment of a provisional liquidator pending the determination of a winding up application is a 'drastic intrusion into the affairs of the company' and will not be done if other measures would be adequate to preserve the status quo. [6]
(4) It follows an applicant must show 'some good reason' for intervention prior to the final hearing of the winding up application, such that the applicant may show that the appointment is needed in the public interest or to preserve the status quo or to protect the company's assets or affairs. [7]
(5) The party seeking the appointment must establish, among other things, that there is a reasonable prospect that the winding up order will be made on the later application. [8] "
Where the affairs of the company have been carried on casually and without due regard to legal requirements so as to leave the Court with no confidence that the company's affairs would be properly conducted with due regard to the interests of shareholders, it may be appropriate to appoint a provisional liquidator. [9]
The Court has an inherent power to appoint a receiver to property on the application of a beneficiary to protect the Trust property. [10]
The Court also has such power under the Corporations Act 2001 (Cth). [11]
[6]
The alleged mismanagement and impartiality
Much of what follows is drawn from Mr Hughes's submissions. These matters were not disputed in Mr Condon's and Ms Buncle's submissions for Faithful, nor those of Mr Priestley SC and Mr Rodgers for Sandu.
[7]
The engagement of Solomons Accountants
In June 2022 Mrs Lui caused Solomons Accountants to be retained on behalf of the Lui interests.
On 7 September 2022 the board of Faithful passed a resolution appointing Solomons to provide accounting and related services to Faithful. Mrs Wong was present at the relevant board meeting and made no comment on the resolution to engage Solomons. She abstained from voting on the resolution.
Documents produced on subpoena suggested that Solomons had been engaged by the Lui interests with a view to finding some wrongdoing by Wonderful.
For example, on a date not identified in the evidence, Faithful gave these instructions to Solomons:
"(a) 'check company background of beneficiary as if they are connected to Wonderful or have direct financial benefits and personal connection with Wonderful, which may be considered involving CONFLICT OF INTEREST'
(b) 'Bank facility agreement specifically mentioned loan purpose is meant for renovation? If so, Faithful shall passed Resolution permitted [Mrs Wong] to utilise part of the loan sum for her personal use. Perhaps, there might be some other arrangement between Faithful & Wonderful';
(c) 'Mrs [Wong] may file an injunction against Faithful in regarding her rights on the claim for her share on the property sales money. To consult lawyer for further opinions'." (Emphasis in original.)
These instructions suggested that the Lui interests had caused Solomons to be instructed to see whether any claim may be available against the Wong interests.
This is notwithstanding the fact that, in its List Response, Faithful has admitted that:
"… at the time Faithful retained Solomons, it was not aware of any circumstances that would suggest that Mrs Wong or Wonderful had engaged in any improper arrangements or used any funds of Faithful improperly for their personal use".
Faithful refused to answer questions asked by Mrs Wong about what Solomons was instructed to do, despite the fact that Mrs Wong is a director of Faithful.
Until recently, Faithful refused Wonderful's suggestion that an independent accountant should prepare Faithful's accounts.
That changed on 28 March 2024 when Mr Michael Lui deposed, in an affidavit made in response to Wonderful's application for the Interim Relief, that:
"I agree to Faithful engaging another accountant to review and finalise the financial statements. I understand from my discussions with Mrs Lui (my mother) that she also agrees to the appointment of another accountant to review and finalise the financial statements".
Mr Michael Lui did not explain this change of heart. I would infer that it was caused by the imminence of the hearing of Wonderful's application.
One of the orders made by consent on 16 April 2024 was that:
"[Faithful] agrees to appoint, and do all thing reasonably necessary to appoint, Steven Di Lio of Titan Partners as the accountant to Faithful (Accountant) within 14 days of the date of these orders, and:
(a) [Faithful] must use its best endeavours to promptly provide the Accountant with the books and records of [Faithful] and must thereafter provide reasonable assistance to the Accountant as he may require in relation to the financial affairs of [Faithful]; and
(b) [Faithful] must, to the fullest extent practicable ensure that all communications between [Faithful] and the Accountant, if in writing, include Mrs Wong, or if made orally, take place in Mrs Wong's presence whether in person or by telephone or other electronic means." (Emphasis in original.)
Thus, Wonderful's position that Faithful engage an independent accountant has, in effect, been vindicated.
[8]
Failure to prepare accounts
Until very recently, and since Solomons was appointed, Faithful failed to prepare accounts for FY2021, FY2022, and FY2023.
As recently as 19 March 2024, Faithful's solicitor, Mr David Andrews (a partner of Makinson d'Apice) wrote to Wonderful's solicitors saying that "the financial accounts for Faithful for the financial years 2021, 2022 and 2023 are not complete".
That also changed shortly thereafter.
In his affidavit of 28 March 2024, Mr Michael Lui exhibited draft financial statements for FY2022 and FY2023 and explained how Mr Lye from Solomons had been able to create these documents. During the hearing before me on 2 April 2024 it emerged that the accounts for each of these financial years were by then ready for consideration by Faithful's directors.
Again, I would infer that this recent activity was prompted by the imminence of the Wonderful's application for the Interim Relief.
[9]
Distributions
The Trust's financial year ends on 30 June each year.
The relevant Trust deed provides that after accounts have been prepared, the trustee must transfer the income of the Trust into a distribution account, less any reserve, and then distribute those monies to unitholders. [12]
For FY2023, Faithful failed to decide upon any reserve, with the result that the whole of the income for FY2023 was vested in the beneficiaries.
The Sussex Street premises were sold during FY2023 for $50 million. Wonderful's expert, Mr Andrew Ross from KordaMentha, estimated that the Trust's income was then somewhere between $32 million and $42 million.
Faithful has offered no explanation for the failure to distribute that money to the unitholders.
In September 2023, the board of Faithful agreed to make a "without prejudice" distribution of $17 million to the unitholders in proportion to their unit holdings. Mrs Wong participated in that decision, although Wonderful contends that the distribution was far less than Faithful was required to make under the Trust deed.
On 19 March 2024, a few days after Wonderful's application for the Interim Relief was fixed for hearing, Mr Michael Lui circulated a proposal to distribute all but $1.5 million of the Trust funds. That has now occurred.
Again, I would infer that this activity was prompted by the imminence of Wonderful's application for the Interim Relief.
[10]
The conduct of this litigation
Until very recently Faithful has played an active role in these proceedings. It served a detailed List Response in which it has denied matters that it ought simply to have not admitted. It also filed a Cross-Claim against Mrs Wong requiring her to account for the proceeds of a number of cheques drawn, inferentially improperly, on Faithful's bank account.
Under, I infer, the guidance of Mr Condon and Ms Buncle, Faithful has now agreed, in the 16 April 2024 orders, to file an amended List Response withdrawing such denials and, with one specified exception, has agreed not to participate in the hearing. By those orders Faithful has also agreed to seek dismissal of its Cross-Claim against Mrs Wong, albeit reserving its position in relation to costs.
Again, this is a recent development.
[11]
Payment of Faithful's legal costs
Mr Andrews deposed Faithful has paid its solicitor, Makinson d'Apice, some $107,000 in fees for these proceedings to date and that "the amount of costs remaining to be paid in relation to these proceedings" is almost $340,000.
In substance, what is at play in these proceedings is a dispute between the Wong and Lui interests. Faithful, as the trustee, should at all times have played the neutral role that it has now sought to play on this application. The amount of fees incurred suggests that it has not done so.
Mr Hughes cross-examined Mr Andrews in relation to payment of his firm's fees. In that cross-examination, as clarified by Mr Andrews in a subsequent affidavit, it was revealed that Mr Michael Lui has paid Faithful's solicitors, Makinson d'Apice, the sum of almost $223,000 in respect of these proceedings.
As I have set out above, the Injunctions restrain Faithful from making "bona fide and reasonable payments" without giving a specified notice to Wonderful's solicitor. The particular order made was:
"5. In order to make a payment or incur an obligation [as] contemplated by [the order referred to at [20(b)] above] the following procedure must be adopted:
a. at least five (5) business days before making a payment of the kind permitted by [the order referred to at [20(b)] above], [Faithful] must provide to [Wonderful's] solicitor:
i. in respect of any payment [for legal services], a copy of the invoices for the provision of legal services that is proposed to be paid, which may contain reasonable redactions to time entries arising from privilege claims; and
ii. in respect of any payment [for accounting services], a copy of the relevant invoice relating to the expense proposed to be paid.
b. [Wonderful] must inform [Faithful] within (5) business days of the request pursuant to paragraph 5(a) whether it consents to the payment or obligation."
The direct payment by Mr Michael Lui to Faithful's solicitors of the $223,000 to which I have referred had the effect that the requirements of this order were not enlivened. In the absence of any explanation from Mr Michael Lui, or from Mr Andrews about this, the inference I would draw was that this was, as Mr Hughes submitted, a device adopted by or on behalf of the Lui interests to avoid the order being enlivened and thus to avoid Wonderful receiving notification of the fees being incurred by Faithful in the proceedings.
Part of the matters recorded in the 16 April 2024 orders is an undertaking from Mr Andrews, given on a "without admissions basis" and on behalf of Makinson d'Apice, to repay this amount to Mr Michael Lui by instalments. Mr Andrews has made an affidavit confirming that the first of these instalments has now been paid.
The 16 April 2024 orders also vary the Injunctions to provide for a more precise regime for the payment by Faithful of further accounting and legal costs.
These matters appear to me to bespeak an implicit acknowledgement on behalf of Faithful that it has allowed itself to be used to accommodate the Lui interests.
[12]
Was adequate protection in place?
At the hearing of Wonderful's claim for the Interim Relief, Mr Priestley and Mr Rodgers for Sandu submitted that there was "already a stable regime in place with respect to Faithful under the freezing orders originally made in the proceedings by Ball J", that is, the Injunctions, and that there "is no proper basis to be concerned about the conduct and management of [Faithful's] affairs".
The circumstances I have set out above show that contrary to that submission, there was significant reason to be concerned about the conduct and management of Faithful's affairs and a powerful basis to conclude that this was a result of the manner in which Mrs Lui and Mr Michael Lui, as Sandu's nominated directors on the board of Faithful, had caused Faithful to behave.
The steadying influence that has now been brought to bear in the management of Faithful was, for the reasons I have explained, evidently brought about by the imminence of Wonderful's application for Interim Relief and, I would infer, the moderating influence of those now appearing for Faithful.
In my opinion, this is a case where Sandu, through its directors, has acted unreasonably so as to justify a costs order against it.
It is also a case where I think it very likely that, but for the compromise that the parties have achieved, I would have granted Wonderful the Interim Relief it sought. That is, Wonderful would almost certainly have succeeded. In substance, it has achieved a substantial victory.
In my opinion, this is one of those relatively rare cases where, although the parties have compromised their differences, and notwithstanding the fact that there has been no adjudication of Wonderful's application for Interim Relief on its merits, it is appropriate to make a costs order in favour of Wonderful against Sandu.
In their submissions on costs, Mr Priestley and Mr Rodgers said:
"The Sandu Parties maintain that the final hearing on the merits in these proceedings will cast the Plaintiff's conduct leading to this interlocutory application in a poor light. The Court cannot assess that now, but it is submitted this at least tends against any costs order against the Sandu Parties at this stage."
Whether or not those matters are borne out at the end of the day, I am satisfied that the appropriate order to make now is that Sandu pays the costs of Wonderful's application for Interim Relief.
[13]
Wonderful's application to amend its List Statement
When this matter was before Ball J on 15 March 2024, those appearing for Sandu informed the Court that Wonderful's application to amend its List Statement would be opposed by Sandu.
Accordingly, directions were made for the exchange of submissions about that question.
When the matter was called on for hearing before me, I was informed that the proposed amendments could be made by consent.
I am informed that the fact that the amendments were not opposed was notified to those advising Wonderful very shortly before the hearing before me.
Wonderful accepts that it must pay the costs thrown away by the amendment but submits that it should have its costs of its application to amend. In my opinion the appropriate order is that Wonderful's costs of its motion of 7 March 2024 seeking leave to amend its List Statement be its costs in the cause.
[14]
Conclusion
The parties should confer and agree on the orders necessary to give effect to these reasons.
I note that the proceedings are listed for directions on 3 May 2024.
[15]
Endnotes
See Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624-625; [1997] HCA 6 (McHugh J); One.Tel Ltd v Deputy Commissioner of Taxation [2000] FCA 270 at [5]-[6] (Burchett J).; Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 at [5] (Davies AJA, Mason P and Meagher JA agreeing).
The premises were sold for $50 million, but Wonderful alleges a sale at $65 million was possible.
[2016] FCA 416 at [4] (Barker J), approving Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) [2013] FCA 234 at [11]-[18] (Gordon J).
Re Huntford Pty Ltd (1993) 12 ACSR 274 at 277 (Seaman J).
Re McLennan Holdings Pty Ltd (1983) 7 ACLR 732 at 738 (Master Lee); Re New Cap Reinsurance Corporation Holdings Ltd (1999) 32 ACSR 234; [1999] NSWSC 536 at [23] (Young J).
Zempilas v JN Taylor Holdings Ltd (No 2) (1990) 55 SASR 103 at 106 (King CJ, Cox and Olsson JJ agreeing); (1990) 9 ACLC 147, and other authorities referred to by Gordon J at [13].
Allstate Exploration NL v Batepro Australia Pty Ltd [2004] NSWSC 261 at [30] (Austin J); Australian Securities and Investments Commission v Weerappah (No 2) [2009] FCA 249 at [8] (Goldberg J).
Tickle v Crest Insurance Co of Australia Ltd (1984) 2 ACLC 493 at 494 (McLelland J); Australian Securities Commission v Solomon (1996) 19 ACSR 73 at 80 (Tamberlin J); Australian Securities and Investments Commission v Weerappah (No 2) at [8].
Australian Investments and Securities Commission v Continental Coal Ltd at [5] citing Montgomery Windsor (NSW) Pty Ltd v Ilopa Pty Ltd (1984) 2 ACLC 224 (McLelland J).
JD Heydon, Jacobs' Law of Trusts in Australia (8th ed, 2016, LexisNexis Butterworths) at [23-05].
S 233(1)(h).
Cll 10(a), (e), (f).
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Decision last updated: 26 April 2024