Relevant history and resolution
19 The applicant submits that Ausin acted unreasonably in the conduct of the proceeding and failed to comply with ss 37M and 37N of the FCA Act by failing to lead any evidence or take any steps to inform him that the Shares were of no real commercial value. Rather than disabusing the applicant of his belief in the value of the Shares, it is submitted that "Ausin's conduct reinforced it" by "engaging in a years-long, protracted campaign of stymying Zhao's prosecution of his claim".
20 Mr Parish submits that Ausin was entitled to defend the case with vigour (citing O'Neill at [17] per Finn J) and the risk of a depressed value of the Shares was "not only foreseeable but present and discoverable". In support, Ausin relies upon multiple news articles published in 2018 and 2019 relating to Ausin China's collapse, as well as Ausin's financial statements that were filed with ASIC on 4 November 2020 and were therefore public records that were available to the applicant either prior to the issue of the proceeding or in the period that followed. It also says that it provided the applicant with the Directors Resignation Deed and Settlement Deed on 14 May 2020, which included references to the losses caused by Jin's conduct. He further submits that the decline in value of the shares was known to the applicant by at least 14 May 2020. From this material, Mr Parish submits that I should find that the state of the company was "easily discoverable".
21 In oral submissions, Mr Williams emphasised that evidence as to the value of the shares was "all available to one side and not to the other", and Ausin has not explained its silence on this point by the filing of any affidavit of a director. The applicant therefore invites me to make certain inferences by reference to Jones v Dunkel (1959) 101 CLR 298 as well as Blatch v Archer (1774) 1 Cowp 63; (1774) 98 ER 969.
22 In oral submissions, Mr Parish in answer to questions from me as to why the value of the shares was not disclosed until March 2022 submitted that his client's silence is explained by the fact that this information was not sought by the applicant. Upon my further probing as to whether that was the correct test to be applied under ss 37M and 37N of the FCA Act, Mr Parish submitted that Ausin did not "have an obligation to volunteer" this information, and when pressed further added "how can my client's conduct be unreasonable for not having provided information that it was not asked for?"
23 I do not accept those submissions. The statutory obligation of a party in a civil proceeding is to conduct it in a way that is consistent with the overarching purpose: s 37N(1) of the FCA Act. Expressly this includes the conduct of negotiations for settlement. The lawyer for a party must take account of the duty of a party and assist the client to comply with it. Compliance with the duty must inform all decision-making and steps taken by a party in a civil proceeding in this Court. These are statutory imperatives: Vita Group, In the matter of Vita Group Ltd [2023] FCA 400 at [14] per Jackman J.
24 The applicant submits that it only became aware that the Shares were of no commercial value and that continuing the proceeding was therefore futile in March 2022 and from two sources as set out in affidavits made by its solicitor, Mr Andrew Zhu. In the first made on 15 December 2022, Mr Zhu deposes at paragraphs [27] and [28]:
On 4 March 2022, Ausin filed and served an interlocutory application for a confidentiality regime in respect of the documents to be discovered. In support of that application, Ausin filed and served an affidavit of its director, Josip Zaja, affirmed on 3 March 2022. For the first time in the proceeding, Mr Zaja explained the issues behind the language of the documents referred to in Ausin's defence and why it was alleged that the nominal consideration for Jin's shares represented fair value.
Further, in his affidavit, Mr Zaja also revealed that Ausin's business had suffered a substantial reduction in sales volume. At paragraph 64, he deposed to the number of sales between 2013 and 2019, which started at 909, peaked at 2,107 in 2015 and crashed to 22 in 2019. This was the first time that Ausin had filed any evidence, or any other document in the proceeding, suggesting that the shares in Ausin were likely to be of little commercial value, if any.
25 In the second made on 24 February 2023, Mr Zhu at paragraphs [25] to [28], gives evidence about a settlement discussion that occurred between the parties and their lawyers on 18 March 2022. Evidence of what was said may be received on the question of costs: s 131(2)(h) of the Evidence Act 1995 (Cth). The evidence is:
On 18 March 2022, at about 4.00 pm, I hosted a meeting in my office with Ausin's representatives, where we discussed possible resolution of this proceeding. The following people attended the meeting with me:
(a) Zhao (by WeChat phone);
(b) Ms Liu (in person);
(c) Matthew Watson (in person), a principal of Ausin's solicitors;
(d) Mr Shaba (by Zoom);
(e) Mr Zaja (in person).
We discussed various topics and exchanged offers to settle the proceeding. During those discussions, Mr Zaja said:
(a) Ausin may not be around much longer because it was not really trading;
(b) there was "no goldmine behind" Ausin.
Further, Mr Watson said that we are not going to see a trial because Ausin would wound [sic] up before the proceeding reached trail [sic].
Zhao made an offer for resolution of the dispute in that meeting, and Ausin's representatives asked that that be left open for some time. Then meeting concluded at about 5.10 pm.
26 The first respondent's solicitor Mr Watson in his affidavit of 27 February 2023 does not, in material respects, dispute the content of the matters discussed on 18 March 2022. His recollection at paragraph [8] of his affidavit is:
I have the following recollections and disagreements with Mr Zhu's recollection (to the extent that words are attributed as having been said by people in the following subparagraphs, those words were said so they could be heard by everyone in attendance at the meeting):
(a) Mr Zhu said: "Our client's position is simple. He is owed a certain amount of money and he wants it back."
(b) There was then a discussion about Mr Zaja's concern that the true purpose of the proceedings was to obtain Ausin's financial documents to assist Ausin's "enemies in China".
(c) Mr Zhao then added: "At this moment I am doing this all for myself. However, if this persists in the future, I cannot guarantee that will remain the case. I will bring other people into it".
(d) I then asked if he meant Mr Jin and I was told by Mr Zhu that he didn't have any names currently. I then said: "we will have to assume you mean Mr Jin for the moment which obviously concerns us because we are worried that you will give documents to Mr Jin", to which Mr Zhu said: "I don't have instructions about that".
(e) Later in the discussion, and in response to the threat made by Mr Zhao referred to in paragraph 8(c) above, I said: "Ausin may not be around by the time the proceedings conclude in its current form".
(f) Immediately following what I said, as detailed in the preceding paragraph, I recall Mr Zaja clarified what he had instructed me to say and said words to the effect: "the company [Ausin] is not trading. It's gone".
(g) To the best of my recollection, neither Mr Zaja nor me, nor Aydn Shaba for that matter, said anything about winding up Ausin before the proceedings reached trial.
(h) Further, Mr Zhu omits the details of two offers in his affidavit.
(i) At the meeting, Ausin offered to resolve the proceedings on the basis that the parties walk away, each bearing their own costs. I conveyed that offer to Mr Zhu.
(j) That offer was rejected immediately. Mr Zhao then made a counter-offer as referred to in paragraph 28 of Mr Zhu's affidavit. That offer was for Ausin to pay Mr Zhao $1,400,000.00 inclusive of interest and indemnity costs.
(k) After Mr Zhao made the counter-offer referred to in the preceding paragraph, I recall Mr Zaja saying "There is no pot of gold at the end of this. If the assumption is that there is a stack of cash at the end of this, then he is completely wrong".
27 For the purpose of resolving the costs of this proceeding I find that at the meeting between the parties and the legal representatives on 18 March 2022, Mr Zaja said words to the effect that the first respondent was not substantively trading at that time, there was no "goldmine", by which I find that he meant that it was a corporation without material assets, and that Mr Watson stated that the matter would not proceed to trial because the first respondent would, by the trial date, have been wound up. I find that objectively these statements were made, and were understood, as conveying to the applicant and his solicitors that there was little commercial purpose to be had in continuing with the prosecution of the proceeding for the reason that the Shares and therefore the security interest were of little value.
28 Mr Zhu gave further uncontested evidence (which I find surprising in the circumstances) at paragraph [29] of 24 February 2023 that:
Mr Zhao instructs me and I believe that, had he been, at an early stage of this proceeding, given the evidence about the reduction in sales volume to 2019 or informed of Ausin's uncertain future, he would have seriously considered the situation and reconsidered his position. For my part, I would have sought instructions from him to explore with Ausin resolving the proceeding by consent. Failing that, I would have sought instructions about discontinuing.
29 Despite the entirely self-serving nature of this evidence, I accept it because it was not challenged through an application to cross-examine Mr Zhu and I find according to it. Importantly, my finding is that if the financial worth of the first respondent had been disclosed to the applicant at an early stage in this proceeding, then it is unlikely that the applicant would have continued the matter and would have sought to resolve it, most likely on the basis that it be discontinued and that each party should pay their own costs.
30 Accordingly, I accept the submission of Mr Williams that prior to 18 March 2022, the applicant believed that the shares in Ausin were of substantial value and the proposition was not contradicted as Ausin did not "lead any evidence or take any step" to inform him otherwise. He further submits (and I accept):
It was the affidavit of Josip Zaja affirmed on 3 March 2022 in support of the application for a confidentiality regime that, for the first time, revealed that the substantial sales volume of Ausin's business, which necessarily underpinned the value of its shares, had plummeted by 2019. The evidence was that Ausin's sale had fallen to a total of 22 in 2019, down from a peak in 2015 of 2,107. In other words, in the space of 4 years, sales had dropped by 99%. Mr Zaja's evidence did not extend beyond 2019.
On 18 March 2022, Mr Zaja asserted in a meeting with Zhao and his solicitors that Ausin might not be around much longer and that there was no "goldmine" behind Ausin, and Ausin's solicitor foreshadowed the winding-up of Ausin prior to trial.
(Footnote omitted.)
31 This submission accords with common practice in commercial litigation. A prudent solicitor who acts for a private corporate respondent will ordinarily take instructions as to the net value of the corporate assets in order to give advice as to the cost and benefits of defending litigation which may be capable of sensible commercial resolution if instructions are received to disclose the net asset position, usually by provision of recently audited year-end financial statements. Correspondingly, a prudent solicitor who acts for an applicant where such disclosure is made will ordinarily give advice as to whether it is commercially sensible to proceed where the prospect of any or any material recovery is low. Of course, there are exceptions, such as where the respondent has, or is believed on reasonable grounds to have, indemnity insurance for the whole or a part of the claim. But even in those circumstances, where the limit of indemnity is far less than the quantum of a claim a prudent insurer will ordinarily instruct that disclosure of the policy and its limits be made in order to facilitate commercial settlement discussions.
32 Prudent commercial practice of that type was in my view required of Ausin in order to conduct this proceeding consistently with the overarching purpose. This is not a case where Ausin was at risk of any form of financial liability, save for costs, if the applicant had successfully progressed this matter to trial.
33 I also find, by necessary inference, that the applicant was motivated to commence and continue the proceeding in order to set aside the reduction and transfer of the Shares because he believed them to be of material value. Were it otherwise, little was to be achieved from the orders as sought against Ausin. Rather than disclose the worth of the first respondent, significant litigation was engaged in between commencement of the proceeding on 31 October 2019 and its discontinuance on 16 December 2022. The history is set out in some detail in Mr Zhu's affidavit of 15 December 2022 and is not in dispute.
34 The history of interlocutory skirmishing need not be repeated or summarised. I accept as accurate the analysis of Mr Williams in his written submission at [16]-[23]. I also accept his characterisation of the first respondent's conduct at [16]:
The motivation for the proceeding was evident from the outset of the proceeding: both in the allegations and nature of relief sought, and in the evidence led during early interlocutory steps. Ausin alone held information that undermined that motivation. It did not reveal that information or proffer it on a confidential basis at any time prior to 3 March 2022. Instead, it engaged in protracted and unnecessary litigious warfare. Its conduct contravened section 37N(1) of the Federal Court Act. It was unreasonable. It caused the rapid escalation of unnecessary costs and served only to reinforce in Zhao the notion that Ausin had something of real financial value to protect.
(Footnote omitted.)
35 In the result, I am satisfied that once the applicant had been so appraised he took appropriate steps to instruct his solicitor to seek to resolve the proceeding as set out in the correspondence of 25 November 2022 addressed to Ausin's solicitors. Clearly, there was a period of delay between March and November of that year, but that delay is adequately explained by Mr Zhu in his affidavit of 24 February 2023 due to a serious illness suffered by the applicant's daughter, and his need to return to China for her treatment. In a timely way, following his daughters discharge from hospital, in November 2022 the applicant gave instructions to resolve the proceeding. The offer was that Ausin pay to the applicant $100,000 within 14 days of acceptance and that the proceeding be dismissed with no order as to costs. That offer was open until 9 December 2022. It was not accepted.
36 Rather, on 28 November 2022, Ausin's solicitors responded with a counter-proposal that the proceeding be dismissed with no order as to costs but that the parties enter into a deed of settlement pursuant to which the applicant would pay to Ausin $350,000 "on account of the legal fees and disbursements" incurred. Within that correspondence, one sees the claim Ausin had incurred legal fees in the order of approximately $562,000 to that time.
37 Next followed sometimes long, and sometimes argumentative, correspondence between the solicitors regarding proposals and counterproposals to resolve the proceeding. On 29 November 2022, the applicant offered that the proceeding be dismissed with no order as to costs and the sum of $50,000 be paid by Ausin to the applicant as a contribution to its legal fees. On 1 December, that offer was rejected and a counter-proposal of $300,000 to be paid by the Applicant to Ausin was made. On 7 December 2022, the applicant offered that the proceeding be dismissed with no order as to costs and that the modest sum of $25,000 be paid by Ausin to the applicant as a contribution to his legal fees. That offer was rejected and a counterproposal was made on behalf of Ausin on 15 December 2022 that the proceeding be dismissed and that the applicant pay $200,000 into court as security for Ausin's costs. Thereafter, leave was granted to discontinue without the question of costs being resolved by agreement.
38 In my view this is an appropriate case to exercise my discretion pursuant to r 26.12(7) of the Rules to depart from the default position. I am of the view that Ausin, acting in accordance with the overarching purpose, ought to have instructed its solicitor at a relatively early stage in this proceeding to disclose to the solicitor for the applicant its net worth and therefore the value of the Shares the subject of the relief sought against it. I am further of the view that Ausin's solicitor, acting in accordance with the duty imposed by s 37N(2), ought to have given advice to Ausin at a relatively early stage in this proceeding to provide instructions to make that disclosure. In accordance with my causation finding, if that disclosure had been made then it is likely that the applicant would have decided not to continue with this proceeding. It is the failure to make that disclosure which caused considerable costs to be incurred by each party. Ausin's conduct was unreasonable.
39 I am also of the view that the applicant acted reasonably in seeking leave to discontinue this proceeding after it became aware of the value of the shares. True it is that there was a period of delay between March and November 2022, but as I have found that delay is explained.
40 Therefore, in my view this is not a case where the applicant should be made liable for Ausin's costs of the proceeding by operation of r 26.12(7) of the Rules.
41 The next question is: what order for costs should be made in the exercise of my general discretion? The applicant seeks an order that Ausin pay his costs of the proceeding on a party and party basis. That order is not appropriate in those terms, for the simple reason that necessarily costs were incurred prior to the commencement of this proceeding and there would have been a period of time thereafter during which, if Ausin had acted so as to give effect to the overarching purpose, considered advice would have been given, reflected on by Ausin and if accepted, an instruction would have been provided to make the necessary disclosures. Once that disclosure had been made, there would have been a period of time for mature consideration of that information by the applicant.
42 Fixing a time point is not straightforward. This matter was the subject of case management orders made by Davies J between 22 November 2019 and 18 November 2021. It was docketed to my list in February 2022. On 11 February 2022, I made detailed case management orders in relation to interlocutory applications that were outstanding between the parties. One of those applications as made by Ausin sought a transfer of the proceeding to the Supreme Court of New South Wales. Ultimately, it was not pressed. There were various disputes about discovery and claims to confidentiality that were pressed by Ausin. The affidavit in support alerted the applicant to the value issue. A further application seeking the appointment of an expert to value the Shares, was made by Ausin on 4 March 2022.
43 On the first respondent's submissions, the decline in the value of the Shares was known by January 2019 at which time it was clear that the Chinese funded investment business of the first respondent had collapsed. In my view, a period of six months from commencement of the proceeding is a reasonable time for Ausin to have considered its position, to have instructed its lawyer to make disclosure of the value of the shares and for that disclosure to be made with supporting documents. Thereafter, a period of three months is a reasonable time within which the applicant could have considered its position and instructed his solicitor to resolve the matter on commercial terms, most likely discontinuance with each party bearing their own costs. Some further period should be allowed for those negotiations and finalisation, say one month. The total is ten months from commencement of the proceeding on 31 October 2019. Thus I have concluded that Ausin should be responsible for the costs of the applicant from 31 August 2020 and to that date, each party should bear their own costs.
44 It follows that there is no merit in Ausin's submission that it should have its costs of the proceeding.
45 I am also of the view that the most efficient mechanism to resolve disputes about costs is to make a lump sum order, having regard to the matters set out in part 4 of the Costs Practice Note (GPN-COSTS).