Shield Lifestone Holdings Pty Ltd v LSKF Holdings Pty Ltd

McCALLUM JA: I agree with Emmett AJA.

EMMETT AJA:

In March 2016, Shield acquired 50% of the issued capital of Litestone, with the result that Shield and LSKF were equal shareholders in Litestone. The two directors of Litestone were Mr Kyri Kyriakouleas, who was the sole shareholder and director of LSKF, and Mr Feng Ye, who was the shareholder and sole director of Shield. In around April 2017, Shield, LSKF and Litestone entered into a written shareholder’s agreement (the Shareholders’ Agreement). The terms of the Shareholders’ Agreement are not before the Court. However, it appears that cl 5.2 of the Shareholders’ Agreement relevantly provided that, so long as Shield remained a shareholder of Litestone and Litestone requested loans from Shield in specified circumstances, Shield was required to provide loans on terms specified in the Shareholders’ Agreement. Loans were made by Shield to Litestone pursuant to cl 5. It also appears that, in addition to the making of loans to Litestone, Shield, or an entity related to Shield or Mr Ye, provided a performance bond for the benefit of Litestone, although the terms of the bond are not before the Court.

A dispute arose between Shield and LSKF in relation to the obligation of Shield to provide further loans to Litestone. That dispute gave rise to a question, as between Shield and LSKF, as to the enforceability of the Shareholders’ Agreement. In addition, a further question arose as to the consequences of alleged breaches of cl 5 of the Shareholders Agreement, assuming it was enforceable.

It appears that the Shareholders’ Agreement provided a mechanism whereby, where one shareholder was a “defaulting shareholder”, the other shareholder could require the defaulting shareholder to transfer the defaulting shareholder’s shares to the non-defaulting shareholder. The mechanism appears to have involved the non-defaulting shareholder first giving a default notice to the defaulting shareholder requiring remedy by the defaulting shareholder of the alleged breach.

On or about 7 December 2017, LSKF served a default notice on Shield. On 18 December 2017, Shield commenced the Equity Proceedings and, on 20 December 2017, the duty judge accepted LSKF’s undertaking not to deal with Shield’s shareholding in Litestone.

On 27 December 2017, LSKF served two further default notices on Shield. On 10 January 2018, LSKF filed a cross-summons seeking declaratory relief and orders based on the notices served on 27 December 2017.

On 15 January 2018, LSKF’s solicitors wrote to Shield’s solicitors making an offer to acquire Shield’s shares in Litestone at “fair value” as agreed or pursuant to an agreed valuation mechanism or process. The offer said that there would need to be an agreement as to the purchase price or, alternatively, a mechanism agreed on for the determination of value before a binding agreement would arise. The offer was not accepted. In any event, the offer was not one the acceptance of which would have given rise to a binding contract.

On 22 January 2018, Shield filed an amended summons in the Equity Proceedings and, on 23 January 2018, LSKF filed an amended cross-summons. On 12 February 2018, Shield filed a statement of claim and LSKF filed a defence to the statement of claim on 14 February 2018. On 15 February 2018, LSKF filed a statement of cross-claim. Shield filed a defence to the statement of cross-claim on 20 February 2018.

By its amended summons, Shield disputed the validity of the notices given by LSKF and sought declarations that the various notices were invalid for the purposes of the Shareholders’ Agreement. Shield also sought an order under s 461(1)(k) of the Corporations Act 2001 (Cth) that Litestone be wound up on the ground that it was just and equitable for Litestone to be wound up. By its cross-claim, LSKF sought declarations that the Shareholders’ Agreement was not a valid, effective or binding contract between the parties. LSKF also sought, in the alternative, declarations that Shield was obliged, pursuant to the Shareholders’ Agreement, to transfer its shares to LSKF at the “Fair Market Value” determined in accordance with the Shareholders’ Agreement.

The Equity Proceedings were fixed for hearing before the primary judge on 13 March 2018. Shield prepared an outline of opening submissions dated 9 March 2018 (the Outline). It appears that the Outline was served and filed. The Outline made the following assertions:

On 13 March 2018, the day fixed for hearing of the proceedings before the primary judge, Shield, LSKF, Litestone, Mr Ye and Mr Kyriakouleas entered into a settlement agreement (the Settlement Agreement). The Settlement Agreement included the following terms:

Having been informed of the Settlement Agreement, the primary judge proceeded to hear argument on the enforceability of the Shareholders’ Agreement and, for reasons published on 20 March 2018, [1] concluded that there was no ground for holding that the Shareholders’ Agreement was void for uncertainty. It appears that his Honour did not consider the question of whether or not a winding up order should be made in respect of Litestone on either on the ground it was just and equitable to do so or under s 459A of the Corporations Act. An appeal to the Court of Appeal by LSKF was dismissed on 20 June 2018 for reasons published on that day. [2]

LSKF then sought orders for costs against Shield. In its written submissions of 15 November 2018, LSKF sought orders as follows:

LSKF’s rationale for the different periods advanced by it is as follows:

The proceedings came before the primary judge on 2 July 2019 for argument on the question of costs. For reasons given ex tempore on that day, his Honour ordered Shield to pay all LSKF’s costs of the proceedings save for the costs of and in connection with the questions raised by the contention that the Shareholders’ Agreement was void and ineffective and the contention based on the first notice. His Honour ordered LSKF to pay Shield’s costs of those questions.

In his reasons, the primary judge said that Shield and LSKF had fallen out and that LSKF wanted to retain ownership and control of Litestone but Shield would not agree. His Honour referred to the Settlement Agreement as providing a mechanism for the appointment of a valuer to determine the fair market value of Shield’s shares in Litestone so that LSKF could exercise “an option” to purchase the shares. His Honour found that that process had been undertaken, that a fair market value of nil had been arrived at and that LSKF had acquired Shield’s shares in Litestone. His Honour said that that was precisely what LSKF had been seeking to achieve in the Equity Proceedings, that that was its commercial object and that the legal means by which LSKF sought to achieve its commercial objective was through the lengthy series of claims for relief in its cross-claim. His Honour held that the ultimate object of the claims for relief made by LSKF was for Shield to transfer its shareholding in Litestone to LSKF.

The primary judge said that the notices issued by LSKF pursuant to the Shareholders’ Agreement were designed to trigger or enliven LSKF’s entitlement to acquire Shield’s shareholding in Litestone at fair market value. His Honour found that LSKF was at all times willing, from the date of filing its cross-claim, to assume the liability of Litestone for the repayment to Shield of the net balance of monies recoverable by Shield from Litestone representing funds that had been advanced by Shield and said that that was the price that LSKF was prepared to pay for the acquisition of Shield’s shareholding in Litestone. His Honour also referred to the offer made by LSKF and Mr Kyriakouleas on 15 January 2018 to purchase Shield’s shareholding in Litestone “for fair value”.

The primary judge then said that, at all times, Mr Ye contended that he should be entitled to purchase LSKF’s shareholding in Litestone, as was made clear in the Outline. His Honour said that when the parties reached a resolution by the Settlement Agreement, Shield agreed to allow LSKF the option of purchasing its shares in Litestone and had effectively “given in” to the claims by LSKF, subject to the repayment of the loans made to Litestone. His Honour said that repayment of the loans was a commitment that LSKF had undertaken, and was spelt out in its cross-claim.

Shield disputes that LSKF ever made a commitment in the cross-claim. Thus, the relevant provisions of the cross-claim may be restated as follows:

I have added emphasis to indicate that there was no consensus as to the amount owing by Litestone. In that regard, it is also significant that, on 15 January 2018, LSKF’s solicitors wrote to Shield’s solicitors referring to an assertion in earlier correspondence that Shield had lent to Litestone a total amount of $632,581.32. The letter requested Shield to provide documentary evidence proving both the amount of money that Mr Ye said Shield had lent to Litestone and the amount of money that Mr Ye said remained payable by Litestone to Shield.

It is clear from the terms of the cross-claim and that letter that there was no consensus as to the amount owing. Ultimately, the Settlement Agreement resolved any dispute by the agreement that LSKF would pay the sum of $530,500 to Shield and the acknowledgement by LSKF that that sum was presently owing by Litestone to Shield. It is apparent, therefore, that, while LSKF may have been prepared to repay monies advanced to Litestone by Shield, the amount was in dispute. Nevertheless, his Honour purported to find that the payment of the sum of $530,500 by LSKF “was never a matter in serious contention or, perhaps, any contention at all”. The basis for that finding is unspecified and is difficult to justify in the light of the cross-claim and the letter referred to above.

The primary judge concluded that the case before him was one where, although there had been no determination of all of the issues on the merits, one party had had “a substantial victory” or one party had “effectively surrendered” to the other. His Honour considered that there was “proper factual basis” for the exercise of the Court’s discretion to make an order for costs “to the successful party”. His Honour concluded that LSKF was the successful party, except as to the question of the enforceability of the Shareholders’ Agreement and the abandoned claims for relief.

By summons filed on 1 October 2019, Shield sought leave to appeal from the Costs Order. A direction has been given that the appeal, if leave is granted, be heard concurrently with the application for leave.

The draft notice of appeal filed in support of the application for leave asserts that the exercise of discretion by the primary judge miscarried because his Honour:

The two letters of 15 January 2018 referred to above and the Settlement Agreement were before the primary judge and are before this Court. However, while a copy of the Shareholders’ Agreement was in evidence before his Honour, it is not presently before this Court. There is no evidence before this Court concerning the advances made by Shield to Litestone or as to the performance bond referred to in the Settlement Agreement. Further, neither this Court nor the primary judge had evidence of the default notices said to have been given by LSKF under the Shareholders’ Agreement invoking the provisions for the acquisition of shares from Shield.

LSKF contends that Shield has failed to identify any real issue of principle, question of public importance or any reasonably clear injustice going beyond something that is merely arguable. Accordingly, it says, leave should be refused. In any event, LSKF contends, if leave to appeal were granted, Shield has failed to establish any error in the exercise of the discretion. LSKF supports his Honour’s analysis and assessment of the Settlement Agreement as amounting to a substantial victory in relation to the issues other than those reserved for determination by cl 3 of the Settlement Agreement. LSKF contends that, in so far as Mr Ye and Shield wanted to be extricated from the joint venture constituted by Litestone, it was unreasonable for Shield not to have accepted LSKF’s offer of 15 January 2018 and to have consented to the alternative relief claimed by LSKF in relation to the transfer of shares in Litestone. It asserts that it was unreasonable for Shield to resist the proposal that its shareholding be acquired by LSKF at a price to be determined by an appropriate valuation process.

Shield accepts that an award of costs such as that made by the primary judge is essentially the exercise of discretion. Accordingly, it must be demonstrated [3] that his Honour:

Shield contends that his Honour misapprehended the parties’ respective commercial objectives in pursuing the litigation and the Settlement Agreement and that that misapprehension rendered his Honour’s exercise of discretion erroneous. Shield asserts that his Honour erred in so far as he assessed the effect of only the Settlement Agreement upon the overall outcome of the proceedings, in circumstances where the effect of the remaining dispute as to the validity of the Shareholders’ Agreement was a matter that had a direct bearing on the effect of the Settlement Agreement.

In so far as Mr Ye’s commercial objectives in the litigation were to extricate himself and Shield in relation to the outstanding advances and the performance bond, LSKF points to its willingness to pay whatever was found to be owing by Litestone and the failure on the part of counsel for Shield to advert to the performance bond in the course of argument. As indicated above, however, there was a dispute as to the amount owing by Litestone to Shield and there was a question as to when the balance of advances would be repaid. That dispute was resolved by the Settlement Agreement. It was resolved favourably to LSKF in so far as the amount agreed was less than that referred to in the letter 15 January 2018. On the other hand, and significantly, Shield achieved a significant advantage in having a date fixed for repayment, time being of the essence, with the sanction of a winding up order of Litestone if the payment were not made.

Shield contends that the primary judge erred in accepting the contention advanced by LSKF that the dispute turned entirely upon which party succeeded in acquiring the shares of the other in Litestone, in circumstances where, Shield asserts, its commercial interests extended well beyond the acquisition of shares in Litestone. Thus, Shield asserts, the proposition that it would have been reasonable for it to accept LSKF’s offer of 15 January 2018 reflects a misunderstanding of Shield’s commercial objectives. Further, Shield says, to suggest that a reasonable course of action for Shield was to consent to the relief sought by LSKF in the cross-claim disregards the fact that the relief sought by LSKF primarily contested the validity and enforceability of the Shareholders’ Agreement or alternatively facilitated the transfer of Shield’s shares in circumstances where Shield was to be declared insolvent.

The latter matter, Shield asserts, could not have been one to which it could have been expected to consent when it intended to continue to trade following the resolution of the proceedings. In any case, consenting to the relief claimed in the cross-claim would have failed to address Shield’s potential liability in respect of the performance bond. In that regard, the security provided in relation to the performance bond under cl 6 of the Settlement Agreement, Shield asserts, vindicates its commercial interests such that his Honour’s assessment of the Settlement Agreement as involving the effective surrender by Shield may be seen to be erroneous.

While some emphasis was placed on cl 6 of the Settlement Agreement in the argument before this Court, cl 6 was not expressly referred to in the argument before the primary judge. Shield asserts, however, that it must be taken to have been apparent to his Honour that that was a matter of concern for Mr Ye and Shield since his Honour referred to the first paragraph of the Outline, which referred expressly to the advances made by Shield to Litestone and to the performance bond question as the reason for Mr Ye’s wish to extricate himself from the joint venture constituted by Litestone.

Further, while counsel for Shield did not refer expressly to the matter of the performance bond in the course of argument, the primary judge was clearly taken to the first paragraph of the Outline in which it was asserted on behalf of Shield that the concerns of Mr Ye were how the liability under the performance bond might be managed and how the undertaking to make repayment of the loans would be made good. The Outline makes clear that the proposed amendment to seek an order that Shield acquire LSKF’s shares in Litestone was no more than a mechanism to enable Shield to manage the difficult position that had arisen. No amendment of the summons seeking an order that LSKF’s shares be transferred to Shield was formulated and no attempt has been made to indicate the legal basis upon which such relief might have been sought. The need for any amendment was obviated by the Settlement Agreement.

It is apparent from the way in which Shield’s case was framed in the Outline that acquisition by Shield of LSKF’s shares in Litestone was not the primary object of litigation from Shield’s point of view. While the commencement of the proceedings by Shield may have been prompted by the notices given by LSKF seeking transfer, pursuant to the Shareholders’ Agreement, of Shield’s shares in Litestone, the reason for resisting such a transfer should be understood as being to avoid the loss of an element of control that Shield would otherwise have in relation to the affairs of Litestone so long as it was a 50% shareholder. Transfer of the shares without finalising arrangements for repayment of loans and dealing with the performance bond would have left Shield in an unsatisfactory situation.

In those circumstances, it was a mischaracterisation of the Settlement Agreement to say, as the primary judge did, that Shield had effectively given in to the claims by LSKF. It was also a mischaracterisation on the part of his Honour to say, as his Honour did, that LSKF had a substantial victory or that Shield had effectively surrendered to LSKF. On that basis, his Honour exercised his discretion on a misapprehension of all of the circumstances. It is therefore open to this Court to exercise the discretion as to costs of the proceedings generally, apart from the question of enforceability of the Shareholders’ Agreement and the abandoned prayers for relief.

For the reasons generally indicated above, it is clear that the Settlement Agreement represented a compromise of the issues, apart from those on which LSKF was totally unsuccessful. In those circumstances, the appropriate order would have been to direct that there be no other order as to costs of the proceedings.

Shield should have leave to appeal. The appeal should be allowed. Order 1 made by the primary judge on 2 July 2019 should be set aside. In lieu of that order, the following order should be substituted:

SIMPSON AJA: I agree with Emmett AJA.